Lambsdorff: renegotiate CAI + Baidu produces new AI chip

Dear reader,

Technological competition between Europe and China is on our minds across the board today. While EU Commission President von der Leyen is pushing for the resurrection of a domestic chip industry, China is already showing off the results of its own, very similar initiative. The IT group Baidu is beginning the production of chips with particularly filigree conductor tracks. So far, only Taiwan, the US, and South Korea have mastered this technology. It is certainly a good thing that the EU is dealing with such issues at all. However, in direct competition with China, the push for an industrial policy comes far too late, as usual.

Alexander Graf Lambsdorff, the deputy parliamentary party leader of the German FDP party, is also dealing with a similar topic. As part of our series ahead of the German federal elections, we asked him how his party positions itself in questions regarding China. The FDP politician favors a free flow of commodities instead of striving for excessive autarky and isolation: “In times of growing populism and nationalism, the German government must counter protectionist tendencies within Europe and the world,” he demands.

Nevertheless, according to Graf Lambsdorff’s ideas, the future federal government should defend liberal values and stand up for human rights. They are not mutually exclusive: Only those who negotiate diligently while staying true to their own positions will end up with a good deal.

Your
Finn Mayer-Kuckuk

“There is a need for amendments to the CAI”

What is your priority: clear words on human rights or frictionless trade?

For us as liberals, human rights come first; we clearly criticize Xi Jinping’s increasingly authoritarian course. But this is not a contradiction to our desire to achieve improved market access and to shape successful economic relations with China. Many companies depend on China as a sales and procurement market or as a production site.

At the same time, China is dependent on the inflow of know-how and income from global trade. As a major economic and technology nation, Germany is therefore in a position to play a more visible role in the fight for human rights.

What do you think about globalization and the free flow of goods?

Globalization and the free flow of goods have increased prosperity and brought progress around the globe, especially for us Germans. In times of growing populism and nationalism, the Federal Government must counter protectionist tendencies within Europe and the world and take a firm lead on trade agreements, investment treaties, and fair investment conditions. This can only be done with the help of a functioning World Trade Organization (WTO).

It is vital to resolve the WTO dispute settlement as quickly as possible to avoid unilateralism, arbitrary tariffs, subsidies, and dumping. At the same time, a new comprehensive round of negotiations is needed, with the aim of uniting the various interests between industrialized, emerging, and developing countries.

Do you think the regions of the world should decouple economically?

No. We reject the growing tendencies towards isolationism and protectionism because the challenges of climate protection, global pandemic control, and the fight against poverty require multilateral action. As Free Democrats, we, therefore, want to strengthen rules-based multilateralism. On the other hand, the Covid pandemic has taught us how dependent our German car manufacturers are on China, or that a lot of much-needed medications are exclusively produced in Asia.

That is why we also say: our companies must diversify their risks to make us less dependent on individual countries that are prepared to use trade as a weapon. China is an important market, but markets such as India, Japan and South Korea are also far from exhausted. At a political level, the German government must take into account that we are taking up the US administration’s new “Alliance of Democracies” project to form a strong global alliance of free-market democracies. Alone, we cannot meet the emerging great power China at eye level in order to stand up for both our values and our interests.

In general, how important is China on your agenda compared to the EU, the US, Russia, and the Global South?

Very important. In my recently published book “Wenn Elefanten kämpfen” (When elephants fight), the systemic competition between China and the West plays a central role. Nations like China and Russia deliberately present themselves as counter-models to Western democracy – in China’s case, with a state capitalist and authoritarian party system. This gives rise to immense challenges.

Afghanistan is the latest example where China is apparently striving to fill the power vacuum left by the West. Specifically, this means that the People’s Republic is, for example, financing infrastructure projects in Africa, which, unlike Western aid, is not linked to criteria such as “good governance” or human and civil rights. In Hong Kong, too, we see what the increased influence of the CCP means for democracy and human rights.

How do you think the currently shelved EU-China Investment Agreement (CAI) should proceed?

On December 30, 2020, after years of negotiations, the German government reached an agreement on the EU-China Investment Agreement on the penultimate day of the German Council Presidency. However, it did not engage in a dialogue with our American partners beforehand, which was a mistake. The Free Democrats are also convinced that there is also a great deal that needs to be added content-wise before ratification. For example, it still lacks any kind of regulation on investment protection.

