The US Congress is trying to figure out how to put a stop to the flow of goods and capital to China from the tech sector. Pressure has been applied to allies like South Korea, Japan, and the Netherlands, to stop the latest manufacturing technology reaching the Chinese. It seems the challenges of high interest rates, unpredictable exchange rates, slowing growth rates, and geopolitical pressures may be character building, at least for manufacturing in China. We have a hint of that in the changing fortunes of its display industry.
Stopping the VC Cash to China
American lawmakers are on their pedestals when it comes to China and technology. They tried to use the fiscal 2023 omnibus spending bill to create mechanisms for the the Treasury and Commerce departments to track U.S. capital flows into tech sectors in China, and some other countries, but China was the big target.
“There is a fundamental contradiction in our China policy today: the U.S. government is placing increasing scrutiny on technology transfer and tightening export controls in concert with our allies to counter malign CCP-directed companies,” said Rep. Mike Gallagher, R-Wis., the chairman of the House Select Committee on the Strategic Competition Between the U.S. and the Chinese Communist Party.
Putting aside the politics of it all and the clutching at proverbial pearls, US investors do put a lot of money into China’s tech sector. A policy briefing by CSET highlighted almost 401 investments in Chinese AI companies between 2015 and 2021 that involved about 167 US investors. Investment in technology companies also set up a general flow of knowledge and IP between entities connected to the investors, or in anticipation of expanding markets into other countries, or gaining competitive advantage. In other words, US investors are giving a leg up to Chinese companies not only in terms of funding but by enabling relationships that strengthen their technologies because, you know, they want to get a return on their investment.
Things are happening in the AI space because it is the hot topic, like you know crypto was, and displays are not. It’s unlikely that a lack of US investors is going to squeeze Chinese display manufacturers. But what could?
Will BOE Get its Gen 8 OLED Deposition Machines
Well, the US chip sanctions have material impact on Chines display manufacturers production lines. The CEO of BOE is trying to make sure that Canon Tokki will be able to deliver deposition machines for its Gen 8 OLED panel production lines. According to TheElec, BOE is fourth in line after Samsung, LG, and Apple.
Canon Tokki has been anointed by Apple as a preferred supplier for Gen 8 machines. It has forced the hand of Samsung, who is also developing its own Gen 8.5 processes with Japan’s Ulvac but has to adhere to Apple’s needs, too. LG hand abandoned its own attempts at partnering on production machines, and Canon Tokki doesn’t want any more partners because it wants to sell whoever it pleases.
Now, if that sounds like Japan and Korea stand to gain from all that is happening, it is worth noting that Korea’s display industry relied on exports to China, and while there have a number of political and trade skirmishes, there are reasons for the two regional powers to be doing more with each other, not less. Japan needs China, too, because that is where it can sell its production machinery with the most benefit. Getting out from being reliant on Samsung and LG alone will open up opportunities for Japanese companies to raise the value of their technology holdings.
China’s Neural Network
In the meantime, China is no slouch in having both the resources and the expertise to bring all its display industry needs in-house. The country has the manpower and the enterprises to build out more local production and there is a very tight bond with research and development at all levels of the country’s infrastructure from universities, through government-funded research bodies through to the web of inter-connected companies that go into making it possible for larger parent organization to become world beaters.
So, what is the US CHIPS and Science Act, and a rampant , partisan Congress, going to do to China? First, it is going to make it possible for a lot of companies to get handouts, spend crazy because they can, and still get undercut by Chinese manufacturers in world markets, while the US domestic market is never going to be enough to sustain the demands of multi-billion dollar fab investments (just ask Intel). Secondly, it is going to make Chinese manufacturers more resilient because they are not lying down and giving up on anything. They will still undercut the rest of the world on prices, weather the storm, and use the time to invest in their own tech infrastructure to support their own innovation. It’s a little too late for the US to put the genie back in the bottle. Thirdly, an economic downturn, a forced entrenchment against the world’s second most powerful country, and a hard transition t new technologies is going to mean that display manufacturers in places like Korea will not be able to widen the gap between their own capabilities and those of China.
To be fair, the global supply chain failures during the pandemic were a wake up call. The reaction should be a long-term strategy to make sure that never happens again, but there is an awful lot of hyperbole being thrown at China, very much only China, and a lot of money being thrown at companies that kind of caused the supply chain issues in the first place, US manufacturers, through short-sighted, pump up the quarterlies financials, approaches. Those same short-term mindsets are now going to get billions of dollars in investment in tax breaks to fix a long-term issue? It is probably better to put your bets on companies like Samsung coming to the US, getting those US CHIPS act tax breaks and building a buffer for the long term. And let’s not forget that Europe is also investing in local manufacturing capability for the same reasons but with its usual conservative investment agenda, it probably won’t face the same issues as the US.
China’s Display Dominance
Given that China routed the competition on LCD displays, and given that it has the resources to compete on next generation display technologies, sanctions or no sanctions, shouldn’t be just see the existing geopolitical pressures on the country as doing nothing more than accelerating its ability to compete. If nothing else, before the US continues with its tech sanctions on China, it should look at what the country is able to do with display manufacturing to get an understanding of how it will react. China can be good enough with its tech, it is not going away as a buyer of production machinery, and it can undercut the competition on price. The US anti-China fever will pass (anyone remember the anti-Japan fever of the 80s). When it does, China is going to probably be in a better position to compete than it is today.
