IN TIMES OF CHAOS CHOOSE TO INNOVATE Chinese foundries that fabricate semiconductor Chinese semiconductors’ content and volume: wafers and companies that design integrated cloud services, internet of things, and smart circuits have been focusing on developing a mature manufacturing. generation of chips and specialty applications. For In our team’s view, on-the-ground insights like example, SMIC, China’s largest and most advanced foundry, can provide integrated circuit foundry and these can place us in a strong position to identify technology services on process technology from companies that will play an integral role in China’s 0.35 microns to 14 nanometers (one nanometer is path to gaining technology independence. It also one-millionth of a millimeter). helps that we’re armed with rich local knowledge, a true understanding of Chinese policymaking and geopolitical issues, and a diligent bottom-up In the semiconductor industry, smaller chip size approach to research. enables a more advanced level of technology. While there is still a long path to silicon A technology gap still exists behind market leaders independence, Chinese companies are rapidly Intel and TSMC. However, SMIC’s first generation increasing production capacity, narrowing of 14-nanometer “fin-field effect” transistors will technology gaps, and equipping themselves with a be used in a broad set of applications, including sizable engineering talent pool. With those pieces high-end consumer products and artificial in place, China’s desire to establish a world-class intelligence capabilities. SMIC plans to accelerate integrated circuit industry value chain by 2030 is a its production capacity by 25% in 2020, given dream that could eventually come true. the rising demand for import substitution. Nevertheless, China is still early in its supply chain We’ll be watching this story as it unfolds in 2020. development and is working to solve for barriers to technology, manufacturing, and high capital expenditure requirements. Where 5G comes into play Transformation in the 5G era I saw something impressive as I spoke with a leading local network equipment- maker at the PT EXPO. A worker was sitting atop a machine from which he controlled a mining operation located far Cloud services Internet Smart away from Beijing. Imagine: A job that of things manufacturing used to be dangerous and costly can now be transformed through human remote After speaking with local company representatives control in the 5G era. at the PT EXPO, it became clear that China’s effort to gain technology independence would greatly As the company showcased its latest 5G-integrated products, I learned that benefit from a new wave of innovation. Most its 5G patent share exceeded 20% notably, 5G technology is expected to cover over 300 Chinese cities by 2020. globally. The firm has been working with telecom operators to provide solutions for manufacturers and local governments, The direct benefits for Chinese semiconductor producers are vast, including demand from focusing on smart manufacturing, smart network build-out and handset upgrades. cities, and other areas. Given the faster speed (10 to 20 times faster than 4G) and low latency (short response time —Connie Ou over the networks), we believe that 5G will lead to increasing connectivity and will trigger rising demand for three areas that can boost 12