The FDP recently called for a renegotiation of the agreement. In your opinion, what should be the goal of these renegotiations?

Mutual market access and legal certainty must be reflected in the agreement. However, China’s unjustified sanctions against European organizations and individuals must also be the subject of renegotiations.

Alexander Graf Lambsdorff is a member of the German Bundestag and is deputy parliamentary group leader of the FDP.

EU plans ban on products made by forced labor

By

Amelie Richter

A groundbreaking new EU ban, more semiconductors from European production, and a new name for the Silk Road competitor: As part of the annual State of the European Union address on Wednesday, EU Commission chief Ursula von der Leyen gave an outlook on upcoming tasks and projects. In Brussels, this ritual is called “SOTEU”, which stands for “State of the European Union”.

She only specifically mentioned China three times during the speech at the European Parliament in Strasbourg, which lasted more than an hour – but the speech was filled with important allusions to EU-China relations. An overview:

EU import ban on products made by forced labor: A full import ban on goods produced under forced labor has long been called for as part of the debate on the EU supply chain law, including by the European Parliament (China.Table reported). Von der Leyen announced legislation to this effect: “We will propose a ban on products in our market that have been made by forced labor. Human rights are not for sale – at any price,” von der Leyen told the plenary. “Doing business around the world, global trade – all that is good and necessary. But this can never be done at the expense of people’s dignity and freedom.” Von der Leyen did not mention whether the ban would become part of the EU supply chain law or a stand-alone piece of legislation. The EU Commission’s value chain due diligence proposal is set for the end of October. However, it is currently unclear whether the date will be met. The import ban could affect goods produced in the region of Xinjiang. Human rights organizations accuse China of using Uyghurs as forced laborers.

Semiconductor offensive I: The European Commission “We will create a European Chips Act” to keep pace with global leaders in the development and production of microchips, von der Leyen said. It’s the latest push by the EU to bolster the domestic sector in the face of a global semiconductor shortage. Von der Leyen’s announcement is reminiscent of the U.S. “CHIPS for America Act,” which U.S. lawmakers unveiled last year. The US law aims to encourage investment and create incentives to support US semiconductor manufacturing, its research and development, and supply chain security. Developing the chip sector in Europe is “not just a matter of our competitiveness. This is also a matter of tech sovereignty,” von der Leyen said. The project was “a huge task” that required European leaders to “be bold again.” The commission chief said member states should “link together our world-class research, design and testing capacities,” and “coordinate EU and national investment.”

Semiconductor offensive II: Thierry Breton, the commissioner responsible for the European domestic market, explained the details of the initiative in a blog following the SOTEU: The law is intended to improve semiconductor research, increase production capacities in so-called “mega fabs“, i.e. particularly large and efficient production facilities, and diversify Europe’s semiconductor supply. Accordingly, these mega fabs should be able to produce the most advanced (towards a structure width of 2 nanometers and below) and most energy-efficient semiconductors in large quantities. He also unveiled a special “European Semiconductor Fund”. “With the European Chips Act, our tech sovereignty is within reach,” Breton wrote.

Connectivity under a new name: In July, EU foreign ministers had called for a revision of the EU’s connectivity strategy, with unified branding (China.Table reported). Von der Leyen now revealed its name: “Global Gateway”. According to the report, the Commission plans to “soon” reveal more details on the initiative, which is intended as an alternative to China’s New Silk Road. “Global Gateway” is to become a “trusted brand” around the globe, von der Leyen said. She clearly outlined its goal: to counter China’s aggressive infrastructure development. Europe needs to get smarter when it comes to financing infrastructure, she argued: “We are good at financing roads. But it does not make sense for Europe to build a perfect road between a Chinese-owned copper mine and a Chinese-owned harbor.” Global Gateway “create links and not dependencies,” the EU Commission chief stressed, which can be interpreted as a remark on Beijing.

Climate demand against coal: The EU Commission President called on China to phase out coal more quickly. The world would be relieved if the People’s Republic could “move away from coal at home and abroad,” von der Leyen said. “The goals that President Xi has set for China are encouraging. But we call for that same leadership on setting out how China will get there.” She reiterated calls from the U.S. and the EU to accelerate climate efforts and peak CO2 emissions as early as “mid-decade,” or 2025. So far, the People’s Republic has planned this for 2030. Xi Jinping had promised last year to make China a climate-neutral country by 2060.

