Modern cars don’t work without chips. But the small silicon components are currently in short supply for various reasons. That makes managers in both Germany and China nervous. Planners in Beijing are therefore forging a Chinese semiconductor alliance of around 70 companies. They are to cover the entire chip supply chain and thus produce around 70 percent of the semiconductors for their own market by 2025, as Christiane Kuehl reports. Automotive expert Ferdinand Dudenhoeffer expects China to become the global market leader in as little as five years.
But China is not only setting a fast pace in chip production. Frank Sieren uses the May holidays to show how quickly China has recovered from the Covid crisis: The Chinese are already traveling more than before the start of the pandemic. For example, 85,000 people visited the former residence of Mao Zedong in Shaoshan – on a single day. Beijing promotes this “Red Tourism” to the best of its ability. Here, ideological education is combined with a disdainful pursuit of profit – and that fits in perfectly with China’s new economic strategy.
The German shipbuilding industry, suffering badly from the consequences of the Covid crisis, could also benefit from the new desire to travel. But the road to recovery initially requires a balancing act: On the one hand, the industry wants to fend off competition from China with a targeted strategy, and on the other hand, it wants to take advantage of the opportunities offered by this booming industry.
Lastly, the curious news about China wanting to introduce a Covid separation line on Mount Everest. As laudable as health protection is, however, it is likely to be difficult to maintain a minimum distance of 1.5 meters on the narrow summit. Whether the climbers will now have to wear FFP2 masks under their oxygen masks was left open for the time being. At least regular ventilation should not be a problem up there.
I wish you an interesting read!
Chips seem to be the most important component of every car at the moment. Since vehicles are full of electronics – digital speedometers, parking aids, or, quite banally, automatic window regulators – each of them needs dozens of chips. But those little semiconductor components are in short supply right now, forvariousf reasons. Around 80 chips are in an average car, says Ferdinand Dudenhoeffer, founder of the Center Automotive Research in Duisburg, in an interview with China.Table. “In premium models, it’s more like 100.”
Due to a lack of chips, production facilities are repeatedly at a standstill – even in China. The People’s Republic’s technology conflict with the USA intensifies the supply problems for semiconductors and components. Beijing wants to solve both problems by building up its own powerful chip industry without components from abroad – as always at record speed. The goal of the economic planners in Beijing: to obtain around 70 percent of the semiconductors for its own market from domestic production by 2025. Today, according to a study by the US think tank Rhodium Group, that figure is only 16 percent. But a lot of money is already flowing. In 2020 alone, Beijing supported semiconductor companies with the equivalent of at least $35 billion – 400 percent more than a year earlier. Tax breaks for chip companies have also been determined, initially until 2030. President Xi Jinping wants technological self-sufficiency, also to no longer be vulnerable to sanctions.
Specifically for the automotive sector, the first Chinese chip alliance was formed in September 2020, linking around 70 companies in the complex semiconductor supply chain for domestic production – including research institutes. This alliance is hung up at the China New Energy Vehicle Technology Innovation Center of the Ministry of Research. The Ministry of Industry and Information Technology is also involved. Little else is known about the China Automotive Chip Innovation Alliance, except that it has just released a brochure with information about all the participants and other manufacturers in the industry, according to state media. It is intended to help companies contact each other as they build supplier relationships. That sounds unexciting at first. Still, this group could be the start of a slowly emerging chip ecosystem in China.
For example, Chinese automaker SAIC Motor recently announced plans to enter the auto chip sector with tech company Horizon Robotics. Taiwanese electronics company Foxconn alsotalkeds with chip foundries about a possible collaboration on chip manufacturing for EVs. That’s a segment Foxconn is entering large-scale right now. According to a report in Caixin magazine, the prestigious Tsinghua University set up an integrated circuit school in April to achieve “breakthroughs in chip technology” and train microchip specialists. Specialists are in short supply in China, even though Tsinghua has had a degree in semiconductor science since 1956. So many things are in development.
