BRICS Partnership for the New Industrial Revolution; Kissinger on US-China; Baidu; Huawei Honor; TikTok; Unigroup; Tianqi Lithium; Brilliance Auto Default; Blockchain Bond
Intelligence and Insights on China's government actions, foreign policy, economy and the capital market
We bring you a new vision brought by China yet again, cultivating leadership in the new Industrial Revolution among the BRICS members. We take a detailed review of China’s leading tech giant Baidu, and its business strengths, particularly in AI. We examine the latest sale of Huawei’s Honor division. We also bring you Kissinger’s talk on US-China at the New Economy Forum. As usual, we bring you key developments in technology, capital markets, foreign policy, unicorn and more.
Please feel free to write to us to request further research and briefings on China. We hope you enjoy today’s issue. Thank you.
Government in Action
1. A BRICS Innovation Hub for the New Industrial Revolution
Chinese president Xi Jinping announced today that China will accelerate the grouping of a BRICS partnership on the new Industrial Revolution, with the establishment of an innovation hub in Xiamen, Fujian Province. This was announced today at the 12th BRICS summit in Beijing.
The participation in the Xiamen innovation hub by the other BRICS countries are non-binding, but welcome. The message is consistent with China’s proposal in 2018 for the establishment of a BRICS conceptual Partnership on the 4th Industrial Revolution. This delivers the first concrete step in solidifying such a concept.
The Xiamen hub will also facilitate cooperation in areas of policy coordination, personnel training and project development.
BRICS Partnership on the New Industrial Revolution
Partnership on New Industrial Revolution (PartNIR) is a program of partnership among BRICS nations that was initiated at the 2018 BRICS Summit. It aims to Maximize the opportunities arising from the fourth industrial revolution/New Industrial Revolution.
The Fourth Industrial Revolution (4IR)
Also known as Industry 4.0, 4IR is the unfolding age of digitalization—from the digitally connected products and services we consume, to advancements in smart cities and factories and increasingly common automation of tasks and services in our homes and at work. It blends the physical and virtual worlds.
And it’s pervading virtually every aspect of modern life. From consumers to manufacturers to cities, 4IR advancements are more accessible and less costly than just a few years ago. But 4IR is more than technology: as it gradually shapes how we live and work (and even play), it also ushers in a revolution of experience. ( PWC summary )
Nine essential technologies that mark the 4IR
1. Huawei Sells Smartphone Division Honor in a Self-Preserving Act
Huawei announced sale of Honor, its budget smartphone unit, that sells 70 million phones per year, to a consortium of over 30 agents and dealers, valuing the business at possibly US$15 billion. The deal price has not been publicly confirmed. Digital China, which was earlier believed to be one of the lead buyers, is not part of the final buyer group.
Huawei will not hold any shares in the New Honor company after the sale.
U.S. government restrictions have forced the world’s second-largest smartphone maker to focus instead on high-end handsets and corporate-focused businesses.
The company said: “Huawei’s consumer business has been under tremendous pressure as of late. This has been due to a persistent unavailability of technical elements needed for our mobile phone business.”
Honor should face no sanctions once it is separated from Huawei. It is believed that Honor will not be added to the Entity List, especially under a Biden administration.
However, state investment consists of a large portion of the consortium of buyers of Honor. New Honor would need to pursue a public listing as soon as the deal is complete, to ensure that shareholders become diversified. (read more)
Senior Executive Reshuffle at Huawei
Wan Biao, COO of Huawei Consumer business division is being replaced by He Gang, current president of Huawei’s mobile phone division.
A few Huawei senior headquarter executives will be reassigned to the New Honor.
Wan Biao is reported to be appointed as the chairman of New Honor, with his vast experience in supply chain management, to ensure the steady chip supplies for the divested New Honor business.
2. Baidu Lags in Digital Economy, but Leads in AI.
Baidu Inc. has agreed to buy livestreaming app YY for US$3.6 billion in an attempt to adapt its business to the mobile era. Joyy’s YY streaming network is a business worth US$1.8 billion with 4 million paying users. Baidu’s CEO Robin Li said, “this is an proactive move”.
Baidu's financial report shows that in the third quarter of 2020, Baidu achieved 28.2 billion yuan in revenue, boasting only a 1% increase since last year. Despite previously being celebrated as one of China’s leading technology companies, and as one third of BAT (Baidu, Alibaba, Tencent), Baidu has since fallen behind.
According to the company's market value on November 17, Baidu is worth 332 billion RMB, less than 10% of the market value of Tencent or Alibaba ( compared to 4.86 trillion yuan for Tencent and 4.6 trillion yuan for Alibaba).
Baidu has been trying hard to diversify its technology offerings and has repeatedly demonstrated its efforts to join the live broadcasting sector this year. In March this year, Baidu began recruiting a large number of positions related to livestream business.
On June 30, Baidu introduced Gu Feng, founder of Huya, to head up their livestream team, reporting to Ping Xiaoli, the general manager of Baidu App. At the same time, Baidu confirmed that they had completed the construction of a livestream platform.
