@GSElevator – #1: On Valentine's Day, send your girl flowers anonymously. If she doesn't mention it, dump her. Sorry, but she's cheating on you.
1. Quote Of The Week / 2. Chinese Sets Sights On The Semicon Sector / 3. So Far In 2016 / 4. Interesting Links / 5. Joke Of The Week
1. QUOTE OF THE WEEK
Last week, state-backed ChemChina agreed to acquire Syngenta for over $43 billion in cash. While more agriculture acquisitions are likely as the Chinese seek to achieve greater self-sufficiency in food production the Syngenta deal represents a strategic initiative by Chinese government-owned companies seeking acquire advanced technologies through foreign companies. The next focus area of acquisition by Chinese state champions will likely be in the semiconductor sector.
“If you can’t be the top-three giant, it will be very hard to develop your business in the chip industry,” said State-backed Tsinghua’s Chairman Zhao Weiguo. “The next five years is key…there is an enormous market there.”
2. CHINA SETS SIGHTS ON SEMICON SECTOR
China announced in 2014 that it aims to catch up technologically with the world’s leading semiconductor firms by 2030 - allocating $100-$150 billion in public and private funds to achieve it. Last year, they added the additional target of producing 70% of the chips consumed by the Chinese industry within ten years.
In 2015, China’s manufacturers—domestic and foreign-owned—consumed $145 billion-worth of microchips. However, the nation’s domestic chip industry is valued at only a tenth of that amount—holding a 12% share of “fabless” chip designers, and virtually nil in integrated chip makers and foundries. Overall, the nation consumes roughly half of the world’s $350 billion in chips, but accounts for only 2.5% of the sector’s revenue, according to Applied Materials, Inc.’s Nanochip Fab Solutions. Semiconductors are China’s biggest import and the nation plans to flip the long-standing paradigm. By 2020, China aims to generate 350 billion yuan ($55 billion) in domestic chip revenue—seeking a compound annual growth rate of 20%.
Chinese authorities recognize that they must acquire as much foreign expertise as possible. A recent example is the joint venture between the southwestern province of Guizhou announced Qualcomm and Qualcomm announed in January which plans to invest roughly $280 million to set up a new maker of specialist chips for servers, in which the province’s investment fund will own 55%.
Private Tsinghua Unigroup has emerged as China’s state champion that will drive the nation’s push into semiconductors. Tsinghua, a provider of integrated circuit chip design, is planning to invest $47 billion over the next five years to leapfrog Qualcomm into becoming the world’s number three chip maker. Tsinghua is one of sixteen investors in China’s National Semiconductor Industry Investment Fund, which contains $100 billion. Last month, the group agreed to buy 25% of Taiwanese company Powertech Technology, which packages and tests chips, for $600 million. In August, Tsinghua also reportedly made an informal $23 billion bid for Micron Technology, a major U.S. maker of DRAM memory chips, but the offer faltered due to potential political opposition. In December, Tsinghua invested $3.8 billion in Western Digital, a month after they agreed to acquire SanDisk for $19 billion - potentially giving Tsinghua access to SanDisk’s U.S. chip patents.
Overall, McKinsey notes that China - based corporate and financial investors have recently announced roughly $15 billion in controlling or minority investments in ten global semiconductor companies across the value chain. However, it still represents only about 15% of the $100 billion in semiconductor M&A deals announced globally since China disclosed its semiconductor targets. During the same period, the global semiconductor industry invested nearly $80 billion in capital spending and R&D—roughly 20 times what local Chinese semiconductors invested. Noting that M&A value outpaced investments by 25%.
China must compete with U.S. chip makers that have been driving robust semiconductor consolidation. The strategic imperative that the Chinese government has made to achieve expertise in semiconductors indicates major acquisitions are likely a question of when, not if.
3. SO FAR IN 2016
From Deutsche’s latest House View [ftalphaville]:
4. INTERESTING LINKS
Market-derived inflation forecasts are plunging [Capital Spectator]; Goldman abandons 5 of 6 2016 calls [Bloomberg]; Ackman backs Bloomberg for President [FT]; Is sub-prime auto the next ‘big-short’ [Bloomberg]? …apparently not [Zero Hedge]; The 2016 Investment Yearbook [Credit Suisse]; The future of news [Wired]; How embedded are FB and GOOG in advertising? [Stratechery]; Citadel to become a NYSE market maker [NextFT]; Another Chinese Ponzi scheme [Washington Post]; A peek at Russia’s economy [Conversable Economist].
5. JOKE OF THE WEEK
