US-China rivalry over Taiwan chip industry could cost $490bn

Hello everyone, Mercedes here from Singapore. The backlash towards Taiwan’s chip industry from the US-China tech war is becoming increasingly apparent, as this week’s Big Story shows. Elsewhere, south-east Asia’s tech scene has an outsized presence in this week’s newsletter. Between Grab’s record-breaking $40bn Spac merger (Mercedes’ top 10 and Spotlight) and Gojek and Tokopedia’s megamerger (Art of the deal) inching closer, it feels like this year is going to put the region on the map. Enjoy!

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The Big Story

The US blacklisting of a Chinese chip company has highlighted Taiwan’s vulnerability to the trans-Pacific tech war. The sanctions came as a leading US industry body estimated that in the event of a year-long shutdown in Taiwanese chip production, the worldwide cost to electronics companies could be $490bn, according to this Nikkei Asia analysis.

Obviously, this represents an extreme scenario. Nevertheless, the blowback toward Taiwan’s chip industry from the US-China tech war is becoming ever more pronounced.

Key implications: This week an important Taiwanese chip designer, Alchip Technologies, suspended business with Phytium Technology, a Chinese chipmaker that Washington blacklisted because of alleged links to China’s military.

Alchip had provided chip design services and intellectual property to Phytium and helped it outsource chip production to Taiwan Semiconductor Manufacturing Company, the world’s biggest contract chipmaker. Phytium is one of the companies at the heart of China’s campaign to boost its self-reliance on critical chip components. 

The move, which drove Alchip’s share price down by the 10 per cent limit for three consecutive days, showed the impact of the US move.

Upshot: President Joe Biden laid out a $50bn plan this week to reinvigorate the US semiconductor industry. Part of the approach is to wean the industry off over-reliance on Taiwan, which the US sees as vulnerable to potential disruption from Chinese aggression.

Mercedes’ top 10

1. Grab, south-east Asia’s most valuable start-up, is going public in a deal that will value its shares at close to $40bn (see Spotlight).

2. Upheaval at Toshiba: the chief executive stepped down earlier on Wednesday. Nobuaki Kurumatani’s resignation came as private equity groups KKR and CVC prepare for a bidding war over the Japanese conglomerate.

3. China’s tech companies have a month to fix anti-competitive practices — or risk suffering the fate of Alibaba, which was hit with a $2.8bn penalty.

4. Meanwhile, Beijing has forced Jack Ma’s business academy to suspend enrolments, while Ant Group could be stripped down to a mobile payments platform.

5. Tencent plans to open two data centres in Indonesia as the Chinese tech giant races to dominate Asia’s booming cloud services market.

6. China fined Jia Yueting, founder of formerly high-flying tech conglomerate LeEco Holdings, about $37m over false disclosures.

7. Two of South Korea’s electric vehicle battery companies have resolved a dispute that threatened Ford and VW’s plans to build electric cars in the US.

8. China’s Huawei says the US is to blame for the global chip supply crunch, blaming Washington’s sanctions against Chinese groups for spurring panic buying.

9. Japan‘s Sagawa, a leading transport company, is set to import the country’s first big fleet of made-in-China electric vehicles.

10. The FT’s John Thornhill offers five ways to counter bias in AI systems, something he calls one of the “wickedest challenges of our times”.

When sages speak

• This astute summary of China’s 14th five-year plan by Nis Grünberg and Vincent Brussee at Merics, a Berlin-based think-tank, finds that “digitisation” and “security” are Beijing’s developmental buzzwords. The goal is to cut reliance on foreign technology as quickly as possible.

• Ilaria Mazzocco of MacroPolo is in perceptive form in this discussion on what Xi Jinping’s government really intends with regard to carbon emissions and clean energy investment.

Our take

Why did Nvidia, a US chip company with a big presence in Asia, announce this week that it was entering the microprocessor market?

Chief executive Jensen Huang shared his vision around two decades ago that graphic processing units, or GPUs, Nvidia’s main products, should be valued more highly than central processing units, or CPUs — microprocessors that are considered the “brains” of personal computers.

His theory then was that the CPU was destined to be a well-rounded but not cutting-edge chip because it was required to perform many functions. In contrast, GPUs would remain focused on optimising high-speed mathematical operations, a role that augured for a cutting-edge, premium-priced product.

Huang’s vision seemed to be vindicated in July 2020 when the market capitalisation of Nvidia surpassed that of Intel, the US chip giant which had relied on making CPUs.

Against this backdrop, Nvidia’s move into the CPU market seemed surprising. Although its new chip, called Grace, targets a niche high-performance market that includes supercomputers and AI systems, the CPU market remains a challenging one for establishing dominance.

But one thing is clear: Nvidia’s entrance into the CPU market challenges Intel, which has long been the champion of server CPUs. The outcome of the upcoming Nvidia-Intel rivalry will have many implications for Asian semiconductor players.

— Ken

Spotlight

Two years after founding an Uber-like taxi service, Anthony Tan was already unabashedly ambitious. “If we get this right, we can literally go into the history books,” the Harvard Business School-educated entrepreneur proclaimed in 2014.

Now the 39-year-old scion of one of Malaysia’s wealthiest families is poised to do exactly that. His company, Grab, south-east Asia’s most valuable start-up, has agreed to the largest-ever merger with a special purpose acquisition company, raising $4.5bn in cash to go public in a US deal that will value its shares at close to $40bn.

Tenacious and driven, Tan is blazing a trail for the entire region. The deeply Christian entrepreneur — he cited Jesus Christ as one of his leadership heroes in a 2019 interview — describes his job as a “mission” to serve south-east Asians’ daily needs. 

Grab’s speed to market is also very much in character. “Anthony always wants to be number one. He is the guy in Seat 1a and the first one off the plane,” said a lawyer whose firm works for Grab.

See also this Nikkei Asia interview with Tan this week.

Art of the deal

One of the biggest corporate marriages in Indonesia moved a step closer to fruition last week. Gojek and Tokopedia, two of Indonesia’s leading tech companies, have written to their investors asking for approval to merge.

While the latest move did not mean they have agreed to the deal, it marked a significant step towards creating one of south-east Asia’s largest tech companies. The post-merger company would be valued at more than $18bn and encompass ride-hailing, food delivery, payments and ecommerce.

The deal would also give the merged company increased firepower in an expensive battle against Grab, Gojek’s main rival. The Singapore-headquartered company has been expanding its business in Indonesia — the region’s biggest market by population and economic size.

According to people familiar with the discussions, Gojek and Tokopedia will finalise a merger a “few weeks after” getting sufficient shareholder approval. The combined entity could eventually be listed in both the US and Indonesia.

Smart data

The pandemic is proving something of a boon for Indian IT companies as accelerated adoption of digital technology by businesses around the world drives a strong order book. The chart above shows the share prices of the leading companies benefiting from the boom.

Tata Consultancy Services, India’s largest software services exporter and a bellwether for the sector, posted strong earnings for the financial quarter to March. Net profit for the quarter was Rs92.46bn ($1.2bn) up almost 15 per cent on the year. Its order book as of the March period stood at $9.2bn. Nevertheless, Tata’s performance disappointed investors, who sent its shares lower on Tuesday (see chart).