Still, many experts remain skeptical. The Rhodium Group, for example, writes that the distribution of subsidies is not efficient because local officials are not familiar with the industry – and thus cannot monitor the use of the funds by the recipients reasonably.
Auto expert Dudenhoeffer is much more optimistic. “My forecast is that China will become the world market leader in semiconductors in about five years.” If Xi Jinping sets a goal, money will flow and a targeted programwill be implemented. Chinese chip companies are only two to three years behind the US or Taiwan, Dudenhoeffer said – “and Chinese companies learn very quickly“.
The crucial shortcoming is that China’s companies are unable to produce the smallest high-tech chips with a structure width of just a few nanometers. The world market leader TSMC from Taiwan is the technological pioneer. When it comes to building up the domestic chip industry, however, Beijing is not necessarily only interested in local companies but, above all, in local production in the country, Dudenhoeffer believes – regardless of whom. TSMC, for example, plans to invest the equivalent of €2.3 billion in Nanjing to expand chip production for the automotive sector at the existing site starting in 2023. The planned 28-nanometer chips are quite large but are in high demand in the automotive sector. China’s leading chip manufacturer SMIC also wants to produce such 28-nm chips together with the local government of the tech metropolis Shenzhen. SMIC is blacklisted by the US but was recently able to buy high-tech lithography systems for chip production from Dutch manufacturer ASML. Analysts see this as an easing of US sanctions.
German automakers would probably view a Chinese chip boom with mixed feelings, Dudenhoeffer believes. “With Chinese chips, there is always the fear that they are programmed in such a way that they can pass on data.” Car manufacturers will thus certainly be cautious in their selection, Dudenhoeffer believes. It is conceivable, he says, that Chinese chips will only be installed in cars for the Chinese market to a certain extent. In the case of autonomous driving, this separation is even mandatory since the systems in China and Europe are different. For example, while self-driving cars in Germany will operate largely independently of specific infrastructure, China is fully committed to networking (vehicle-to-X/V2X) with traffic signs, Dudenhoeffer explains. “But in general, there will be no getting around incorporating Chinese chips as well.”
In recent months, reports have been mounting – from Volkswagen to the electric startup Nio – about production interruptions. Due to chip supply shortages about 100,000 vehicles could not be built in the past fiscal year, VW Group CEO Herbert Diess said at the virtual annual press conference in late March. And just last week, BMW, Honda Motor, and Ford Motor reported further growing problems with chip shortages.
At the same time, according to Dudenhoeffer, the attitude towards electronic systems in cars is currently changing: The future will bring central computer systems instead of implementing separate functions with individual chips, as has been the case in the past. The new system again places new demands on the required semiconductor elements. Observers expect the shortage to worsen before things start looking up again at the end of 2021, at the earliest. Not a scenario in which there is much freedom of choice.
While many central banks are still investigating the possibility of issuing a digital currency, China has rolled out a digital currency via a series of pilot programs since last year. The eRMB (my term as opposed to the more awkward official DC/EP) by itself will not help the renminbi to challenge the US dollar’s global dominance. Its true significance instead lies in its potential to alter the balance between China’s technology giants and traditional majority state-owned banks, thus indirectly enhancing the banks’ international competitiveness.
The pilot programs employ a two-tier structure with “controlled anonymity.” The People’s Bank of China (PBOC, the central bank) issues eRMB to an authorized group of large state-owned banks and other selected financial institutions, which then make the money available to households and firms – the digital currency’s ultimate users. Unlike with some other central-bank digital currencies under discussion, Chinese households and companies would not have an eRMB account directly at the central bank, thus distancing the PBOC from any glitches that might occur.
The authorized institutions see only a portion of the digital footprints of individuals or firms – for example, when they deposit or withdraw funds using eRMB – and are not supposed to keep the information longer than needed. That’s the “anonymity” part of “controlled anonymity.” The “controlled” part, however, is that the PBOC sees the entire history of the movement of a given eRMB unit, and can choose whether or not to use or share the information. Both the two-tier system and controlled anonymity are likely to be central features of any eventual national program.
