Montage Merger: Good for Shareholders, Bad for China

The deal between Montage and Pudong Science and Technology has just been finalized.  With 14.3% premium over Montage's closing price Monday it is hard to argue that this is a bad deal for shareholders.  But it is a bad deal for China. And by China, I mean for the medium-to-long-term development of China's fabless sector.  Now the state has gobbled up the most promising of the local companies.  A nice exit for Montage's investors it is, but five years from now will Montage be able to maintain any ability to innovate under state ownership?  Miracles may happen, but it would be the first such state-owned fabless firm to do so.  Even Newave, Howard Yang's original start-up, went into steep decline as IDT Newave (in terms of its design capabilities) once Howard left, and IDT Newave was owned by a multinational not a Chinese state firm.

Montage's IPO

It was good to see Montage's IPO last week on NASDAQ has done reasonably well after a less than stellar start (the firm's target price was lowered right before the IPO).  The price is now back at the upper end of the original target range and this represents a price premium compared to a firm like Actions.   Montage's stock performance (admittedly just one week) is well deserved given the firm's technical team and track record.  More importantly, it might be part of a turn around in the attitude of US equity markets towards Chinese stocks.  While many firms deserved their bad reputations and the scorn short-sellers heaped upon them, the good firms have suffered along with the bad.  China-based tech firms need to be treated with circumspection, but cannot all just be labelled as frauds waiting to happen.  Of course, it would be help if PCAOB would assure foreign investors and regulatory agencies that they could actually have access to the documents needed to properly vet Chinese tech firms. 

Hua Hong NEC and Grace merger finally going through?

Reuters claims that the merger of Hua Hong NEC and Grace is nearly a done deal with the last hurdle being regulatory approval (link here).

Foxconn and Brazil: Wild Promises and the Realities of Currency Appreciation

Apparently, Foxconn is growing cold on making major manufacturing investments in Brazil (link here).  Well, knock me over with a feather.  As I pointed out in a post earlier this year (link here), it was always highly unlikely (read: never gonna happen) that Foxconn would invest in short order 12 billion USD in manufacturing in Brazil, a figure that represents more than its total manufacturing investment in China.  In the meantime, the Brazilian Reais has continued to appreciate against the dollar (and was appreciating against the renminbi until late July), and the Brazilian government wisely has bargained hard with Foxconn over tax breaks, technology transfer and the like.  Of course, Foxconn's stand is that the Brazilian government has to make it worth Foxconn's while to invest, but such a stance will probably only increase pressure for the Brazilian government to do something to protect local manufacturing due to the currency appreciation shock.  Indeed, for those Brazilians disgruntled by what they perceive to be Foxconn's tough bargaining (would we really expect anything less from hard-nosed Terry Gou?), protectionist measures would likely be most welcomed because they would work to undermine Foxconn's leverage i.e. the firm would have to set up some facilities in Brazil to get around the protectionist barriers whereas right now it can happily ship its goods from China.

Chinese Yahoo: Who Cares(?)

Jack Ma, ever the provocateur, casually mentioned his interest in buying Yahoo at a seminar at Stanford University (link here).  The FT wondered whether this would be acceptable to Americans.  Certainly in Washington there will be the usual political grandstanding about Chinese investments in American "high-tech" firms, but given Yahoo's increasing irrelevance, would anyone outside the Beltway even care?

Global 450 Consortium's Albany R&D: Boon or Boondoggle?

The announcement Tuesday that the Global 450 Consortium (consisting of IBM, Intel, Samsung, GlobalFoundries and TSMC) will invest $4.4 billion in a R&D center in Albany has generated some excitement and considerable skepticism.   For the latter, take a look at the recent Mannerism's post (link here).  Beyond the vagueness of the promised R&D goals that Manners points out in his post, there are additional questions of the funding.  According to the companies and the New York state government, there are no state subsidies involved.  That should reassure those who fear that the project is simply a boondoggle by companies to extract subsidies out of governments' concerned about competitiveness.  However, the details of the plan have not been released and, as always, the devil is in the details.  One crucial area is tax breaks.  The state may not be giving these firms money, but IBM, which is reportedly spending 3.5 of the 4.4 billion, as a prominent New York corporate tax payer may benefit heavily from tax breaks.  Large tax breaks for a New York-based firm to do R&D where it has always done lots of R&D has the stench of a boondgoggle.  However, what makes economic and industrial policy so difficult is that it is hard to suss out from the beginning what benefits this large scale R&D project will have for upstate New York and the wider US semiconductor industry (the latter of course not being a concern of NY state pols).  We'll really only know if this project has proven to be a boon to the local economy and American industry many years into the operations.  Nevertheless, with firms like IBM no longer shy about moving highly skilled jobs to other locations around the world, one does not have to be a cockeyed optimist to think these operations may turn out to be slightly more of a boon than a bane, but only time and details of the tax deals will tell us which one it is.

