On April 17, ZTE announced a temporary suspension due to the US Department of Commerce’s Industry and Security Bureau’s activation of the refusal order. The day before the suspension, the U.S. Department of Commerce announced that it would prohibit U.S. companies from selling components, goods, software, and products to ZTE for the next seven years. technology.
According to a CICC research report, ZTE currently has parts and components stocks for January-February. If it does not reach a settlement within 1-2 months, it will affect the normal production and sales of its communications equipment and mobile phones. It is reported that ZTE is in China Telecom. The equipment market has a share of nearly 30%. This is undoubtedly a deadly blow for ZTE.
According to statistics from the China Semiconductor Industry Association, the value of domestic integrated circuit imports in 2017 was 260.1 billion U.S. dollars, which was China’s largest import commodity, and the IC trade deficit hit a record high.
The background of ZTE’s sanctions against the United States was the Sino-US trade war that began on March 23. The predicament of ZTE at this time also caused widespread discussion among investors. Some investors stated that they will increase input and research on the underlying chips in the future. Other VC investors are cautious about this. Why did China not have a good chip company in the past? For investors, have you ignored the investment opportunities for technological innovation in the past? Is VC suitable for chip investment? How to make better use of it? Capital power to develop the chip industry?
In the past two days, my circle of friends has been filled with all sorts of arguments about how to look at the chip and the underlying innovation. I think we need to return to the nature of business. 10 years ago, our internal fund strategy was to ignore the so-called original underlying technology. Innovation, and today we boldly propose that we must pay close attention to the underlying technological innovation. Why?
Let's take a look back at every successful element of technological innovation. From PCs, mobile internet to today's artificial intelligence, every generation of technology companies faces a certain window period. The real barrier established by this window for technology companies is ecology and the entire market. , Leading companies can use the window period to build huge technological barriers.
In the past, China replaced technology with the market. We missed the development of the chip in the 1970s and the development of the PC in the 1990s. In 2000, we only caught up with the Internet model innovation window.
But today, China has the opportunity to use the market to create technology, because this timing is right. Our talent and capital have the opportunity to create original technologies on the same starting line, relying on China's powerful market size.
In 2004, we invested in China Microelectronics. Now the founder is 70 years old. He is working on equipment in the semiconductor industry. It has been 14 years since 2004 and it has just barely surfaced. Everybody saw Chinese in the media. How to resist all kinds of pressure to return to China's story.
There are many such talents in China, but they are very small. The core of semiconductors has just been mentioned. In the past ten years, the United States has not voted, and China has not voted. But I think there is an opportunity for the future. The cost of production is half that of the United States. I don't know how many companies can succeed 1-2 times. But I think many opportunities will be left to China.
I am from Shenzhen, ZTE. Recently, we may have more attention to Shenzhen. What implications does this incident have for the venture capital industry? I think that VC organizations need to pay more attention to and invest in genuine core original things because core innovations have vitality and competition. force.
Generally speaking, companies that are able to grow in the long term must have their own core competencies. Some are technology and others are models. The wave of model innovation may have passed, but the greater opportunity lies in technological innovation, including Biology, AI, and chip industries. (Possible) LPs don't understand, but we have to stick to it. Only in this way can we earn more. Although companies that invest in technological innovation have a long time, they don't grow as fast as the model, but sticking to them can be rewarded.
I studied semiconductors. After entering the investment industry, this area has always been the direction I am concerned about. After 2001, the US industry has not voted. The reason is very simple. The entire capital market does not support the high-tech chip industry.
But China happens to be a mismatch. We know we have to invest in this industry, but my return in this industry is the worst in the entire category, not the worst but also the penultimate. Why? Because the US capital market is no longer supported. , China's capital market is also not supported.
Recently this piece has made great progress. China has a lot of big funds and hopes to invest in important and strategic industries, such as semiconductors. But there are also many problems with this, that is, investment in state-owned assets cannot lose money, so they will be abroad. The mature company got it back, and then it took another round of money from China's capital market. This is not very good, it caught the attention of the United States, and did not approve such investment.
Actually, there are great opportunities in the Chinese market because the applications of the chips are all in China, but the challenges are even greater. How can we practise it, build our own capabilities, and patiently invest in a technology company that has an impact on the industry? This still has today. Certain challenges and difficulties.
In fact, we did not vote for chips. Before we voted for several companies that did chips, we lost all our money and contributed to China’s technological innovation.
I think there are several difficulties in China's chip technology. First of all, China's chip companies are mostly single-product companies. Single-product companies have problems in the long-term, because their life cycle is very short and they soon drop to the average level. Because of the large initial investment, R&D personnel and tapeout are all high costs, and the valuation of the company is not high. Unlike Tencent, Alibaba has a market value of US$450 billion, and the most successful listed company is 10-20. Billion US dollars. For VC, the investment and the return are disproportionate.
Secondly, from a medium-term perspective, any large industry has a cyclical nature. The first to come out is definitely to be a hardware company. For example, in the PC era, Intel, IBM, Cisco, and NVIDIA come out first in artificial intelligence. Smart, China still has a chance.
Once the chip investment is formed, the new company will have a hard time. In particular, the initial investment of the chip company is very large. If your competitors take the initiative to occupy the market and amortize equipment costs, you cannot compete with them. The cost curve will be Far from lagging competitors, you cannot compete unless you rely heavily on government subsidies and support.
However, there are still opportunities in the artificial intelligence chip. We recently voted one or two in the AI chip company that was very hot on the market.
In my opinion, in China, it is more reliable to accumulate capital and strength first and then follow the technical route. Today's Internet giant, whether it is Ali, Tencent or Didi, spends a lot of money on core technology R&D. The United States established a laboratory and recruited a lot of outstanding engineers. This is the path I think is more realistic.
China's real-standard VCs are making large-scale investments in China, which is the case from 2004 to 2011. There are a lot of people who cast chips during this period. In fact, many companies that now produce basic application chips are also investing at that time.
However, there are several problems with the chip. First, it either succeeds or fails. Unlike some model innovations, this path can be changed without delay.
Second, early VCs were not large. In the late 1990s, 100 million U.S. dollars were big funds. When most of the chips were put into production, they were basically an average profit. They did not bring monopolistic profits. Therefore, after the second half of 2000, it is very difficult for everyone to enter this field of chips.
For VCs, it likes to invest in projects that can generate greater demand and get money back quickly. You say that it's good to beat drums to make money, and how many times you actually get profits.
In the second half of 2000, mainstream VC investment chip companies mainly invested in the third round, basically 90% did not go into the first round, and the remaining 10% did the second round, put things out, the second round of The valuation of the third round will not be very far apart, so everyone will vote in the third round. For this reason, some of the things related to our basic level are basically invested by the state. Because capital is profitable, The point is beyond reproach.
When it comes to the chip problem, unless it is a true AI chip today, it can generate high profits in the short and medium term, and other things even if you make, that is, the average profit, or zero profit status. This is the actual situation, the actual situation will affect Business investment behavior, this point still hope everyone can understand.