In the pilot schemes, eRMB were distributed to randomly chosen individuals via free digital gifts. At the full-scale launch, the government will have several tools at its disposal to encourage wider use. For example, it could pay the salaries of government and state-owned firms’ employees – some 15% of the workforce – and public-sector pensions in eRMB. Government procurement programs, transfers to low-income households, and subsidies to firms also can be carried out in the new currency. In addition, the government could require citizens to pay a progressively higher proportion of income taxes and other public-sector fees in eRMB.
How significant will the digital renminbi be? By replacing China’s physical notes and coins, the eRMB will save the PBOC the costs of printing and circulating new currency and regularly replacing a portion of existing notes, which currently amount to billions of renminbi a year. While these savings are socially useful, they are unlikely to be large relative to China’s government budget or GDP.
Nor will the eRMB completely stamp out illegal transactions in China’s underground economy, because criminals will doubtlessly settle deals using alternative means such as dollar or euro bills, gold chains, or valuable artwork. (More than half of all physical US dollar bills, especially $100 dollar bills, circulate outside the United States, often aiding the underground economy in other countries.)
A far more significant consequence of the eRMB that Chinese officials have not publicly discussed is its potential to alter the balance of power between China’s banks and Big Tech firms.
The rise of digital conglomerates such as Ant Group, JD.com, and Baidu has created significant value for Chinese households and firms. Households can access a large array of mutual-fund products through digital financial supermarkets with a level of convenience unavailable even to Americans, while millions of small entrepreneurs unable to obtain bank loans have secured funding without having to post a collateral.
The ability to make such loans reflects Big Tech’s advantage in observing not only the revenue growth of an online business, but also “soft information” such as customer reviews of the firm’s products and services, and product return rates. Such data – which typically is not available to banks – allows Big Tech to generate high-quality credit scores. Big data also enable Big Tech firms to process credit applications, distribute loans, and collect repayment much more cheaply and quickly than banks.
Regulators within and outside China have become increasingly worried that Big Tech firms could abuse these advantages. Traditional banks, which have been losing market share to the digital giants in both money management and lending, are probably cheering the regulators on as they take a tougher stance.
Under controlled anonymity for the eRMB, the PBOC will gain a similar ability to monitor what is otherwise invisible to banks. Although the PBOC would still lack other information such as customer reviews, its data on growth of revenues and expenses would in some ways be better than Big Tech’s, because it would include an economy-wide history of transactions. This may allow the PBOC to estimate potential borrowers’ creditworthiness and to share these new credit scores with banks at low or no cost, enabling them to make uncollateralized loans too, which could reduce or even eliminate Big Tech’s information advantage.
The eventual international use of the eRMB will depend on a number of factors. As China’s global trade and financial importance grows, more transactions will be settled in renminbi. Chinese state-owned firms could insist on settling a portion of their international transactions in renminbi, while the PBOC could sign more swap agreements involving the currency. But Chinese capital controls, as well as the relatively small amount of liquid renminbi-denominated assets that can be bought and sold by international investors, will limit the currency’s international uptake. Reforms in these areas, on the other hand, can promote its adoption.
US policy also will play a role. The US authorities could, for example, discourage American financial institutions from using the renminbi. Ironically, frequent US financial sanctions that exploit the dollar’s privileged global position could promote the emergence of alternatives to the greenback, including the renminbi.
The eRMB on its own will not advance the renminbi’s internationalization. Its main impact is likely to be a rebalancing of power between the banks and the Big Techs at home.
Shang-Jin Wei, former Chief Economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and the School of International and Public Affairs at Columbia University.
Copyright: Project Syndicate, 2021.
www.project-syndicate.org
Zodiac race track: The “Zodiac Mountain Road” (十二盘坡 ) near Haidong in the east of the Chinese province of Qinghai has twelve curves in store for car and two-wheeler drivers – one for each sign of the zodiac. In the Year of the Buffalo, the road winds from Xining to the Huzhu Beishan National Forest Park.
