Baidu & Samsung – Made in Korea 2020.

China has a lot of ground to make up.

• Semiconductors and AI are at the heart of China’s desire to become self sufficient in technology, but this is going to be a long hard task as evidenced by Baidu’s choice to manufacture its AI chips in Korea.
• Baidu and Samsung have jointly announced that Baidu’s new KUNLUN neural processor that is designed for both deployment in both the cloud and the edge will go into mass production in early 2020.
• This should have been a proud moment with Chinese AI chip manufacturing going to a home-grown contender like SMIC but unfortunately, SMIC appears not to be able to manufacture this chip.
• This because the KUNLUN processor is being manufactured at 14nm which is a node that SMIC and I suspect all other Chinese semiconductor foundries do not have.
• Furthermore, Baidu will be leveraging Samsung’s advanced manufacturing technologies as well as its chip packaging ability.
• I think this is a bit of a black eye for Chinese ambitions in the technology sector and indicates:
  • First, Made in China 2025: goals are extremely unlikely to be met.
  • These goals set out for 40% of local demand to be met by Chinese semiconductor companies by 2020, rising to 70% in 2025.
  • In 2019 just 4.2% of local demand was met by semiconductor companies who have their headquarters in China.
  • The problem is that Chinese companies are far behind when it comes to offering manufacturing capacity at nodes smaller than 28nm.
  • This meant that Baidu had to go overseas or face having no viable chips at all.
  • It could have made them at 28nm but this would have made them very uncompetitive hindering Baidu’s AI performance.
  • Second, TSMC: was an obvious place to manufacture this chip but I suspect that TSMC’s high prices put Baidu off.
  • This also hints that TSMC and Taiwan are considered by Chinese enterprises as foreign despite Taiwan technically still being part of China.
  • It would appear that there is no patriotic advantage in manufacturing chips at TSMC as compared to Samsung.
  • Combine this with Samsung’s better pricing and its in-house competence, and it becomes a clear choice for Baidu.
• Alastair Newton and I have already addressed the issue of Taiwan as it relates to China and the technology sector (see here) where we expect the new government in Taiwan push to maintain the current status quo.
• This means that there is no re-unification with the mainland on the long-term horizon.
• Hence, If China wants to meet its Made in China 2025 targets it will need to count Taiwan as part of China as this would allow it to comfortably meet its targets.
• We continue to think that the real area of focus for Chinese technology is in the areas which are still emerging like Quantum Computing, Robotics, Augmented Reality and so on where it has a genuine opportunity to be a world leader.
• China was just too late to the semiconductor game in our opinion.