Source: Jiang Fei Macro Research
Core ideas
Artificial intelligence may open the third wave of technology since the Internet era. At the beginning of 2023, AI technology represented by ChatGPT ignited the market heat. Since the Internet era, there have been two waves of technology around the world. The first wave of technology was the rapid spread of the Internet through personal computers, and the number of Internet users worldwide increased dramatically. The second wave of technology is the mobile Internet mediated by smart phones, which further changes production and lifestyle. It is characterized by scientific and technological innovation, which has improved the operational efficiency and factor productivity of various industries in the whole society. The "AI+" model can be widely used in all walks of life, reinventing the traditional business model, and may become the driving force of economic growth in the third decade of the 21st century.
The wave of technology has led to a boom in investment, and global R&D investment has increased. The first investment direction of the concept of artificial intelligence is the development of intelligent program tools, that is, the software side. China has been deeply engaged in the field of AI for many years, and the patented technology of artificial intelligence continues to rise, and the research covers the basic layer, technical layer and application layer, but there is still a gap between it and the level of artificial intelligence programs in the United States. The second investment direction of the concept of artificial intelligence is the semiconductor industry, that is, the hardware side. The computing power and terminal demand created by the "AI+" model may shorten the time for the semiconductor industry to climb from the bottom of the cycle. In the short term, China's AI investment will be biased towards the hardware side to solve the "stuck neck" problem.
The competition in the chip industry between China and the United States will become more intense, and the United States is trying to promote the decoupling of the industrial chain. It has been five years since the United States began its technology sanctions against China in 2018, and the sanctions have gradually increased. We divide the US sanctions against China into three stages, the first phase of which is weak, and domestic technology has made breakthroughs, seizing part of the semiconductor market. In the second stage, the United States strengthened sanctions, blocked the development of Chinese chips in an all-round way, and accelerated the process of domestic substitution. In the third stage, the United States formed a chip alliance to try to squeeze China out of the chip industry chain.
In 2023, the United States will engage in "small courtyards and high walls" and forcibly promote "decoupling and breaking chains". On August 9, 2022, the United States signed the CHIP and Science Act, and on February 16, 2023, the United States gathered Japan, South Korea, and Taiwan for the first formal meeting, and the United States entered a new phase of sanctions against China. Once the US sanctions against China are escalated to the level of the industrial chain, the disadvantages of China's technological shortcomings will also be magnified. It is foreseeable that the United States will adopt more comprehensive and stringent sanctions.
"AI+" may open a new wave of science and technology and productivity improvement, master more intelligent manual programs and more powerful chip manufacturing will master the future, so the competition between China and the United States in this field will be more intense, the United States sanctions against China gradually increased, from sanctioning chip companies to promoting the decoupling of the industrial chain. We believe that China has a long-term advantage in the development of artificial intelligence, because technological innovation on both the software side and the hardware side ultimately needs to serve the application level. China is the world's largest consumer market, and artificial intelligence has a wide range of application prospects in China. The innovation of Chinese Internet enterprises at the application level has always been stronger than that of Europe and the United States. As long as capital investment is maintained, technology continues to improve, systems continue to improve, and key problems are overcome, China will achieve ultimate victory in the great power competition in the field of artificial intelligence.
1 Artificial intelligence may start the third wave of technology
At the beginning of 2023, AI technology represented by ChatGPT ignited the market heat. The concept of AI technology has been around for a long time, and it has been in the process of technological innovation and precipitation, and there is a lack of application scenarios that integrate with the real economy. At the end of 2022, ChatGPT was born, and its powerful language understanding and text generation capabilities quickly sparked heated discussions in the market. ChatGPT shows the ability to write copy, compile code, and predict analysis, building a picture of AI technology fully integrated into human society. On February 2, Microsoft announced that all its products will integrate ChatGPT across the board. The "AI+" model may rapidly expand to all walks of life, carry out a new round of upgrading of traditional industries, and have a profound impact on the economy.
