Is the AI bubble about to burst? Two years after OpenAI launched ChatGPT, sparkling a surge in generative AI startups, China has now seen a wave of closures on AI companies. According to a report by Commercial Times, citing Chinese media TMTPost, nearly 80,000 AI companies in China have registered and then either closed down or suspended operations within the past 600 days.

The reports note that according to the data from the National Enterprise Credit Information Publicity System of China, between November 30, 2022, the release date of ChatGPT, and July 29, 2024, a total of 78,612 AI-related companies in China, which were newly registered during this period, are now in a deregistered or abnormal business status. This accounts for 8.9% of the 878,000 AI companies registered during the same period.

The current adversity for the AI companies in China, the reports suggest, could be attributed to excessive spendings regarding high computational costs and R&D investments, declines in venture capital leading to a funding freeze, and difficulties in achieving profitability.

According to the reports, over the past three years, more than 200,000 AI-related companies in China have been deregistered or revoked, with a total of 353,000 AI-related companies disappearing within the past decade.

On the other hand, as of August 7th, there are said to be 300,700 new AI companies registered in 2024. Currently, there are 1,804,300 AI-related companies in existence in China, the reports state.

Among them, over 4,500 companies are officially recognized as part of the AI industry system. More than 180 large generative AI models, which have completed registration and be online to provide public services, have been developed, with a registered user base exceeding 564 million.

Wang Xiaochuan, founder of Chinese search engine company Sogou, once stated in 2023 that the Large Language Model (LLM) for AI would undergo an “elimination tournament” in China, with the top tier likely consisting of no more than five companies, according to a report on Soho.

Baidu CEO Robin Li also mentioned in July that China has too many large language models, calling for tech leaders to focus more on building real-world applications driven by AI. A report by South China Morning Post, quoting Li, said that since the launch of ChatGPT in late 2022, China’s generative AI market has become crowded with over 200 large language models.

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• [News] China Reportedly Imposes Mandatory AI Model Reviews on ByteDance, Alibaba, and Others

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According to a report on the official website of the Shanghai Qingpu District’s Government on August 11th, the exterior construction and interior decoration of Huawei’s Xicen apartment project in Shanghai have been completed, and the project has entered its final stages.

The apartments are expected to be finished by the end of September this year. Once completed, the project will provide over 6,000 housing units for the influx of Huawei research talent moving to Qingpu (Shanghai). This further hints that Huawei’s largest global R&D center is getting closer to being fully operational.

The project, which started construction in December 2023, will provide ample accommodation for employees serving in the eight parks at Huawei’s Lianqiu Lake R&D Center. Once completed, it will house over 15,000 people.

Reportedly, the Huawei Lianqiu Lake R&D Center in Shanghai’s Qingpu District, was completed on July 9. It covers an area of 2,400 acres, with a total building area of 2.06 million square meters and an investment exceeding CNY 10 billion.

The center is mainly used for research, office space, and supporting facilities, including R&D offices, laboratories, conference halls, cafeterias, and data centers.

This research center, per a previous report from EE Times China, is designed with 40,000 offices and is expected to gradually attract about 35,000 Huawei R&D talents.

The focus will be on R&D, product design, and sales in areas such as 5G chips, wireless, and the Internet of Things (IoT). By the end of this year, it is anticipated that 10,000 personnel will have joined the new R&D center, primarily consisting of employees from other Huawei R&D centers and newly hired research and development talent.

Regarding Huawei’s substantial investment in building this research center, tech media outlet “Tom’s Hardware” highlighted on July 14th that amid the US-China semiconductor rivalry and various US sanctions against Huawei, the company must bolster its research and development efforts. Consolidating multiple research centers allows Huawei to streamline operations and facilitate easier collaboration among different departments.

The report states that this flagship project showcases Huawei’s investment commitment in future technologies. The new R&D Center is even said to be larger in scale than the combined size of Apple Park and Microsoft’s Redmond Campus headquarters in Seattle.

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• [News] Huawei’s Largest Global R&D Center in Shanghai Unveiled, Invests Over USD 1.4 Billion
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(Photo credit: Huawei)

Over the past two weeks, the unexpected rate hike by Japan, coupled with weak U.S. manufacturing PMI and rising unemployment rates, sparked fears of an economic recession in the markets. Meanwhile the strengthening of the yen prompted a significant number of carry trade investors to sell assets to cover margin calls, leading to a sharp decline in global stock markets within a short period.

However, as the U.S. services PMI and jobless claims came in better than expected, along with dovish remarks from the Bank of Japan, global stock markets quickly rebounded. Given the market’s heightened sensitivity to macroeconomic changes, this week’s key economic data need to be closely watched. Below is a preview of the upcoming economic data this week, as well as potential  market outlook regarding these key indicators.

August 14:

• July U.S. CPI: In June, the U.S. CPI increased by 3.0% year-over-year, with the core CPI (excluding food and energy) rising by 3.3%. According to a survey by the Federal Reserve Bank of Philadelphia for the third quarter of 2024, it is expected that as the labor market slows and service inflation decreases, the CPI and core CPI will decline to 2.5% and 2.6%, respectively, by the end of 2024.

Read more at Datatrack

• July U.K. CPI: In June, the U.K. CPI rose by 2% year-over-year, with the CPIH (including owner-occupiers’ housing costs) at 2.8%. Excluding food, energy, and tobacco, the core CPI and CPIH were 3.5% and 4.2%, respectively. According to the August MPC meeting minutes, the Bank of England expects the CPI to rise to around 2.75% by the end of 2024 due to a reduction in the impact of energy prices, before falling back to the target of around 2%.