TY Chiu is back at SMIC

The good news for SMIC is that TY Chiu is becoming CEO of SMIC (link here).   His expertise is running foundry fabs hyper-efficiently.  These skills should help SMIC's operations and were sorely missed at the SMIC since he left the firm the first time around in 2005. The bad news is that the conflicts between state shareholders and private shareholders and among the state shareholders of SMIC have not been resolved. The poor market outlook for the foundry in the coming months just adds to what look to be turbulent times for SMIC.

SMIC's Takeover

As I predicted last February (link here), the Chinese state's control of SMIC's board has finally had some adverse consequences for the firm.  The widely reported failure of CEO David N. K. Wang to get re-elected to the board is due to Datang's long-standing bid to turn SMIC into its subsidiary according to local media reports.  The fact that the other state board members abstained from voting thus ensuring Wang went down in defeat is not reassuring.  More disturbing still, in the wake of Wang's defeat Walden's Lip-Bu Tan and the other real independent director, Kawanishi, have resigned.  Given that Wang was in charge when the firm turned its first annual profit, apparently no good deed goes unpunished.

Clever Terry Gou

Clever Terry Gou really knows how to play both sides of the Taiwan Strait.  He can wring concessions out of Taiwan's government for his industrial park in Tucheng with one hand and with the other scratch the back of the PRC.  How else can one explain the recent announcement (link) that Foxconn will invest 12 billion US in Brazil just as Brazilian president, Dilma Rousseff, is visiting China?  Somebody had to help the PRC out by providing a little hard cash to go along with all the empty rhetoric about the many common interests of BRICs.  Like many investment announcements, this one is inflated and much more inflated than most.  Invest in Brazil, yes.  Invest in Brazil several multiples of what Foxconn's total declared investment in China, no way

Rare Earth Elements: Another Environmental Fiasco in China's Green Industries

This article from SCMP (link here) documents the horrendous environmental and health effects of China's rare earth elements industry.  The irony of course is that rare earth elements are a critical component in many "green" technologies.  And yet, these very un-green externalities are common across China's green industries.  See for example the heavy energy consumption of solar panel production in China.

Hong Kong in the Five-Year Plan

Hong Kong has finally gotten some significant space in the new 5YP document (see today's SCMP here).  However, calling for Hong Kong to be the "dragon head" of Pearl River Delta financial system does not really offer much reassurance that the long term goal is not to have Shanghai replace Hong Kong as China's main financial center.  Indeed, two years ago the State Council named 2020 as the year Shanghai will be a global financial center and the new 5YP acknowledges Shanghai as the hub for RMB financial services with Hong Kong given the smaller role of hub for international RMB services.  Siu-Kai Lau of the Central Policy Unit has trumpeted Hong Kong's 5YP-designated role as showing up Guangzhou's bid to become the financial hub of the Pearl River Delta.  True as this may be, Hong Kong should not really be competing with Guangzhou in the first place.  Oh well, at least Hong Kong can comfort itself with the fact that the snail's pace of liberalization towards the capital account openness that Shanghai will require to become a global financial center means that Hong Kong will remain the financial window on the world for China beyond the 2020 deadline.

Asustek and Tsinghua Tongfang Tie-up?

Taiwan's China Times has reported rumors (article here) that Asustek and Tsinghua Tongfang may merge in a bid to replicate the success of Acer's alliance with Founder.  If such a merger occurred, the Chinese marketplace that Lenovo relies on would probably become not quite so hospitable.  One more reason to think Lenovo will continue its decline and no longer rank among the major global PC vendors (if measured in something more sensible than just unit sales in China).

Google's Trouble Started at the Top

According to the Guardian's review of Wikileaks' release of US diplomatic cables (link here), a member of the Chinese Politburo ordered hacker attacks on Google after searching his own name on the international version of the search engine and finding articles critical of himself.

Hua Hong over Grace

The always pending but never completed merger of Grace and Hua Hong is a step closer to being realized now that Ulrich Schumacher has stepped down as CEO and President of Grace and Gacre VP and former Hua Hong executive, William Yu Wang, has taken over as President.  It sounds if Schumacher went down fighting as he tried to become CEO of the Grace-Hua Hong JV fab, Huali, before resigning as CEO and President of Grace (link here).  Could the fact that the CEO position is still vacant mean Grace anticipates a full merger with Hua Hong sooner rather than later?