We believe that since the Internet era, there have been two waves of technology around the world. The first wave of technology was the rapid spread of the Internet through personal computers, and the number of Internet users worldwide increased dramatically. In 1997, the number of Internet users worldwide exceeded 100 million, and in 2001 it reached 500 million. Although the dot-com bubble caused the stock market to plummet, Internet companies with real growth space and technological prospects stood out. From 2003 to 2011, global PC shipments increased from 169 million to 365 million, with an average annual compound growth rate of 10.12%. The popularity and application of the Internet drove economic growth in the first decade of the 21st century.
The second wave of technology is the mobile Internet mediated by smart phones, which further changes production and lifestyle. From 2009 to 2016, global smartphone shipments increased from 174 million to 1.473 billion, with an average annual compound growth rate of 35.66%. At the same time, the number of mobile Internet users in China is also growing rapidly. The mobile Internet has upgraded the operation mode of traditional business, achieved a large number of Internet enterprises, and effectively improved social operation efficiency and factor productivity. The mobile Internet led the economic growth in the second decade of the 21st century.
The first two waves of technology were reflected in the Philadelphia Semiconductor Index – the rapid rally of 1999-2000 and the slow bull market of 2013-2019. After 2020, although the Philadelphia Semiconductor Index rose sharply and reached a new high, the main reason was supply-side factors such as epidemic restrictions on production capacity and Sino-US technology sanctions, and the secondary reason was demand-side factors such as automotive chips and 5G technology. We believe that new energy vehicles and 5G technology are only technological upgrades in the automotive industry and the communications industry, and are not enough to promote the wave of science and technology. The wave of science and technology is defined as technological innovation that can promote the general increase in factor productivity of all industries in an era, such as the Internet and mobile Internet.
Artificial intelligence may open the third wave of technology in the Internet era. The "AI+" model can be widely used in all walks of life to comprehensively improve social productivity. Just like personal computers and the Internet, smart phones and mobile Internet, smart terminals carrying chips and AI models may open the era of "Internet of Everything". Smarter AI programs, more powerful chips and faster transmission networks have given new possibilities to social development and revolutionized traditional business models. AI could be the driving force of economic growth in the third decade of the 21st century.
2 The third wave of technology has led to an investment boom
The wave of technology has led to an investment boom. On March 30, international data company IDC released the "2023 V1 Global AI Spending Guide". IDC predicts that global spending on artificial intelligence (including software, hardware, and services for AI-centric systems) will reach $154 billion in 2023, up 26.9% year-over-year. Capital expenditures for AI-related industries will exceed $300 billion by 2026, with a compound annual growth rate (CAGR) of 27% from 2022 to 2026. Among them, the spending scale of the Chinese intelligence market will increase to US$14.75 billion in 2023, accounting for about one-tenth of the global total. China's AI market will reach a market size of US$26.44 billion in 2026, with a five-year compound growth rate (CAGR) of more than 20% from 2021 to 2026. IDC believes that the United States will account for more than half of all AI spending over the forecast period, Western Europe is expected to account for more than 20%, and China is expected to be in third place.
2.1. The investment boom has boosted global R&D investment
The first investment direction of the concept of artificial intelligence is the development of intelligent program tools, that is, the software side. ChatGPT is a natural language processing tool driven by artificial intelligence technology. After the explosion of ChatGPT, on January 3, 2023, Microsoft announced an additional multibillion-dollar $10 billion investment in OpenAI. On February 4, Google announced a $300 million investment in artificial intelligence company Anthropic, and on March 15, Anthropic released a ChatGPT-like product, Claude. In addition, Elon Musk said on April 17 that a new version of the artificial intelligence chatbot TruthGPT will be developed.
Chinese Internet companies have been deeply engaged in the AI field for many years, and BAT is developing AI language models and quickly following Chatgpt. On March 16, 2023, Baidu officially released the large-language model and generative AI product "Wenxin Yiyan". On April 7, Alibaba launched the "Tongyi Qianwen". Tencent has also been conducting research and development of ChatGPT-like projects "Mixed Element Assistant". In addition to BAT, Chinese companies such as ByteDance, 360, iFLYTEK, and JD.com are also accelerating the development and application of ChatGPT-like products.