More commitment in the Indo-Pacific: von der Leyen called the planned EU strategy on the Indo-Pacific region not only a “milestone”, but also an opportunity to establish the EU as an “active global player”. She said the strategy “reflects the growing importance of the region to our prosperity and security.” However, she mentioned autocratic regimes were also using the region in an attempt to expand their influence. “Europe needs to be more present and more active in the region.” The EU wants to deepen trade ties, strengthen global supply chains and develop new investment projects for green and digital technologies. The presentation of the EU’s expanded Indo-Pacific strategy had originally been scheduled for Tuesday, but will now take place at a press conference by EU foreign affairs chief Josep Borrell on Thursday. According to EU circles, there was a dispute over some of the phrasing behind the scenes.

Cooperation with NATO: The EU is working on a joint declaration with the defense alliance, according to von der Leyen. This is to be presented before the end of the year. In light of China’s rise, the European Parliament, among others, had already called for closer coordination between the bloc and NATO on defense issues (China.Table reported). The “NATO 2030” reform agenda also envisions a closer partnership with the European Union. NATO included the People’s Republic in the final declaration of a summit for the first time in June this year, describing China as a “systemic challenge” (China.Table reported).

In theory, von der Leyen’s SOTEU speech was very productive in terms of providing impetus for European China policy – but as always with the EU, timetables are still expected. As is well known, there is never a lack of good ideas and intentions in Brussels, but tangible details on the majority of the key points are still left to be desired.

Baidu impresses with cutting edge chip technology

By

Frank Sieren

China’s largest search engine service Baidu announced at its annual “Baidu World Conference” in mid-August that its new, self-designed “Kunlun-II” AI chip has already entered the mass production phase. The powerful chip is designed to process large amounts of data in the field of autonomous driving, among other applications. The Kunlun-II chips are also optimized for AI technologies such as voice and image recognition. In addition, they support deep learning with artificial neural networks in a special way. Baidu offers a freely accessible platform called PaddlePaddle for this purpose.

Baidu has so far earned its revenue primarily from online advertising. However, the group is also one of the leading companies in the development of AI applications and technology for autonomous cars. The new generation of Kunlun AI chips with a structural width of 7 nanometers achieves two to three times higher processing power than the previous generation, the company said. Until now, no Chinese manufacturer has been able to produce chips in the 7-nanometer range. However, Robin Li, founder, chairman, and CEO of Baidu, had announced back in July 2018 at the Baidu AI Developer Conference that his company plans to launch an internally developed AI chip.

The 7-nanometer technology is already reaching the limit of what is technically possible for practical use (China.Table reported). The lower the structure widths, the more efficient the chips become. The next limit is 5 nanometers. So far, only industry leaders such as Taiwan-based TSMC, Qualcomm (U.S.), and Samsung (South Korea) have dominated the mass production of such advanced semiconductor elements. With the push into the 7-nanometer range, Baidu is now playing right at the forefront.

The first-generation Kunlun chips went into mass production as early as the end of 2019. According to Baidu, more than 20,000 first-generation chips have been produced so far and used for search engines, intelligent assistance systems, and cloud programs.

In March this year, Baidu’s chip division raised an investment of around two billion US dollars by phasing out Kunlun’s chip manufacturing unit as a separate company in June. The financing round was led by Chinese private equity company CITIC Private Equity Funds Management (CPE). Other investors included Chinese investment houses IDG Capital, Legend Capital, and industrial fund Oriza Hua.

Tech companies want more independence

Baidu’s Kunlun II chip is part of a Chinese and global trend in which more and more tech companies are investing in the development of their own semiconductors, including corporations such as Apple, Amazon, Facebook, BYD, and Tesla. The self-designed chips are supposed to better meet the requirements of in-house applications and products than chips “off the shelf”. Customized semiconductors can also help to reduce power consumption of smartphones or cloud services, for example.

The ongoing global chip shortage is another reason why large tech companies aim for less dependency on external services. Even the EU has now come up with the idea of using high subsidies to breed their own manufacturers. After all, companies already feel restricted in their pace of innovation because they are tied to the schedules of large chip manufacturers such as Qualcomm, TSMC, or Nvidia.

