On the evening of September 25, after 1,028 days of absence, Huawei Vice Chairman Meng Wanzhou finally returned to the embrace of the motherland. This incident is enough to be recorded in the history of China’s high-tech rise.

It is worth noting that Meng Wanzhou’s return to China happened 15 days after the call between the heads of state of China and the United States. It is believed that the occurrence of this landmark event shows that the US policy of suppressing science and technology in China is showing signs of easing.

Previously, there has been a wave of decline in the A-share semiconductor sector, which is most likely related to the warm wind of US policy.

From the high point at the end of July so far, the semiconductor index has fallen by more than 13%, SMIC has fallen by nearly 20%, and the controlling shareholder of Zhaoyi Innovation and those acting in concert plan to reduce their holdings by more than 3%, and the stock price has fallen by 30%. It also chooses to reduce its holdings of several corporate stocks.

Changes in the trend of the A-share chip industry sector (January 2020 to present)

In the context of the lack of cores sweeping the world, chip stocks have ushered in a wave of strong gains. However, as supply and demand gradually balance, the industrial cycle may move from “mid-stage” to “late-stage” for the first time since 2019, and some media have begun to remind that “many people have forgotten that chips are a heavy-cycle industry.”

From an emotional point of view, Meng Wanzhou’s return to China will undoubtedly boost the domestic chip and even the entire hard technology industry’s ambition to become self-reliant. However, it is worth thinking very carefully whether the current chip industry will enter the downward phase of this cycle.

Is winter already over and spring is coming, or is winter just around the corner and spring is still in some distant future?

The special feature of China’s chip industry is that there has never been an industry so closely bound with the two major countries. It is still far from enough to focus on the details of the industry’s production and operation.

01

From high to moderate

U.S. restrictions on Huawei are starting to loosen.

There are many things to think about behind the incident of Meng Wanzhou’s return to China.

Meng Wanzhou was released on a “not guilty” basis, Huawei did not accept huge fines or compensation, and the U.S. government suspended the prosecution. This way of handling has exceeded expectations.

According to the Associated Press and other media sources, Meng Wanzhou and the US Department of Justice reached a “deferred prosecution agreement”, agreeing to delay the prosecution against her until December 1, 2022. After the “Deferred Prosecution Agreement” was signed, the extradition proceedings against Meng Wanzhou were terminated immediately. This shows that the US government has suspended the high-pressure situation in the past.

Previously, the former French Alstom executive Frederic Pierucci was sentenced in the United States and sentenced to 5 years in prison. Alstom paid a high fine and was forced to sell its core business to General Motors. Compared with Pierucci, Meng Wanzhou and Huawei are much luckier.

Meng Wanzhou’s return to China is also proof that Sino-US relations have changed in the Biden era.

For the United States, compared with the Trump administration, the Biden administration seems to be more inclined to consider the interests of multinational technology companies, so it is more willing to listen to the opinions of the industry and make some degree of policy adjustment accordingly.

In March of this year, the Biden administration loosened the “sanctions” on SMIC, which was understood by some market participants as a positive signal for the Sino-US chip trade.

In March of this year, China and the United States also jointly established the China-US Semiconductor Industry Technology and Trade Restriction Working Group, hoping to “strengthen communication and exchanges through the working group and promote deeper mutual understanding and trust.”

This sends a clear signal: For the semiconductor industry, the two countries are about to start exchanging trade restrictions.

On the evening of September 24, Xu Zhijun, Huawei’s rotating chairman, said at the Full Connection Conference that some of Huawei’s low-end automotive chips have been licensed by the United States, and these chips will be used in the growing Huawei auto parts business in the future.

This also shows that the US restrictions on Huawei have begun to loosen. Although the situation is still murky, the macro environment facing the chip industry has quietly changed.

02

Spring may not be near

In the fields of chip manufacturing, chip equipment, materials, and industrial software, which have higher thresholds, the United States, South Korea and Japan are still firmly stuck by the neck.

In the past three years that the United States launched the trade war, my country’s chip industry has been forced to catch up, and a number of tens of billions or even hundreds of billions of listed companies have grown rapidly.

With policy support, big fund assistance, and capital market support, many semiconductor companies have experienced leaps and bounds in performance while their market value is improving, and they have achieved varying degrees of progress in market share and global competitiveness.

The US technology war against China did not overwhelm China’s technology industry, but instead stimulated the national consciousness of self-improvement in the field of science and technology.

Back at the Huawei company level, under the iron gate of the US sanctions, Huawei was forced to sell the Honor brand, and the high-end mobile phone market fell sharply, from the first to “Others”, and the self-developed Kirin series chips could no longer be manufactured. “Singing”.

As a result, Huawei’s financial report for the first half of 2021 was greatly affected. Overall sales revenue fell by 29% year-on-year, and the consumer business fell by 46%. Under the shadow of sanctions, Huawei has to start over to find a new growth pole.

To this end, Huawei launched the “Nanniwan Project”, which means “achieve self-sufficiency during difficult times”. Products that are not affected by the United States, such as laptops (laptops), smart screens, and IoT smart homes, are included in the “Nanniwan Project”.