Modern cars don’t work without chips. But the small silicon components are currently in short supply for various reasons. That makes managers in both Germany and China nervous. Planners in Beijing are therefore forging a Chinese semiconductor alliance of around 70 companies. They are to cover the entire chip supply chain and thus produce around 70 percent of the semiconductors for their own market by 2025, as Christiane Kuehl reports. Automotive expert Ferdinand Dudenhoeffer expects China to become the global market leader in as little as five years.
But China is not only setting a fast pace in chip production. Frank Sieren uses the May holidays to show how quickly China has recovered from the Covid crisis: The Chinese are already traveling more than before the start of the pandemic. For example, 85,000 people visited the former residence of Mao Zedong in Shaoshan – on a single day. Beijing promotes this “Red Tourism” to the best of its ability. Here, ideological education is combined with a disdainful pursuit of profit – and that fits in perfectly with China’s new economic strategy.
The German shipbuilding industry, suffering badly from the consequences of the Covid crisis, could also benefit from the new desire to travel. But the road to recovery initially requires a balancing act: On the one hand, the industry wants to fend off competition from China with a targeted strategy, and on the other hand, it wants to take advantage of the opportunities offered by this booming industry.
Lastly, the curious news about China wanting to introduce a Covid separation line on Mount Everest. As laudable as health protection is, however, it is likely to be difficult to maintain a minimum distance of 1.5 meters on the narrow summit. Whether the climbers will now have to wear FFP2 masks under their oxygen masks was left open for the time being. At least regular ventilation should not be a problem up there.
I wish you an interesting read!
Chips seem to be the most important component of every car at the moment. Since vehicles are full of electronics – digital speedometers, parking aids, or, quite banally, automatic window regulators – each of them needs dozens of chips. But those little semiconductor components are in short supply right now, forvariousf reasons. Around 80 chips are in an average car, says Ferdinand Dudenhoeffer, founder of the Center Automotive Research in Duisburg, in an interview with China.Table. “In premium models, it’s more like 100.”
Due to a lack of chips, production facilities are repeatedly at a standstill – even in China. The People’s Republic’s technology conflict with the USA intensifies the supply problems for semiconductors and components. Beijing wants to solve both problems by building up its own powerful chip industry without components from abroad – as always at record speed. The goal of the economic planners in Beijing: to obtain around 70 percent of the semiconductors for its own market from domestic production by 2025. Today, according to a study by the US think tank Rhodium Group, that figure is only 16 percent. But a lot of money is already flowing. In 2020 alone, Beijing supported semiconductor companies with the equivalent of at least $35 billion – 400 percent more than a year earlier. Tax breaks for chip companies have also been determined, initially until 2030. President Xi Jinping wants technological self-sufficiency, also to no longer be vulnerable to sanctions.
Specifically for the automotive sector, the first Chinese chip alliance was formed in September 2020, linking around 70 companies in the complex semiconductor supply chain for domestic production – including research institutes. This alliance is hung up at the China New Energy Vehicle Technology Innovation Center of the Ministry of Research. The Ministry of Industry and Information Technology is also involved. Little else is known about the China Automotive Chip Innovation Alliance, except that it has just released a brochure with information about all the participants and other manufacturers in the industry, according to state media. It is intended to help companies contact each other as they build supplier relationships. That sounds unexciting at first. Still, this group could be the start of a slowly emerging chip ecosystem in China.
For example, Chinese automaker SAIC Motor recently announced plans to enter the auto chip sector with tech company Horizon Robotics. Taiwanese electronics company Foxconn alsotalkeds with chip foundries about a possible collaboration on chip manufacturing for EVs. That’s a segment Foxconn is entering large-scale right now. According to a report in Caixin magazine, the prestigious Tsinghua University set up an integrated circuit school in April to achieve “breakthroughs in chip technology” and train microchip specialists. Specialists are in short supply in China, even though Tsinghua has had a degree in semiconductor science since 1956. So many things are in development.