The car industry alone could face losses of more than 60 billion USD this year due to the shortage of semiconductors, which resulted after former US President Donald Trump barred Chinese suppliers from using US technology. China’s high-tech companies then bought every chip they could get their hands on. Competition from other countries then followed suit. That’s how the shortage came about. The U.S. chip sanctions are hitting Chinese telecommunications giant Huawei especially hard. The smartphone business of the former world market leader has slumped. In the first half of the year, business dropped by nearly 50 percent, leaving Huawei in only 5th place. “I expect that as the capability in chip manufacturing increases, Huawei will return to the smartphone throne.” Huawei Chairman Guo Ping said recently. For the time being, the Shenzhen-based company has had to look for new business areas, such as autonomous driving.

The chip sanctions, however, may yet go down in history as Donald Trump’s biggest tactical blunder. Trump has ensured that the Chinese have learned their lesson faster than necessary: never again do they want to be this dependent on the US. The power struggle between nations is shifting more and more to technology anyway. US President Joe Biden, after all, wants to “end an era of major military operations to remake other countries.”

Nevertheless, the industry was surprised that Baidu’s 7-nanometer chip arrived this quickly. It can definitely compete with products of the US graphics card and AI specialist, Nvidia. However, China’s big issue still lies with in-house chip production with all components: It’s very expensive and requires a lot of know-how, even for Chinese tech giants. The construction of an advanced chip factory like TSMC’s in Taiwan costs around 10 billion USD and takes several years.

Beijing forges ahead with particularly high research spending

While China is almost on par when it comes to chip design, the booming country is still lagging behind in specialized chip production machinery. For example, Dutch high-tech company ASML is no longer allowed to supply Chinese companies with state-of-the-art production machines due to pressure from the US government. This is because the machines contain software that was developed in the USA. At the same time, the Chinese market is too important for suppliers and manufacturers to leave out. These are machines such as the new extreme ultraviolet (EUV) lithography machines, a single unit costs up to 150 million euros. When shipped, one machine takes 40 containers.

No other country currently builds as many chips as the People’s Republic. That’s why European companies like ASML are putting pressure on the Americans – and as does Beijing, of course. But President Joe Biden has not yet made any fundamental moves on this issue. One good sign, however, is that Huawei received the OK from the US government at the end of August to acquire US-made chips worth several hundred million US dollars for autonomous driving.

China now wants to catch up as quickly as possible. The progress made in the research and development of semiconductors in recent years has been “particularly impressive” in international comparison, writes the Berlin-based think tank of the “Stiftung Neue Verantwortung” (SNV) in a new study. According to it, China’s leading chip manufacturer SMIC invested almost 4.7 billion yuan (about 610 million euros) in its R&D last year. This accounts for 17 percent of sales, more than the average 13 to 14 percent that is common in the international semiconductor industry. China is no longer “just a manufacturing hub in the semiconductor value chain, but is already deeply rooted in the development of the chips of the future,” explain SNV’s digital experts.

Now, the production machinery must also be brought in. London-based Analysys Mason Group, one of the leading consultancies in the field, believes China will be on its own two feet in 3 to 4 years. China is already “a lot closer to achieving self-sufficiency than we would have predicted a couple of years ago,” says Caroline Gabriel, research director at Analysys Mason. “They will reach self-sufficiency for 28nm chips this year and 14nm processors next year.” While these are not just cutting-edge chips due to their 7-nanometer structure, they are the broader “workhorses” of the chip industry and therefore almost as important. “The pace of progress is impressive.” Europe and China should cooperate more closely in this field, as the Europeans face similar problems with the US. “The US wants to slow them down.”

Boston Consulting Group and US Semiconductor Industry Association already ran the numbers and came to a similar conclusion. In the end, the US would lose its market leadership to China, they summed up Trump’s policy. The Semiconductor Industry Association has even advised the US Department of Commerce to allow exports to China. This, it said, is the only way to maintain US market leadership. The industry desperately needs profits from China to keep up the pace of research and development. Before the sanctions, China purchased about 12 billion USD worth of chips from the US, saving about 40,000 jobs, according to industry estimates.

