China Ditch Intel and AMD for Homegrown CPUs But What For?

The wise Lee Kuan Yew said,

“China knows that it needs access to U.S. markets, U.S. technology, opportunities for Chinese students to study in the U.S. and bring back to China new ideas about new frontiers. It therefore sees no profit in confronting the U.S. in the next 20 to 30 years in a way that could jeopardize these benefits.”

Regrettably, relations between China and the U.S. have deteriorated since 2018 during Donald Trump's presidency. A return to previous conditions seems unlikely as the trade war escalated into a technology conflict, resulting in several Chinese companies being blacklisted. In response, China sought to supplant American technology with homegrown alternatives. The prospect of China's peaceful rise appears dim, forecasting a challenging journey ahead. Even if China were to surpass the U.S. in GDP, the path is likely to be fraught with sacrifices and difficulties. For investors, this situation demands a discerning approach as not all China stocks are ‘investible’.

However, we believe it is premature to expect China to completely supplant American technology. A recent development underscores this viewpoint: China introduced new regulations that prohibit the use of Intel or AMD CPUs in government computers.

Together, Intel and AMD command a staggering 98.9% market share in the CPU sector as of the first quarter of 2024. It is unrealistic to anticipate that China could replace these industry stalwarts overnight. Therefore, we assert that the private sector and consumers will continue to depend on Intel and AMD computers for the foreseeable future.

Indeed, China has nurtured its own homegrown brands, listing 18 CPUs approved for government use. While the capabilities of these processors in comparison to Intel and AMD remain uncertain, it's clear there are numerous challenges ahead.

Even at the foundational level of CPU architecture, the technology originates from the West. Intel's x86 architecture is the prevailing standard, with AMD licensing it from Intel. ARM architecture is gaining popularity but also requires licensing from Western entities, giving the U.S. the power to restrict China's access as it has done with high-end semiconductor manufacturing equipment.

China's potential fallback is the RISC-V architecture, an open-source alternative over which the U.S. has no control should China decide to adopt it. However, even this technology is American in origin, leaving China without a proprietary architecture and still reliant on Western technology.

The subsequent challenge for China is scaling the production of these CPUs. SMIC (Semiconductor Manufacturing International Corporation) is anticipated to play a significant role in chip fabrication. Although SMIC achieved a breakthrough by manufacturing the Huawei Mate 60 Pro's 7nm chip last year, this success still depended on equipment from Western companies like ASML, Lam Research, and Applied Materials, albeit older models. China's ability to continuously acquire these technologies, possibly through secondary or black markets, will be crucial for expanding capacity and keeping pace with technological advancements.

While Intel is progressing towards 7nm chips and AMD is advancing to 5nm, SMIC has shown it can produce sophisticated chips. However, the entirety of this business is unlikely to shift to Chinese foundries immediately. Intel's revenue from China alone amounted to approximately $14.634 billion, more than double SMIC's full-year revenue of $7 billion. Therefore, it is improbable for SMIC to instantly assume full production capacity. Moreover, not all computers in China need to use domestic chips—only government devices do—meaning Intel could still generate significant revenue from China. This is reflected in Intel's share price, which only declined by 1.7% following the announcement of these regulations, indicating a limited impact.

In the same document, China outlined approved lists of operating systems and databases, exclusively featuring local entities.

As alternatives to Microsoft Windows, options such as Galaxy Kirin, Tongxin, and Fangde have been endorsed. The document includes a list of these domestic brands:

This document was actually published in December 2023 but only came to prominence recently when the Financial Times reported on it. Another significant document, known as Document 79, was covered in our previous discussions:

China is unmistakably committed to achieving self-reliance and has initiated tangible measures to substitute American technology, beginning with government entities. However, it's evident that even domestic companies continue to rely on Western technology stacks. As of now, China lacks equivalent proprietary technology, and this push towards self-sufficiency may incentivize developers to innovate uniquely. Nonetheless, this transition appears premature. The U.S. has not prohibited China from utilizing mass-market CPUs, making China's response seem excessive.