The patented technology of Chinese intelligence continues to rise, and the research covers the basic layer, technical layer and application layer. In the ten years from 2010 to 2019, there were more than 520,000 global artificial intelligence patent applications, of which 389,600 were Chinese intelligent patent applications, ranking first in the world. According to the 2020 Artificial Intelligence China Patent Technology Report by the Electronic Intellectual Property Center of the Ministry of Industry and Information Technology, in 2019, the total number of patent applications for Chinese intelligent technology exceeded that of the United States for the first time, becoming the country with the largest number of applications in the world. From the perspective of patent distribution, cloud computing, computer vision, deep learning and autonomous driving account for a relatively high proportion, and Continental has a certain foundation for research and development in key technology fields.
Internet enterprises and colleges and universities are the main force in the development of artificial intelligence technology, and they are also the focus of future AI technology investment. Among Internet companies, Baidu, Tencent and Ali all rank in the top ten in terms of AI applications and authorizations. Among colleges and universities, Tsinghua University, Zhejiang University, Beihang University, etc. have become important innovators in the field of artificial intelligence. In addition, State Grid monitoring focuses on innovation at the application level of AI technology, such as platforms, early warning platforms, and intelligent inspection robots. In general, the mainland's industry-university-research cooperation in artificial intelligence technology has been steadily advanced, and scientific and technological innovation has been accelerated.
2.2 Artificial intelligence technology boosts global chip demand
The second investment direction of the concept of artificial intelligence is the semiconductor industry, that is, the hardware side. The computing power demand and terminal demand created by the "AI+" model may shorten the time for the semiconductor industry to climb from the bottom of the cycle. The global semiconductor industry is at the bottom of the cycle. From the historical data, the sales and investment of the global semiconductor industry have shown cyclical characteristics, generally experiencing a complete cycle in 4-5 years. From the end of 2021 to the beginning of 2022, the year-on-year growth rate of global semiconductor sales basically peaked, and then fell rapidly, in February 2023, -24.4% year-on-year. The reason for the rapid decline in global semiconductor sales is that, on the one hand, global smartphone shipments in 2022 will be -11.4% year-on-year, and the demand for consumer electronics chips will weaken; on the other hand, the global automotive "lack of cores" in 2021 will lead to capacity expansion, and the chip shortage will be eased in 2022.
On the one hand, the computing power required for AI model training has increased exponentially, driving chip demand. According to the OpenAI research report, the training volume of artificial intelligence models increased by more than 300,000 times from the visual recognition program AlexNet in 2012 to the intelligent Go program AlphaGo Zero in 2018. At present, the computing power required for AI training doubles every 3.5 months, far exceeding Moore's Law in the chip industry, which doubles chip performance every 18 months. This also means that the gap where the chip performance improvement is not as good as the growth in computing power demand must be made up by increasing the number.
On the other hand, artificial intelligence from training to scene landing is still inseparable from chips. The greatest value of the "AI+" model lies in the integration of technology and industry, enhancing creativity and productivity, and promoting socio-economic growth. For example, "AI + Industry", with the help of artificial intelligence technology, can not only use intelligent robots in the production process, realize automated production lines, improve production efficiency, but also add artificial intelligence modules to products to realize complex functions such as user remote control, automatic data collection and analysis, and improve user experience. However, the improvement of artificial intelligence technology to the production process and the product itself needs to be based on smart devices that carry chips.
In the short term, China's AI investment will be biased towards the hardware side to solve the "stuck neck" problem. IDC believes that AI hardware spending will still account for more than half of the total size of the Chinese market during the five-year forecast period, and in the long run, with the gradual improvement of AI infrastructure construction, the proportion of hardware in the total scale of the Chinese market will gradually decrease. The AI software market has great potential for growth during the five-year forecast period, and IDC predicts that AI software spending will grow to US$7.69 billion in 2026, accounting for about 29% of the total market size, an increase of 10 percentage points from 2021. The AI services market will further expand at a slightly slower growth rate than the software market. Among them, the dominant IT services segment will reach a market size of $3.27 billion in 2026, nearly four times larger than in 2021, with a five-year CAGR of nearly 30%. The demand for AI services market is also growing, which is also driving the expansion of the market size.