More prison sentences for pro-democrats in Hong Kong

The political purge in Hong Kong continues. On Tuesday, a court sentenced nine activists and former politicians to prison terms of up to ten months. The pro-democracy defendants were punished for organizing and participating in a vigil for the victims of June 4, 1989. The event last year had taken place in Hong Kong’s Victoria Park despite a ban. The authorities had officially banned the memorial service because of the Covid pandemic.

Those convicted again included former parliamentarians such as Albert Ho and “Long Hair” Leung Kwok-hung, who are already serving prison sentences for similar offenses, as well as leaders of pro-democracy organizations such as the Hong Kong Alliance in Support of Patriotic Democratic Movements of China and the now-defunct Civil Human Rights Front.

The vigil in Victoria Park has been hosted every June 4 since the Tiananmen Square massacre 32 years ago, before it was first banned in 2020. Organizers accused authorities of feigning concerns about Covid. Instead, they said, the goal was to prevent a gathering of the city’s democratic opposition.

In 2019, months of protests against the growing influence of the People’s Republic of China in Hong Kong had followed a steady erosion of civil liberties in the city by the authorities. With the introduction of the National Security Law last summer, the Communist Party provided Hong Kong authorities with a means of almost arbitrary punishment for political dissent. grz

German Frigate “Bayern” will skip Shanghai

The frigate “Bayern” will not visit the port of Shanghai due to opposition from Beijing. “China has decided after some deliberation that it does not want the German frigate to visit the port, and we have taken note of that,” a Foreign Ministry spokeswoman said in Berlin on Wednesday, according to German news agency dpa. China’s Foreign Ministry had earlier requested more information about the frigate’s intentions in the South China Sea before approving the pending request for a port visit to Shanghai (China.Table reported).

The frigate had departed from Wilhelmshaven for the Indo-Pacific on August 2nd. The German government had already announced in April that it would step up its security commitment in Asia and coordinate more closely with Japan in particular to this end. However, the objectives declared by the Federal Ministry of Defense – “a rules-based order, free sea lanes, multilateralism” – were to be coupled with a friendly gesture towards China. The friendly gesture should be the port visit.

The region currently sees a territorial dispute between China and other littoral states in the South China Sea. Berlin had previously announced that the frigate would stick to international trade routes when transiting the South China Sea (China.Table reported). The navy expects escorts by Chinese ships and overflights by the Chinese air force, but not a confrontation, the German defense ministry announced at the beginning of the journey. ari

Volvo about to go public

Geely plans to list the Volvo brand on the Stockholm stock exchange in the coming weeks, Reuters has learned from three unnamed sources. According to the sources, Geely Holding is in “advanced negotiations” with financial institutes to conduct the IPO. A valuation of just under 17 billion euros is being targeted. NordLB automotive analyst Frank Schwope believes a valuation of 8.5 billion euros to 12.5 billion euros is more realistic, he told Reuters. The IPO would be one of the biggest of the year in Europe.

Geely wanted to make Volvo public as early as 2018, according to Reuters, but put the plans on hold due to trade tensions and a downturn in auto stocks. Volvo was purchased by Geely in 2010. nib

Macau regulation sends prices tumbling

The authorities’ intervention in the gambling market of Macau has led to a plunge in stock prices of casino operators. They lost up to a third of their value on Wednesday, Reuters reported. According to the Financial Times, the loss amounted to 18.4 billion USD. Shares in Sands China plunged 32.5 percent, Wynn Macau dropped 29 percent and MGM China lost nearly 27 percent in Hong Kong on Wednesday.

The background to the price plunge is a 45-day public consultation on revising Macau’s gambling law. This is expected to result in tighter control over operators in the world’s largest gambling hub. The casino groups’ 20-year concessions to operate gambling venues in Macau expire next year.

Beijing plans to appoint its own representatives to casino boards of directors, according to a draft law, FT reported. Accordingly, the law is also expected to re-regulate the number and duration of concessions for casino operators, which will give the authorities significant influence over the largest employer in the Chinese territory.