Commentators suggest that selling YY is considered a good opportunity for parent Huanju Group, as YY has reached a “ceiling” on the user scale. According to the Q3 financial report, paying users of YY fell by 4.7% year-on-year to 4.1 million. Huanju Group is instead focusing on its overseas operations following the successful acquisition of BIGO live.
Meanwhile, Baidu benefits from acquiring a mature product with a large market share. After the acquisition is completed, the entire YY team, including content and technology, will be assigned to Baidu. Chinese reports suggest that this will be undoubtedly useful for Baidu’s ongoing expansion into the sector.
The old BAT to the new ATM
Baidu arose as China’s dominant search engine, and ranked alongside Alibaba and Tencent as China’s tech “BAT”.
Alibaba and Tencent have both adopted more aggressive strategies in building its own ecosystems. Alibaba uses an integrated strategy, and Tencent, a decentralized strategy. Baidu has been lagging in expanding into the rising tech and social areas, and have a far smaller presence.
The Chinese tech universe pillared on BAT has been gradually replaced by ATM- Alibaba, Tencent and Meituan. And more recently, the addition of Bytedance has been particularly strong.
Baidu is a global early mover and global leader in AI.
Baidu started “AI” branding in 2010, 5 years before Google. Baidu has quietly become a global leader in AI.
Quantifying AI rankings are tricky. However, one metric is the General Language Understanding Evaluation (GLUE), which ranks approaches to AI language understanding. At the end of 2019, Baidu topped this list, beating out competition from Google and Microsoft to become the first model to achieve a 90. (read more)
Baidu’s leadership in Autonomous Driving
Baidu says that Apollo – its open-source autonomous vehicle technology platform – is one of the “largest autonomous driving ecosystems in the world, bringing together over 130 global partners and used by over 12,000 developers and partners worldwide.”
At the 2019 Consumer Electronics Show on Tuesday, Baidu said it would build on this platform by launching Apollo Enterprise, a business unit that will create intelligent driving products and solutions for mass production vehicles. (read more)
Kissinger Urges US-China Rapprochement
Former US Secretary of State Henry Kissinger called for Joe Biden to restore communication with China and warned that otherwise the world would head towards a major catastrophe analogous to World War I.
"Unless there is some basis for some cooperative action, the world will slide into a catastrophe comparable to World War I," Kissinger said during the opening session of the Bloomberg New Economy Forum, adding that military technologies available today would make such a crisis "even more difficult to control" than those of earlier eras.
Kissinger also believed an informal dialogue mechanism, between the leaders’ representatives, is essential, beyond the routine official dialogues.
Two sides should "agree that whatever other conflict they have, they will not resort to military conflict." To achieve that, the US and China should jointly create "an institutional system by which some leader that our president trusts and some Chinese leader that President Xi trusts are designated to remain in contact with each other on behalf of their presidents.”
At the New Economy Forum
Former US Treasury Secretary Hank Paulson said that the incoming Biden administration should start a new round of negotiations with China concerning trade.
"We'll need to deal with structural and process issues that include services, not just goods," he said. "The agreement should be done in phases with regular deliverables, beginning with easier issues that build momentum to tackle the tough ones."
Dialogue with Henry Kissinger on US-China at the New Economy Forum 2019
This is a wise substantial and consequential dialogue from Henry Kissinger for the current era.
1. Defaults Trouble Chinese Companies
Tsinghua Unigroup, the semiconductor company that is a wholly-owned subsidiary of Tsinghua University, has defaulted on a US$198 million bond. The default prompted a credit rating downgrade from AA to BBB, which will weaken the company’s financial health in a costly chip making industry.
The price on a corporate bond of Unigroup’s parent, Tsinghua Holdings, fell more than 14% on Tuesday, making it the worst performing bond on the Shanghai Stock Exchange.
Unigroup failed to win creditor approval for a rollover of the US$197 million bond, which came due on Sunday. In a meeting on Friday, Unigroup proposed repaying RMB100 million and extending the balance by six months.
The company is a key player in China’s push for self-reliance in semiconductors. The OECD ranked it top globally out of 21 semiconductor companies in terms of government support received from 2014 to 2018.
This follows defaults at Yongcheng Coal & Electricity on Friday and Huachen Automotive Group, the parent company of Brilliance Auto, at the end of October, on which China BIG Idea reported yesterday.
Worryingly, China’s leading battery player, Tianqi Lithium Corp. is also facing a huge debt burden. The company must come up with US$1.88 billion by the end of November amid falling lithium prices. It has already missed US$71.5 million in interest payments this year. Shares in the company fell 10% on Monday.
2. Brilliance Auto Group Holdings defaulted on its debts
GZ Tooling Group（格致汽车科技股份有限公司), a car stamping die research and production company, has recently file lawsuit with the Liaoning Shenyang Municipal Intermediate People’s Court to restructure the Brilliance Group, due to Brilliance’s inability to pay off its debt obligations. There is still uncertainty as to whether the court will finally accept the case and whether Brilliance Group will formally enter the restructuring process.