Nonsense Number One

China is now being heralded as the world leader in patent filings (link here), but this world number one reveals very little about China's innovation prowess or lack thereof.  First of all, counting filings (applications) rather than approved patents is rather silly.  Anyone can apply to Harvard Law School.  What is impressive is getting into Harvard Law School.  Second, China is busy filing lots of patents in China where the process of approving patents is lax at best.  If (when?) China overtakes Germany or Japan in patents received from the USPTO or some other respectable patenting office, then and only then should we sit up and take notice.  Third, there are different types of patents representing different levels of innovation.  For example, in the USPTO system, the inherent innovation behind utility patents is all else being equal much higher than that for design patents.

China ends ban on rare earth exports to Japan but damage is already done

In line with many of its other recent foreign policy foibles that have served only to irritate its neighbors and drive them into a closer embrace with the US, China's rare earth export ban directed at Japan was just plain dumb.  It served to heighten everyone's concerns about relying on China so now everyone will look for alternative rare earth suppliers.  On top of that, it heightens the alarm already felt about China's perceived increasing willingness to use its economic leverage to squeeze its trading partners.  And it puts the spotlight on how opaque China's descionmaking process is as there were rumors but no official confirmation of the ban for days.  Lifting the ban (link on lifting here) does not undue this damage.

Foxconn and Retail

Foxconn's public announcement that it will venture into retail has the potential of being a real game changer (link here and here).  With GOME on the ropes due to the arrest of its founder and ensuing succession battle, Foxconn's strategy of building up a rural network based upon setting up its own employees in business has the potential to rival Lenovo's rural distribution arm.  It will be interesting to see if the Chinese state tolerates this gambit.  As much as Taiwanese are considered compatriots when the issue of Taiwan's political status comes up, the Chinese state more often than not treats Taiwanese firms as foreign ones.  This can be good (lower corporate taxes) but also bad (many non-tariff barriers to the "strategic" parts of the domestic market blocking Taiwanese firms).

Acer and Founder

The new tie-up between Acer and Founder looks very interesting (see report).  Acer has always dreamed about being a big player in China's PC market and this may (depending on the details of the agreement) finally push Acer into the top ranks in a market that Lenovo still dominates.

Geography, Inequality and the Renminbi

Yukon Huang in the FT (link here) suggests that a fixed exchange rate will help move factories to the interior and thus reduce China's massive inequality.  Therefore, he is against china appreciating its currency.  But recent research challenges the conventional wisdom that geography accounts for a lot of inequality in China.  Benjamin, Brandt, Giles and Wang (Ch. 18) in China's Great Economic Transformation find that at least half and up to 2/3 of inequality is between "neighbors" within a given locale rather than across locales (city or village). Provincial differences account for even less of the inequality.  Urban-rural differences are also not a major source of overall inequality.  However, they did find that the "dynamics of inequality" are different between interior and coastal provinces with a faster increase of inequality within interior provinces due to faster increases in rural inequality and urban-rural income differential in the interior.  Huang would surely jump on the suggestion Benjamin and his colleagues make that one of the reasons for different dynamics of inequality in the coastal provinces is the stronger job growth in the non-state sector there in order for Huang to claim that such dynamics could be transferred to the interior along with the movement of non-state production to those areas.  The question remains how much the transfer of coastal-style non-state sector job growth would reduce the overall level of inequality.  If such a transfer does not solve a lot of the national inequality it does not seem like a very strong argument against appreciating the renminbi.

Legitimate Concerns on Rare Earth Minerals and Beyond

Paul Denlinger is spot on in calling the ability of Molycorp Minerals to get up and running in order to end America's utter dependence on China for rare earth minerals as a (one might say THE) test case for whether the US is serious about preventing a continuation of China's current near monopoly on these resources (link here).  One might go further and state that this is a test case for the American government's resolve in turning around the severe structural weakness of the American economy more generally (i.e. too much consumption, not enough investment and thus not enough production) amidst an international economy where other major players predicate their economic strategies on American excessive consumption (hello China, Germany and Japan) as former World Bank economist and FT columnist, Martin Wolf, has repeatedly emphasized over the past year or so. Beyond the question of US determination to fix these problems is the specific issue of how quickly the dependence on China for rare earth minerals can be terminated.  Denlinger's states that opening a few mines would end dependence, and this may be true, but opening a few of these mines might take a long time.  The Government Accounting Office suggests it might take up to 15 years to end rare earth mineral dependence on China (link here).