Here's a new way to tell whether a Chinese company is a major player: Ask the CEO if the firm is designing its own microchips.
After years of a state-led drive to achieve "semiconductor independence," many Chinese companies have started 2021 with a chip side-gig. The list of those trying is a corporate who's-who: Baidu, Alibaba, smartphone brands Huawei, Xiaomi and Oppo, and home appliance brands Gree, Midea, TCL and Haier. Some already have experience making chips, while some are new to the (demanding) game.
They join an increasingly crowded space. In 2020, over 22,000 new semiconductor companies were registered in China, according to data firm Qichacha. In the first two months of 2021, there were 4,350 more.
Many reasons lie behind this nationwide frenzy, primarily the Chinese government's urgent determination to reduce reliance on imported chips. In the race to become a tech superpower, semiconductors are a key factor holding the country back. In 2020, China imported $350 billion worth of chips, accounting for one-sixth of total imports. China can mass-produce almost anything, but microchips, especially high-end ones, are still beyond its reach. To change that, China established a $22 billion investment fund in 2014 and added $29 billion to it in 2019, although little has come of it so far.
So far, these semiconductor side hustles concentrate on the design process, where technological barriers are easier to overcome. The actual fabrication is still outsourced to foreign foundries run by Samsung or Taiwan Semiconductor Manufacturing Company. Even if big Chinese companies are able to make breakthroughs in chip design, they are still far away from achieving the nationwide goal of complete independence.
From a business perspective, the moves still make sense. For some companies, it de-risks their supply chains. The U.S. sanctions preventing Huawei from purchasing chips from American companies offer a cautionary tale. Even for brands in less sensitive fields, the global chip shortage that started this year is another reminder that international suppliers can become very unreliable very quickly. For tech companies like Baidu and Alibaba, both of which are doing cutting-edge work in cloud computing and artificial intelligence, a self-designed chip can cater to specific internal needs better than a chip purchased from another maker.
The power of IoT
Home appliance makers traditionally import a large number of chips to power televisions, air conditioners and refrigerators, although these chips are usually lower-tech. The rise of Internet of Things technologies is changing that. Connecting to Wi-Fi or 5G networks or incorporating audio operating systems requires that the chips used in home appliances become more sophisticated.
In 2018, Dong Mingzhu, the "Iron Lady" atop China's top air conditioner maker Gree Electronics, made headlines when she declared the company would invest as much as $7.7 billion to make its own chips. The southern city of Zhuhai, where Gree has its headquarters, is encouraging this pivot. Last October, the municipal government said that by 2025, it would build a semiconductor industry that's worth more than $15.4 billion.
So far there is little public information on what Gree has accomplished. But its competitors are acting similarly. Appliance makers TCL, Konka and Midea — all household names in China — have set up subsidiary semiconductor companies in a flurry of activity starting in 2018.
By contrast, Huawei started its own semiconductor research more than two decades before U.S. sanctions. In 2004, Huawei built a separate company called HiSilicon to focus on chipmaking, a decision doubted by many and followed by no one. Throughout the years, HiSilicon has released a different set of chips that can be used in smartphones, servers or wearable gadgets. It's now the only Chinese company seen as a serious contender in the global semiconductor industry.
Other smartphone brands are taking a similar step, albeit belatedly. Xiaomi started investing in chipmaking in 2014 and launched its first chip three years later. Little progress has been reported since. Oppo only began its research and investment in semiconductors in 2019. It will take a long time for those investments to bear fruit.
Big Tech sells to itself
Baidu is the first among China's Big Tech companies to have ventured into the semiconductor field. It started investing in chip research in 2010 and released its first mature product in 2018: Baidu Kunlun, a chip for accelerating machine learning.
The Kunlun is designed to be versatile. It can be used in centralized cloud data centers or in consumer-end devices. In 2019, Baidu released another chip, Honghu, a less-sophisticated chip to power smart speakers in cars and home devices.
Baidu's chip experiments have a clear focus: AI. Baidu has long positioned itself as the Chinese Big Tech company most interested in cutting-edge AI. This requires massive amounts of computing and thus, specially-designed processors.
"If an internet company wants its programs or operating systems to function better, they will need to run on their own hardware. A good example is iOS and Apple's chips," He Hui, principal semiconductor analyst at London-based consultancy Omdia, told Protocol. "The eventual goal of internet companies like Baidu is to establish an ecosystem, like cloud servers, a search engine and a self-driving system. But the software ecosystem needs to be supported by better hardware."
In return, Baidu's ecosystem affords ample opportunity to test its chips, unlike a dedicated chip company, which needs to find external clients. According to Baidu Chief Technology Officer Wang Haifeng, by last December, 20,000 Baidu Kunlun chips were outsourced to Samsung's foundries, then used in Baidu's own servers, including for its flagship search engine and cloud services. The other chip, Honghu, has been deployed in Baidu's popular smart speaker as well as its car operating systems, both of which sell in the millions each year.
There are few applications of Baidu's chips outside its own businesses. But it may not be the company's plan to sell chips at all, He Hui said. "Internet companies are making chips for themselves. They are not making it to sell to others."
Among Baidu's competitors, Alibaba has invested the most in semiconductors. In 2018, Alibaba bought a domestic chipmaker company, which later became PingTouGe Semiconductor. It has launched two AI chips since. Alibaba has strategic investments in six other chip startups.
There are signs Tencent and ByteDance are hustling to catch up. Tencent has invested in the chip startup Enflame for four rounds in a row, and a subsidiary cloud computing company established in 2020 has included chipmaking in its business activities. Job platforms show ByteDance, the youngest of four, actively recruiting personnel with chipmaking experience, but the company hasn't announced any concrete plans yet.
Big money, long wait
Investors are betting big. In 2020, 32 Chinese semiconductor companies have gone public. Another $20 billion worth in investment has poured into private companies, four times higher than that of 2019, according to private equity firm Winsoul Capital. Investors include big names like Huawei, Xiaomi and major VC firms like Sequoia and Hillhouse Capital.
The semiconductor industry requires years of massive investment with no immediate return. It took more than a decade for the Huawei-owned HiSilicon to only have a seat in the global chip market — and it still can't compete with the dominant players. For newcomers to the chip game, it will be at least another few years before there emerge genuine signs of who's succeeding and who isn't.