In our view, IDC may be underestimating the intensity of China's capital spending in AI in the coming years. On the one hand, domestic R&D spending in China and the United States is far ahead of the three European representative countries of Germany, France and the United Kingdom combined, and the economy determines that Europe may not be as good as China and the United States in terms of investment spending. On the other hand, from the hardware side of artificial intelligence - semiconductor industry - this is the "stuck neck" problem that China is currently facing, and it is also a technical problem that needs to be solved urgently, and the Chinese government and enterprises will invest more money. Finally, AI technology is not a castle in the air, it needs to be practiced. China is one of the world's largest consumer markets, and AI has a wide range of application prospects in China, which means that China's investment in application services may be strong.
3 The global chip industry will be more competitive
It has been five years since the United States began its technology sanctions against China in 2018, and the sanctions have gradually increased. On April 16, 2018, the U.S. Department of Commerce announced a seven-year technology ban on ZTE, marking the beginning of the Sino-US technology war. On May 15, 2019, U.S. President Donald Trump issued a presidential order prohibiting the use of information and communications and services from "hostile countries," and on the same day, the U.S. Department of Commerce added Huawei to its export control entity list. On June 21, the domestic server CPU leader Haiguang Information was included in the export control entity list, and AMD no longer provides related technical services. Since then, the US government has continuously included Chinese enterprises, universities, and research institutions on the list of export control entities and carried out technology blockade.
We divide the US sanctions against China into three stages, the first phase of which is weak, and domestic technology has made breakthroughs, seizing part of the semiconductor market. In the second stage, the United States strengthened sanctions, blocked the development of Chinese chips in an all-round way, and accelerated the process of domestic substitution. In the third stage, the United States formed a chip alliance to try to squeeze China out of the chip industry chain.
3.1 From 2018 to 2019, China seized the low-end semiconductor market
From 2018 to 2019, China gradually seized the market share of Japan and South Korea in the low-end semiconductor industry. The semiconductor industry has a certain cyclicality, and the semiconductor exports of Chinese mainland, Taiwan, Japan and South Korea are all showing cyclical fluctuations in the trend. However, through horizontal comparison, in recent years, the growth rate of China's integrated circuit exports is significantly higher than that of Japan and South Korea, especially from 2018 to 2019, China's integrated circuit exports have an average year-on-year growth rate of 24.7%, while the average year-on-year growth rate of semiconductor exports in Japan and South Korea is 1.6% and 2.9% respectively. It was not until after 2020 that the US sanctions against China became stricter, and the growth rate of exports from China, Japan and South Korea tended to be consistent.
Taking Changjiang Storage as an example, technology has made rapid progress in the field of flash memory, and its market share has gradually increased. In 2016, the newly established Yangtze River Storage began to study 32-layer NAND, while Samsung has mass-produced 64-layer NAND, and the technology gap is obvious. In August 2018, Changjiang Storage released Xtacking technology, successfully achieved breakthrough innovation in flash memory technology architecture, in September 2019, 64-layer NAND based on Xtacking technology architecture began mass production, Samsung is about to mass produce 128-layer NAND, technology gap still exists. However, YMTC skipped the 96th layer and directly developed 128-layer NAND, and announced on April 13, 2020 that it had successfully developed 128-layer QLC 3D NAND. In August 2022, YMTC released 232-layer 3D NAND flash, accelerating corners and matching the world's leading technology level. In 2022, Changjiang Storage's flash memory market share will reach 4%-5%.
Under the rapid technological progress, when the United States sanctioned China in 2019, China already occupied a place in the low-end chip market. According to reports by SIA and BCG in the United States, wafer manufacturing Chinese mainland larger than 45nm and 28-45nm accounted for 23% and 19% of global production capacity, respectively, second only to Taiwan. From the perspective of the global market structure in 2019, low-end chips still account for the mainstream, and the market share of high-end chips is small. In 2019, global chips smaller than 10nm and 10-22nm chips accounted for 2% and 8% of the market, respectively, accounting for only 10%, and the rest of the low-end chips accounted for ninety percent of the market.