Read more at Datatrack

August 15:

• China’s July Economic Data: In June, China’s retail sales of consumer goods increased by 2% year-over-year, industrial output rose by 5.3%, and fixed asset investment grew by 3.9%. The market expects that with the summer season and a low base effect, retail sales could rebound to 2.6%. Meanwhile, industrial output is anticipated to increase to 5.4% due to sustained high growth in industrial exports, while fixed asset investment is expected to remain steady at 3.9%.

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• July U.S. Retail Sales: In June, U.S. retail sales increased by 3.0% year-over-year, with monthly growth flat. Core retail sales rose by 0.4% month-over-month, while double core retail sales (excluding autos and gasoline) increased by 0.8%, and control group retail sales rose by 0.9%. Given the slowdown in consumer spending, the market expects a modest monthly growth of 0.3% in July retail sales.

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• Japan’s Q2 Real GDP: In Q1, Japan’s real GDP contracted at an annualized rate of 1.8%, and was revised downward to -2.9% due to declines in consumption and exports. According to a survey by the Japan Center for Economic Research, economists expect Q2 2024 GDP growth to reach an annualized rate of 2.26% driven by a rebound in external demand. The Bank of Japan forecasts full-year 2024 GDP growth of 0.5% to 0.7%.

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(Photo Credit: Federal Reserve)

According to a report from the South China Morning Post, the U.S. export controls, which are restricting China’s access to advanced chips and technology, have intensified China’s efforts to replace global semiconductor manufacturing equipment. However, industry sources have indicated that China still faces significant bottlenecks in this area.

The report mentions that Chinese semiconductor equipment companies like NAURA and AMEC are leading efforts to encourage local foundries to adopt domestic equipment.

Notably, sources cited in the same report also reveal that there is an unwritten rule among Chinese semiconductor fabs that locally-made tools should account for 70% of their production lines.

Per a report by TrendForce, Chinese manufacturers have achieved a self-sufficiency rate of 15% or higher in materials for mature processes, such as silicon wafers, photomasks, photoresists, electronic gases, and wet chemicals. However, items with a self-sufficiency rate still below 15% include photolithography equipment, photomasks, and EDA.

AMEC’s chairman and CEO, Gerald Yin Zhiyao, stated that China is expected to achieve a basic level of self-sufficiency in chip production equipment by this summer, something that was unimaginable just a few years ago.

He acknowledged that while there are still gaps in quality and reliability, China’s semiconductor supply chain can indeed achieve self-sufficiency. This, he suggested, is further evidence that U.S. export controls may have accelerated the development of China’s chip industry.

However, the report also pointed out that China remains constrained in one critical area: lithography technology, which is subject to the most stringent export controls.

Dutch company ASML is the sole supplier of Extreme Ultraviolet (EUV) systems, essential for producing advanced chips, and is also the main supplier of Deep Ultraviolet (DUV) systems needed for mature process chips.

President of foundry China Resources Microelectronics, Li Hong, stated that in 2023, only 1.2% of the lithography systems used by Chinese foundries was purchased from local suppliers.

In the second quarter of this year, ASML’s shipments to Chinese customers totaled EUR 2.35 billion, accounting for nearly half of its global sales. This indicates that China continues to rely heavily on ASML’s equipment in the legacy nodes, which is not subject to U.S. sanctions.

Paul Triolo, senior vice-president for China and technology policy lead at the U.S. consulting firm Albright Stonebridge Group, noted that the significant purchases of DUV lithography systems from ASML by Chinese companies highlight that SMEE, a major Chinese lithography equipment manufacturer, still lags behind ASML in reliably producing lithography systems for 28nm and below processes.

However, lithography technology is not the only bottleneck China faces. Li Hong also noted that the local supply ratios for ion implantation and inspection and metrology systems is only 1.4% and 2.4%, respectively.

As per Chinese customs data, the value of ion implantation systems imported by China in 2023 increased by 20% year-on-year to USD 1.3 billion.

A research report by Guohai Securities indicates as well that Chinese fabs rely heavily on metrology systems from companies like KLA, Applied Materials, and Japan’s Hitachi.

KLA reportedly holds a 50% global market share in inspection and metrology equipment.

An industry source cited in the report mentioned that the local supply ratio in the inspection and metrology sector is relatively low, with local substitution primarily occurring in lower-end products.

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• [News] China Lists Semiconductor Self-Reliance Challenges, Excluding Lithography Equipment
• [News] ASML Former CEO Predicts Chip War Between China and the US May Persist for Decades

(Photo credit: ASML)

The National Bureau of Statistics of China released the CPI and PPI data on August 9. The Consumer Price Index (CPI) for July increased by 0.5% year-on-year, higher than the 0.2% growth in the previous month and above the market expectation of 0.3%. This marks the six consecutive months of positive growth. The increase was primarily driven by rising food prices due to weather conditions, which accounted for approximately 50% of the CPI’s annual growth in July. Excluding the relatively volatile food and energy prices, the core CPI rose by only 0.4% year-on-year, down from 0.6% in the previous month.

Read more at Datatrack

On the other hand, the Producer Price Index (PPI) for July decreased by 0.8% year-on-year, matching the decline of the previous month and performing better than the market expectation of -0.9%. However, this marks the 22nd consecutive month of contraction. According to Dong Li-juan, a statistician at the National Bureau of Statistics, the decline was mainly due to weak market demand and falling international commodity prices.

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Overall, the domestic demand in China remains weak. Although the Chinese government committed to revitalizing domestic demand during the 3rd Plenary Session and the Politburo meeting in July, so far, the government has only lowered the Loan Prime Rate (LPR) and has not introduced detailed or large-scale fiscal stimulus measures. This presents a significant challenge to achieving the annual GDP growth target of 5% through increased domestic demand.