The industry is already reeling from the Covid pandemic: According to numbers released by the official regulatory body, gross gambling revenue is down about 80 percent from pre-pandemic levels due to the absence of mainland tourists. ari

Xu Jiayin – head of the over-indebted Evergrande Group

Xu Jiayin Gründer der Immobiliengruppe Evergrande — Xu Jiayin, founder of the real estate group Evergrande

Xu Jiayin 许家印 (62) could go down in economic history as one of the biggest bankrupts before the end of the year. His real estate conglomerate Evergrande is threatened with insolvency(China.Table reported). Yet just a year ago, Xu was considered one of China’s most successful entrepreneurs. State media praised him as one of the country’s most generous benefactors. He was also known beyond business circles as a sponsor of Guangzhou FC. The soccer club was among the regular winners of the Chinese championship until 2019. Xu was considered a “model case for the Chinese dream”, a “showcase for the realization of the dream of wealth”.

The praise and accolades are now over. Under Xu’s leadership, Evergrande has accumulated so much debt that the chances of full repayment have fallen to zero. There are currently debts of around 300 billion euros outstanding. About 75 billion of that is bank loans and bonds. Another part consists of outstanding invoices, for example with construction companies and craftsmen. Xu has indeed pushed down the debt level through distress sales of real estate owned by the company. But in doing so, he has also diminished the revenue base that was a prerequisite for the loans. On Wednesday, the authorities issued a formal warning to the banks: there is a threat of further defaults as early as next week. The dream of wealth is over for now.

Xu comes from a small background. He was born in 1958 in a village in Henan province. After school, he first worked in cement production. At the age of 24, he became a technician in a steel mill. At 38, he founded the real estate company Evergrande. He initially bought cheap properties in smaller towns, which rose enormously in value as China developed. Xu always held on to the more valuable properties and used them as collateral for new loans. With the money raised in this way, Xu has always moved on to the next round of acquisitions. Evergrande’s profits and sales only ever seemed to go up. Evergrande became the largest real estate company in the country.

Until last summer, Xu had always been able to keep the balls deftly in the air. But the business model was based on the assumption that prices in the real estate market only ever go up and that China always grows evenly. Then came Corona. It became apparent that the Xu system was not crisis-proof. The shocks from the pandemic sent the conglomerate into a downward spiral where before it was an upward spiral. Investors withdrew money, creating payment problems. That again increased distrust. Even when the Corona fallout was somewhat overcome, Xu could not extricate himself from the downward spiral. He had simply gambled too high.

Xu got bogged down in too many projects

His business practices are now contributing to investor anger. Evergrande demanded high down payments and large deposits. As a result, angry investors include not only banks and stock market speculators. But also normal homebuyers who have already transferred money to Evergrande before even the first excavators for the construction of the housing complex approached. At times, it took years for prepaid units to be completed. These advance payments are enormously valuable to a finance company in good times: it’s money it can work with first. Now, however, the flow of capital has abruptly dried up.

It didn’t help that Xu invested in numerous other industries at the height of his success. In addition to the football club, these included electric cars, for example. This led to news stories as recently as last year such as, “Real estate developer Evergrande has unveiled six electric-powered car models.” The Hengchi brand was – of course – to do no less than knock Tesla off its throne. Xu Jiayin wanted to go head-to-head with Elon Musk. If everything had gone according to plan, mass production would already be underway today. Instead, Evergrande has so far only burned many billions of euros in the new business field. Even an involvement in the health industry and investments in amusement parks have not been profitable so far. In his delusions of grandeur, Xu has gotten bogged down.

Die Berichte aus jener Zeit listen dabei die exzellenten Kontakte des Arbeitersohns Xu zur politischen Führung als Erfolgsfaktor. Das ist im Prinzip eine richtige Beobachtung. Milliardär Xu ist – natürlich – KP-Mitglied und saß auch als Delegierter in der Politischen Konsultativkonferenz des Chinesischen Volkes. Doch wer hoch steigt, den lässt auch die Partei tief fallen. Das zeigen die Beispiele zahlreicher anderer Ex-Milliardäre, die heute im Gefängnis sitzen. Wenn etwas übel schiefgeht, dann müssen sie als Sündenböcke herhalten. Finn Mayer-Kuckuk

Dancing with the fluffy “conspecifics”: The panda robot Youyou shows off its agility alongside larger-than-life plush bears. Youyou was developed by the Hangzhou-based company Youbixuan and was presented at the World Robot Conference in Beijing.

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