China's low-end semiconductor industry manufacturing has scale and cost advantages. The technological gap between China's low-end chip manufacturing and the world's advanced level is not large, and this subdivision competition is a cost advantage. China's labor costs, raw material costs, and infrastructure costs are better than those of Japan, South Korea and the United States, especially in a global environment of high inflation. The Semiconductor Industry Association and the Boston Consulting Group estimate that the cost of Chinese fabs is 37%-50% lower than that of the United States. At the same time, China is the world's largest consumer market and has the most complete industrial chain. This scale advantage makes China's semiconductor industry competitive in low-end chip manufacturing.
3.2 From 2020 to 2022, the United States will accelerate the encirclement and suppression of Chinese chip technology
Since 2020, the United States has accelerated its encirclement and suppression of China's chip manufacturing and technological development. The export quantity of the Dutch ASML sixth-generation lithography machine EUV minimum process below 7nm and the fifth generation lithography machine ArFi minimum process 7nm suddenly decreased in 2020 because the United States prevented the Dutch ASML company from selling advanced equipment such as lithography machines to China. From 2020 to 2022, the United States further sanctioned more than 40 Chinese chip companies, including SMIC, Jingjia Microelectronics, Yangtze River Storage, Cambrian, etc., hindering the development of China's chip industry.
Chips are the largest domestic imported commodities, and under the background of Sino-US scientific and technological competition, the domestic substitution of chips has accelerated. In 2015, China's integrated circuit imports surpassed crude oil, becoming the largest commodity imported by the mainland. In the face of sanctions, China can only import foreign chips, and in 2020, China's chip imports reached $350 billion, accounting for 18% of total commodity imports. If China cannot break through the key technology of chips, it will not be able to grasp the pricing power and have to import chips at a high price, so chip self-research and domestic substitution are imminent.
Domestic substitution of chips is steadily advancing, but the self-sufficiency rate is still low. In October 2022, China's integrated circuit production bottomed out, and the export volume bottomed out in November. In the context of a sharp increase in production and exports, China's integrated circuit imports have remained at the bottom, which shows that domestic substitution is steadily advancing. According to IC insights data, the self-sufficiency rate of domestic chips in 2021 is about 16.6%, and the self-sufficiency rate of chips is low. In August 2020, the State Council's "Several Policies to Promote the High-quality Development of the Integrated Circuit Industry and the Software Industry in the New Era" proposed that "China's chip self-sufficiency rate should reach 70% by 2025".
With the strong support of the policy, domestic chip production may continue to increase. Still taking Yangtze River Storage as an example, after the technology breaks through the blockade, the next step is to increase production capacity. At the end of 2016, the first phase of the national memory base project, with an investment of about 160 billion yuan, began construction. In June 2020, the second phase of the national memory project began construction, with a total investment of nearly 170 billion yuan. With the completion and use of the project, the storage capacity of the Yangtze River has grown rapidly. In 2020, Changjiang Storage's global market share is only close to 1%, and according to its planned production capacity of 300,000 pieces per month in 2025, it is expected that the global market share will reach about 6%.
3.3 In 2023, the United States will engage in "small courtyards and high walls" and forcibly promote "decoupling and breaking chains"
After 2023, the United States will not only continue to sanction China in the field of technology, but also try to squeeze China out of the chip industry chain. China's biggest advantage is low manufacturing costs, once the technology breakthrough, enter the mass production stage, more prominent Chinese manufacturing advantages. Therefore, in addition to continuing technical sanctions, on the one hand, the United States encourages chip companies to build factories in the United States through subsidies, and on the other hand, establishes chip alliances to exclude China from the industrial chain. The US sanctions against China have further escalated from chip technology blockade to industrial chain confrontation, and competition among major countries has become more intense.
