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Foreign investment funds are betting on a US-safe Chinese chip industry




Pictured here is a chip manufacturing plant in Suqian city, east China’s Jiangsu province, April 1, 2022.

Future Publishing | Future Publishing | Getty Images

BEIJING — China is so far behind the United States in semiconductor technology that some investors are betting on startups to fill the gap.

The US this month introduced new restrictions to maintain an edge over China in advanced chip technology. While the rules immediately cut into U.S. and Chinese business revenues, they only affect firms that sell the most advanced semiconductor technology, analysts pointed out.

The bulk of Chinese demand is for chips with far simpler technology, they said, and Chinese companies are still small players right now.

That gap leaves a huge market opportunity far more insulated from U.S. restrictions — and one that Chinese startups can tap into, some venture capitalists said.

Interest from investment funds

Vertex Ventures China is a firm that has raised money from foreign investors to buy into the idea.

The firm has raised nearly $500 million for a new Chinese technology fund set to close early next year — more than previous plans for $400 million, said Tay Choon Chong, managing partner and head of Vertex Ventures China.

What is the disturbance in China right now? The biggest disruption is that the West is not going to provide technology to China. We see this as the best opportunity for us.

Tay Choon Chong

Managing Partner, Vertex Ventures China

“In China right now, what̵[ads1]7;s the disturbance?” he said. “The biggest disruption is that the West is not going to provide technology to China. We see this as the best opportunity for us.”

Chinese chip companies could see double-digit growth annually since the market is worth tens of billions of dollars, Tay said, noting that China imports about $400 billion worth of chips a year.

He said specific areas of possibility include chips that amplify phone signals, or control displays in cars.

Another firm putting international money into China’s chip industry is WestSummit Capital Management, which says its strategy did not change when the new US rules came out.

That’s because WestSummit only invests in chips made with mature technologies — for mass market, civilian use, said Bo Du, CEO of the firm.

Chips in the mature category use older technology and are generally less sophisticated than the most advanced chips, whose use in consumer products today is mainly in high-end smartphones and personal computers.

Foreign investment funds are betting on a US-safe Chinese chip industry

He said that 79% of the global chip market falls into the category of mature technologies – a share that rises to 94% if you look only at automotive chips. You were a senior engineer at the American chip manufacturer AMD, among other previous roles in the industry.

He claimed WestSummit-backed GigaDevice Semiconductor is one of the Chinese companies well-positioned to capture the mature market.

The stock is down about 50% for 2022, but is up more than 2% so far this week despite a broad market decline.

US restricts Chinese chips

China accounts for about 40% of global chip demand each year, according to a Natixis report.

However, Chinese companies only have a 5.2% share of global supply – mostly at the lower end of the industry, the report said.

Read more about China from CNBC Pro

“The [new U.S.] Regulations make it more lucrative to develop non-US chip-making technology because it means less political restrictions and uncertainty,” said Alex Liang, partner at Beijing law firm Broad and Bright.

“However, chip-making is a mature technology that has been developed for many years. It is difficult to separate American and non-American technology after all these years of intertwined development.”

The United States has taken several steps this year to limit China’s technological capabilities.

The Biden administration has named China a strategic competitor, following the Trump administration’s blacklisting of specific companies such as China’s largest chipmaker, Semiconductor Manufacturing International Corporation.

To “develop everything from scratch, I would say the latest move would probably have set China back by more than 5 years,” said Patrick Chen, head of research for CLSA in Taiwan.

Some products, such as cars, may have to sacrifice some non-essential AI features for now, he said, although manufacturers can keep basic sensors or microcontrollers since they’re not using the most advanced chips.

Imminent risk

Despite the large market opportunity, early-stage investments in Chinese chip startups still face risks from potential lawsuits and the complexity of the technology itself, said Vertex’s Tay. He said a company needs to make sure it has enough expertise and money to get its products to market on time.

Others are more skeptical.

The complex and extensive chip supply chain has become a hot – and speculative – investment area in China since Beijing began emphasizing technological self-reliance.

At the peak of a perceived bubble in the market last year, it is difficult to identify which startups might succeed, said Hongye Wang, China-based partner at venture capital firm Antler. He described the odds as about 10 in 1,000 – or about 1%.

Wang said that like most VCs in China this year, he has not made any investments this year, in part because Covid restrictions limited face-to-face meetings with entrepreneurs.

“I think the market for high-tech startups will be even better than the year before Covid-19, because this market holds too much money for these technology startups,” he said.

For many Chinese companies trying to survive today, the consequences of American actions are still being sorted out. The sweeping new US rules target everything from Chinese chipmakers’ US employees to foreign companies that sell to China.

A sub-sector that is paying closer attention is the so-called fabless Chinese chip companies that rely on outsourcing manufacturing to operate, said Chen Deng, a partner at Hylands Law Firm. She said these businesses now need to look beyond a simple revenue exposure model to assess compliance risk.



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