Still, many experts remain skeptical. The Rhodium Group, for example, writes that the distribution of subsidies is not efficient because local officials are not familiar with the industry – and thus cannot monitor the use of the funds by the recipients reasonably.
Auto expert Dudenhoeffer is much more optimistic. “My forecast is that China will become the world market leader in semiconductors in about five years.” If Xi Jinping sets a goal, money will flow and a targeted programwill be implemented. Chinese chip companies are only two to three years behind the US or Taiwan, Dudenhoeffer said – “and Chinese companies learn very quickly“.
The crucial shortcoming is that China’s companies are unable to produce the smallest high-tech chips with a structure width of just a few nanometers. The world market leader TSMC from Taiwan is the technological pioneer. When it comes to building up the domestic chip industry, however, Beijing is not necessarily only interested in local companies but, above all, in local production in the country, Dudenhoeffer believes – regardless of whom. TSMC, for example, plans to invest the equivalent of €2.3 billion in Nanjing to expand chip production for the automotive sector at the existing site starting in 2023. The planned 28-nanometer chips are quite large but are in high demand in the automotive sector. China’s leading chip manufacturer SMIC also wants to produce such 28-nm chips together with the local government of the tech metropolis Shenzhen. SMIC is blacklisted by the US but was recently able to buy high-tech lithography systems for chip production from Dutch manufacturer ASML. Analysts see this as an easing of US sanctions.
German automakers would probably view a Chinese chip boom with mixed feelings, Dudenhoeffer believes. “With Chinese chips, there is always the fear that they are programmed in such a way that they can pass on data.” Car manufacturers will thus certainly be cautious in their selection, Dudenhoeffer believes. It is conceivable, he says, that Chinese chips will only be installed in cars for the Chinese market to a certain extent. In the case of autonomous driving, this separation is even mandatory since the systems in China and Europe are different. For example, while self-driving cars in Germany will operate largely independently of specific infrastructure, China is fully committed to networking (vehicle-to-X/V2X) with traffic signs, Dudenhoeffer explains. “But in general, there will be no getting around incorporating Chinese chips as well.”
In recent months, reports have been mounting – from Volkswagen to the electric startup Nio – about production interruptions. Due to chip supply shortages about 100,000 vehicles could not be built in the past fiscal year, VW Group CEO Herbert Diess said at the virtual annual press conference in late March. And just last week, BMW, Honda Motor, and Ford Motor reported further growing problems with chip shortages.
At the same time, according to Dudenhoeffer, the attitude towards electronic systems in cars is currently changing: The future will bring central computer systems instead of implementing separate functions with individual chips, as has been the case in the past. The new system again places new demands on the required semiconductor elements. Observers expect the shortage to worsen before things start looking up again at the end of 2021, at the earliest. Not a scenario in which there is much freedom of choice.
While many central banks are still investigating the possibility of issuing a digital currency, China has rolled out a digital currency via a series of pilot programs since last year. The eRMB (my term as opposed to the more awkward official DC/EP) by itself will not help the renminbi to challenge the US dollar’s global dominance. Its true significance instead lies in its potential to alter the balance between China’s technology giants and traditional majority state-owned banks, thus indirectly enhancing the banks’ international competitiveness.
The pilot programs employ a two-tier structure with “controlled anonymity.” The People’s Bank of China (PBOC, the central bank) issues eRMB to an authorized group of large state-owned banks and other selected financial institutions, which then make the money available to households and firms – the digital currency’s ultimate users. Unlike with some other central-bank digital currencies under discussion, Chinese households and companies would not have an eRMB account directly at the central bank, thus distancing the PBOC from any glitches that might occur.
The authorized institutions see only a portion of the digital footprints of individuals or firms – for example, when they deposit or withdraw funds using eRMB – and are not supposed to keep the information longer than needed. That’s the “anonymity” part of “controlled anonymity.” The “controlled” part, however, is that the PBOC sees the entire history of the movement of a given eRMB unit, and can choose whether or not to use or share the information. Both the two-tier system and controlled anonymity are likely to be central features of any eventual national program.