On August 9, 2022, the United States signed the Chips and Science Act, which aims to curb China's semiconductor industry and enhance the United States' advantages in the chip field. The bill will provide more than $52 billion in government subsidies to the U.S. chip industry, and provide investment tax credits for semiconductor and equipment manufacturing to encourage companies to build factories in the United States. Under the influence of the bill, Samsung invested USD 17 billion to build a factory in Texas, USA in May 2022, and increased its investment to USD 25 billion in March 2023. At the same time, the Chip and Science Act clearly stipulates that enterprises receiving subsidies are not allowed to "substantially expand production capacity" in Chinese mainland for 10 years, restricting relevant chip companies from carrying out normal economic, trade and investment activities in China.
On February 16, 2023, the United States brought together the CHIP4 alliance of Japan, South Korea and Taiwan for its first formal meeting, marking a new phase of U.S. sanctions against China. Taiwan and South Korea have manufacturing advantages, the United States has design and equipment advantages, and Japan has material advantages, trying to monopolize the global semiconductor industry chain. Although the first meeting of the CHIP4 Alliance did not mention export controls, the Chip Alliance's intention to isolate China is self-evident. According to IC insight, the CHIP4 alliance accounted for 70% of the world's chip production capacity in 2021, while Chinese mainland accounted for only 15%.
Once the US sanctions against China are escalated to the level of the industrial chain, the disadvantages of China's technological shortcomings will also be magnified. Although Yangtze River Storage has made technological breakthroughs in the field of flash memory, the industrial chain is intertwined, and if the upstream and downstream cannot provide equipment and materials with the corresponding technical level, chip production will also be difficult. For example, in terms of lithography machines, in February 2023, Shanghai Microelectronics delivered two domestic lithography machines, but it can only create a 90nm low-end process, and is currently working hard to tackle 28nm and 14nm lithography machines. The Dutch company ASML is already developing 2nm process semiconductor manufacturing equipment.
On April 21, 2023, at the regular press conference of the Ministry of Foreign Affairs, spokesman Wang Wenbin said that "the US side is accustomed to politicizing, instrumentalizing and weaponizing economic, trade and science and technology issues under the guise of national security, engaging in "small courtyards and high walls", forcibly promoting "decoupling and breaking chains", and even carrying out economic coercion on allies at the expense of friends and self-enrichment. The real purpose of the US side is to deprive China of its right to development and safeguard its own hegemonic and selfish interests, which is naked economic coercion and scientific and technological bullying, which seriously violates the principles of market economy and fair competition, seriously undermines the international economic and trade order, seriously disrupts the stability of the global industrial chain and supply chain, and harms the interests of the entire world. China will pay close attention to relevant developments and resolutely safeguard its own rights and interests. ”
It is foreseeable that the United States will not sit idly by and ignore China's chip technology breakthroughs, but will take more comprehensive and severe sanctions. China's response, on the one hand, can continue to expand the production capacity of low-end chips, increase the self-sufficiency rate of chips, and invest in the research and development of high-end chip technology with the profits of low-end chips. On the other hand, Europe has not joined the US CHIP alliance, and China can strengthen cooperation with European chip manufacturers to prevent being excluded from the global chip industry chain. Finally, the competition between China and the United States is intensifying, and breakthroughs in key technology areas are necessary to ensure that they are not subject to others.
4 Summary: AI has opened a wave, and competition among major countries has become more intense
In the first decade of the 21st century, personal computers and the Internet drove global economic growth; In the second decade of the 21st century, smartphones and mobile Internet drive global growth. In the third decade of the 21st century, artificial intelligence and the Internet of Everything will open the third wave of science and technology. The "AI+" model can upgrade traditional industries in a new round and improve the productivity of the whole society. The AI boom will drive an investment boom on both the software side (AI program models) and the hardware side (chips). In the development of AI program models, Chinese Internet companies led by Baidu have invested a lot of capital in the past decade and have achieved a certain technical foundation, but there is still a gap between them and the level of artificial intelligence in the United States. In the chip manufacturing industry, although the technology of some chip companies represented by Yangtze River Storage has made obvious progress, China is still weaker than the United States in terms of the overall chip industry chain. Chip self-research and domestic substitution are imminent.
Risk Warning
escalating U.S. sanctions against China; The Sino-US science and technology war has escalated; The U.S. recession exceeded expectations; The decoupling of the international industrial chain has intensified
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