Brilliance Auto Group has issued a notice that it has incurred debt defaults in the amount of $990 million (6.5 billion RMB), overdue interest amount of $21.97 million (144 million RMB). Due to its capital shortage, the credit extension approval has not been granted.
In the first half of 2020, Brilliance Group reaches a total debt of $20.27 billion (132.844 billion RMB). After deducting goodwill and intangible assets, the firm’s asset-liability ratio is 71.4%. At present, Brilliance Group still has 14 outstanding bonds with a principal repayment of more than $2.59 billion (17 billion RMB). 2022 will see the peak of the group's debt repayment, involving an amount of nearly $1.37 billion (9 billion RMB).
The total assets of Brilliance Group near $30.52 billion (200 billion RMB). Liaoning State-owned Assets Supervision and Administration Commission（辽宁省国资委）holds 80% of the shares, and the rest 20% is held by Liaoning's Council of Social Security Funds. Brilliance is 100% state-owned.
In 2003, Brilliance and BMW Group formed a joint venture with BMW officially realizing domestic production inside China. From 2015 to 2019, BMW Brilliance contributed nearly $4.12 billion (27 billion RMB) to Brilliance China. Excluding BMW Brilliance, the firm would have performed much worse. (3.484 billion RMB).
Brilliance and BMW agreement
Brilliance will transfer 25% of BMW Brilliance to BMW Group for $4.27 billion (3.6 billion euros) and extend the operation of the joint venture until 2040. BMW and Brilliance will then each own 75% and 25% of BMW Brilliance respectively.
3. China’s First Blockchain Bond Listing Suspended
Last week it was announced that China Construction Bank (CCB) had partnered with Hong Kong fintech company, Fusang, to introduce new blockchain-based debt issuance which was set to raise up to $3 billion USD. Trading was scheduled to commence on Friday 13th November.
However, Fusang announced that the listing is delayed until February 2021, at the request of the issuer, Longbond ltd. No further details were given in the statement.
CCB also clarified on Friday that it was acting as a sponsor and had no direct relationship with the issuer of the bond, Longbond Ltd. While CCB would be responsible for settlement and deposits, the Chinese bank would not receive any bitcoin or other cryptocurrencies.
ByteDance was granted a 15 day extension by the Committee on Foreign Investment in the US (CFIUS) last Thursday to restructure the ownership of TIKTOK. The company now has until 27th November 2020 to resolve national security concerns raised by Washington.
“ByteDance has filed a legal petition challenging a White House order that would force a sale of TikTok’s US operations, citing delays from the Trump administration to finalize a deal.”
The petition was filed in the US Court of Appeals for the District of Columbia, asking for a court to review Trump’s divestment order and arguing it violated the company’s constitutional rights. (read more)
In the petition ByteDance said it had submitted a new proposal this month that discussed restructuring TikTok US as a new entity wholly owned by Oracle, Walmart and ByteDance’s US investors. However, ByteDance, Oracle and stakeholders are still waiting for clear indications from the Trump administration and the CFIUS officials on what to provide for the deal to get approved.
2. Qualcomm and Huawei
Qualcomm received US permission on Friday to continue selling 4G chips to Huawei. The license includes a list of products which include some 4G components. However, Qualcomm spokeswoman refused to specify which 4G products those were but pointed out that they were related to mobile devices. Qualcomm still has other license applications pending with the US government.
Bernstein analyst Stacy Rasgon said the Qualcomm license would have a “limited impact” because it covers only 4G chips while consumers are shifting to newer 5G devices. Rasgon said it is still unclear whether U.S. officials will grant Qualcomm licenses to sell 5G smartphone chips. (read more)
Unicorn in Spotlight
Founded in 2012 in Beijing, Yuanfudao (Chinese: 猿辅导) is an online education platform. Its homework tutoring apps (猿辅导/Yuan Tutoring、猿题库/Yuan Question Bank、小猿口算/Yuan Algebra、斑马AI课/Zebra AI Classes etc.) offer services for various subjects from kindergarten through K12. The app Yuan Question Bank also allows students to check their homework by uploading a picture of it. Yuanfudao has to date provided tutoring to over 200 million students with approximately 2 million paid users. It claims to have checked on average 70 million arithmetic problems per day, saving users around 40,000 hours of time in total. (read more)
Online education service providers have become increasingly popular around the world post-COVID-19. Business is thriving even more in China with the country’s wide adaptation of after-school tutoring.
In 2018, China added after-school training regulations for the first time, stating, “off-campus training institutions should have stable teaching resources, and should not hire in-service [sic] teachers who work on campus”. (read more) Yuanfudao had hence transitioned from one-to-one tutoring to placing a bigger focus on online services.
Valuation: $15.5B (as of October 2020)
Funding: $3.8B (as of October 2020)
Select Investors: Tencent, EASME -EU Executive Agency for SMEs, Y Combinator, Techstars, 500 Startups, SOSV (read more)