In the pilot schemes, eRMB were distributed to randomly chosen individuals via free digital gifts. At the full-scale launch, the government will have several tools at its disposal to encourage wider use. For example, it could pay the salaries of government and state-owned firms’ employees – some 15% of the workforce – and public-sector pensions in eRMB. Government procurement programs, transfers to low-income households, and subsidies to firms also can be carried out in the new currency. In addition, the government could require citizens to pay a progressively higher proportion of income taxes and other public-sector fees in eRMB.
How significant will the digital renminbi be? By replacing China’s physical notes and coins, the eRMB will save the PBOC the costs of printing and circulating new currency and regularly replacing a portion of existing notes, which currently amount to billions of renminbi a year. While these savings are socially useful, they are unlikely to be large relative to China’s government budget or GDP.
Nor will the eRMB completely stamp out illegal transactions in China’s underground economy, because criminals will doubtlessly settle deals using alternative means such as dollar or euro bills, gold chains, or valuable artwork. (More than half of all physical US dollar bills, especially $100 dollar bills, circulate outside the United States, often aiding the underground economy in other countries.)
A far more significant consequence of the eRMB that Chinese officials have not publicly discussed is its potential to alter the balance of power between China’s banks and Big Tech firms.
The rise of digital conglomerates such as Ant Group, JD.com, and Baidu has created significant value for Chinese households and firms. Households can access a large array of mutual-fund products through digital financial supermarkets with a level of convenience unavailable even to Americans, while millions of small entrepreneurs unable to obtain bank loans have secured funding without having to post a collateral.
The ability to make such loans reflects Big Tech’s advantage in observing not only the revenue growth of an online business, but also “soft information” such as customer reviews of the firm’s products and services, and product return rates. Such data – which typically is not available to banks – allows Big Tech to generate high-quality credit scores. Big data also enable Big Tech firms to process credit applications, distribute loans, and collect repayment much more cheaply and quickly than banks.
Regulators within and outside China have become increasingly worried that Big Tech firms could abuse these advantages. Traditional banks, which have been losing market share to the digital giants in both money management and lending, are probably cheering the regulators on as they take a tougher stance.
Under controlled anonymity for the eRMB, the PBOC will gain a similar ability to monitor what is otherwise invisible to banks. Although the PBOC would still lack other information such as customer reviews, its data on growth of revenues and expenses would in some ways be better than Big Tech’s, because it would include an economy-wide history of transactions. This may allow the PBOC to estimate potential borrowers’ creditworthiness and to share these new credit scores with banks at low or no cost, enabling them to make uncollateralized loans too, which could reduce or even eliminate Big Tech’s information advantage.
The eventual international use of the eRMB will depend on a number of factors. As China’s global trade and financial importance grows, more transactions will be settled in renminbi. Chinese state-owned firms could insist on settling a portion of their international transactions in renminbi, while the PBOC could sign more swap agreements involving the currency. But Chinese capital controls, as well as the relatively small amount of liquid renminbi-denominated assets that can be bought and sold by international investors, will limit the currency’s international uptake. Reforms in these areas, on the other hand, can promote its adoption.
US policy also will play a role. The US authorities could, for example, discourage American financial institutions from using the renminbi. Ironically, frequent US financial sanctions that exploit the dollar’s privileged global position could promote the emergence of alternatives to the greenback, including the renminbi.
The eRMB on its own will not advance the renminbi’s internationalization. Its main impact is likely to be a rebalancing of power between the banks and the Big Techs at home.
Shang-Jin Wei, former Chief Economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and the School of International and Public Affairs at Columbia University.
Copyright: Project Syndicate, 2021.
www.project-syndicate.org
Zodiac race track: The “Zodiac Mountain Road” (十二盘坡 ) near Haidong in the east of the Chinese province of Qinghai has twelve curves in store for car and two-wheeler drivers – one for each sign of the zodiac. In the Year of the Buffalo, the road winds from Xining to the Huzhu Beishan National Forest Park.