The Hongmeng system, which replaces Android, currently has more than 120 million users. In the past 100 days, nearly 1 million users have upgraded the Hongmeng system every day.

At the same time, Huawei also strives to build Euler systems for servers, edge computing, cloud, and embedded devices. According to the plan, Hongmeng and Euler will become Huawei’s “soul casting project”.

But in terms of high-end chips, Huawei has fallen into the quagmire of supply cuts – which is also the pain of our entire country’s chip industry.

Huawei HiSilicon is still continuing to carry out chip research and development, and Huawei is also continuing to invest in scientific research. However, without TSMC’s supply, Huawei’s chip research and development in a short period of time can only accumulate research and development strength, and cannot bear fruit.

China’s integrated circuit industry has experienced more than 60 years of development. Today, “lack of cores and few souls” is still a major dilemma for the industry.

Although in the field of IC industry and packaging and testing, my country is already in a leading position in the world. However, in the fields of chip manufacturing, chip equipment, materials, and industrial software, which have higher thresholds, the US, South Korea and Japan are still firmly stuck in the neck.

The most typical example is ASML, which dominates EUV lithography machines. Although it is a Dutch company, since the first and second largest shareholders are both American capital, ASML is an uncompromising American company.

If there is no high-end lithography machine, there will be no high-end chips, and only by investing in ASML can we get priority supply. To this end, Intel, Samsung and TSMC did not hesitate to spend huge sums of money to help, of which Intel’s investment amounted to 2.513 billion euros.

Moreover, the key components of ultra-high-end lithography machines are all produced in western developed countries – light sources from the United States and Japan, lenses from Germany and valve parts from France, etc. All core components are embargoed to China.

High-end lithography machines are the “heavy weapons” used by the United States to restrict China’s high technology. In this field, the United States has no intention of relaxing at all, which is in sharp contrast to the generally relaxed dialogue caliber.

It should be noted that the relaxation of the US chip industry policy towards China is basically an expedient measure under the current economic and political situation.

03

stopgap

It is undoubtedly a short-sighted behavior to suspend or even stop continuous investment in the chip field just because of the relaxation of US policies.

It can be found that in 2018-2019 before the epidemic, the United States had no intention of releasing Meng Wanzhou. But at present, the epidemic in the United States is still raging, and the US economy is caught in the quagmire of high unemployment and high inflation.

Whenever there is an economic crisis, countries represented by the United States adopt monetary easing stimulus measures without exception, but the manufacturing industry has not been able to benefit from it.

Judging from the situation this year, the US housing prices have soared, the shortage of materials has been superimposed on the QE policy, and many people have even begun to predict that a serious economic crisis will occur in the United States, including the famous American investment guru Rogers.

Meng Wanzhou’s return to China is the result of the nation’s efforts, and it is also the result of the United States weighing the pros and cons. But while the whole country is celebrating, the alarm bells should be ringing even more – the “compromise” of the United States is for interests, but the balance of interests will not sink forever towards one side.

The relaxation of the attitude of the United States towards China’s technology industry is only a phase, and it is very likely to enter a tangled situation of “stop, stop, stop, fight” after that.

It is unrealistic to expect the United States to abandon the blockade of China’s high-tech industries. When the policy eases, China’s chip industry should take this opportunity to vigorously accumulate technology, promote independent research and development, and consolidate the strength of chip basic technology.

It is undoubtedly a short-sighted behavior to suspend or even stop continuous investment in the chip field just because of the relaxation of US policies.

From the perspective of the capital market, the easing of the technology war may bring about optimistic expectations in emotion, and it may also be pessimistic in predicting the extension of the autonomous replacement cycle, but in the long run, the determinant of the stock price ultimately depends on the quality of the company.

This industry essentially depends on technical strength. TSMC and ASML have achieved absolute market competitiveness by relying on technological monopoly. The ultra-high threshold makes it difficult for competitors to match, and can also make the stock price go out of the amazing epic long bull market.

ASML (ASML) share price performance (January 2001 to present)

Therefore, for Chinese chip companies, only by mastering the core technology in their own hands can they not be led by the nose.

04

write at the end

Meng Wanzhou has returned home safely, and her darkest moment is over, but it will take time for Huawei to get out of trouble.

In the face of the increasingly powerful Chinese technology industry, whether it is Trump or Biden taking office, the main tone of the US political and economic policy towards China cannot be completely reversed in a short period of time.

Chips are the “nuclear weapons” for the United States to become the world’s superpower. Continuously harvesting the most fertile profits in the technology value chain is the long-term pursuit of the political and business circles in the United States.

On the basis of a huge market, abundant capital and a constantly improving talent team, Chinese chips are ushering in a golden age of development.

The history of the past few years has proved that the chip is not an industry in which a certain country will always dominate and remain invincible. The key time for Chinese chips to break foreign monopoly and rewrite the chip pattern is now. In front of small favors and small favors, big right and wrong must be seen clearly.

Link to this article：After Meng Wanzhou returns to China, will Chinese chips usher in spring or winter?