​The Chinese “New for OLED” subsidy program for home appliances that began in August of alst year has been a success, at least according to the Ministry of Commerce, who stated that as of 12/19/24, 33.3m Chinese consumers had purchased more than 52.1m home appliances, and the funds used for those subsidies was greater for the home appliance segment than it was for the automotive segment.  This would indicate that consumers are more highly focused on using the subsidies for low-cost, low-cost of ownership items than for high-visibility, high-cost items.

On January 2, the Chinese Ministry of Commerce added 28 US companies to its ‘Dual-use Export Control List’, prohibiting the export of said ‘dual-use’ items to any on the list.  Dual-use items are any goods, technologies, or software that has both civilian and military applications.  Examples would be navigation and avionics systems, electronics and communications equipment, biotechnology and biomedical equipment, and certain tools and materials.  In December we noted that China had restricted exports of additional rare earths and materials that are used in the manufacturing of advanced semiconductors and weaponry, while also having broad applications in consumer products.  We expect that the Chinese government will continue to add to this restricted list as the US does to its trade limitations with China.  As of yesterday, all exporting of Chinese product to these companies is halted and any Chinese company that considers exporting to these US companies as essential has to submit an application to the Ministry of Commerce.  If China holds to the same mindset as the US, it will be denied.
Here’s the list:

• General Dynamics (GD)
  • General Dynamics Ordnance and Tactical Systems
  • General Dynamics Information Technology
  • General Dynamics Mission Systems:
• L3 Harris Technologies (LHX)
• Intelligent Epitaxy Technology (IntelliEPI): 4971.TT
• Clear Align LLC: (pvt)
• Boeing Defense, Space & Security: (BA)
• Lockheed Martin Corporation: LMT
  • Lockheed Martin Missiles and Fire Control
  • Lockheed Martin Aeronautics
  • Lockheed Martin Missile System Integration Lab
  • Lockheed Martin Advanced Technology Laboratories
  • Lockheed Martin Ventures
• Raytheon Missiles & Defense – (RTN)
  • Raytheon/Lockheed Martin Javelan Joint Venture
  • Raytheon Missile Systems
• Iron Mountain: IRM
• Inter-Coastal Electronics: pvt
• System Studies & Simulation: pvt
• Applied Technologies Group: pvt
• Axient: pvt
• Anduril Industries: pvt
• Maritime Tactical Systems: pvt
• Pacific Rim Defense: pvt
• AEVEX Aerospace: pvt
• LKD Aerospace: pvt
• Summit Technologies Inc.: pvt

With only three of the 11 months of Chinese mobile phone shipments in 2024 being above the monthly 5-year averages, one might think that the Chinese mobile phone market continued the long-term decline it has been in since 2017.  While 2024 Chinese mobile phone shipments will not wind up anywhere near the heady levels seen eight or ten years ago, we expect 2024 to be the second year of improvement after hitting a low in 2022 (see Figure 1).  Based on our expectation for mobile phone shipments in China for December, we estimate that 2024 will see shipments increase by 6.9% y/y.  This is a bit better than shipment growth in 2023, which was 6.5%, but comes after the extremely weak 2022, which saw y/y Chinese mobile phone shipments down 22.6% y/y.  

In isolation (see Figure 2), the last three years of Chinese mobile phone shipments present a picture of growth, however the shipment level for 2024, the better of the three years shown in Figure 2, are only slightly above the level of shipments in 2020 and are still below all other years, other than the previous two.  Given the strength of 4Q of 2023, much of the y/y growth in 2024 came in late 2Q and 3Q.  That said, while we would expect 2025 to again see some y/y growth in Chinese mobile phone shipments, we would expect overall y/y growth to be lower than in the two previous years as the comparisons become more difficult throughout the year.  However there are two factors that could influence shipments in 2025.
First, AI.  The Chinese market has had a number of AI enabled models available to consumers, with the Vivo (pvt) X100, released in November of 2023, the first we can find that had advanced generative AI features, and also the first to use the Mediatek (2454.TT) Dimensity 9300 Ai chipset.  By 3rd quarter of 2024 ~22% of all Chinese smartphone shipments were AI capable and Chinese brands held a roughly 92% share of the 28m Ai capable smartphones that were shipped in that quarter in China (Samsung (005930.KS)) had a 4% share along with ‘others’, also at 4%).  This data points to Chinese smartphone brands looking to use AI in 2025 as a way to push the upgrade cycle on the mainland, in what has been a relatively weak retail environment. 
While the success of this strategy is far from certain, Chinese consumer seem to be more enthusiastic about AI, we believe, in part, because China itself has been quite aggressive in AI development, and started from a point similar to others, rather than having to play catch-up.  While trade restrictions on semiconductor development could slow that growth a bit, we expect a continued push from Chinese smartphone brands to offer AI features as a selling point this year.
Second, the Chinese government has recently included smartphones in its ‘New for Old’ consumer subsidy program, which helped to spur sales for a number of CE products in 4Q ’24.  Details of the smartphone subsidies are not yet available, but other products covered under the program typically garner a subsidy between 10% and 20% of the retail price, which we believe is substantial enough to move the needle, at least at the onset.
With these two potential factors as influencers early in the year, and an early Chinese New Year (1/29), we expect 1Q ’25 could see continued y/y growth, but we expect that it will lessen as the year progresses, as comparisons get more difficult and the enthusiasm behind the subsidies wears thin.  All in we expect Chinese smartphone shipments to stay in the low 300-million-unit range for the year, with much of the y/y growth in the 1st half, and, barring any unforeseen trade issues, we see similar results for 2026 at this time. 
As Chinese smartphone brands have a small share of the US market, potentially onerous trade restrictions on Chinese phones would have little effect on US consumers, with Xiaomi (1810.HK) having the largest share, albeit a small one (~1.2%).  However the implications for non-Chinese brands, particularly US smartphone brands in China could face a bit of additional nationalistic pride from Chinese consumers, who tend to opt for Chinese brands during periods of trade tension with the US.  2025 presents a fair number of variables that can have an influence on the Chinese mobile phone market, but we believe the longer-term picture is one where it become similar to other more mature markets, finding a shipment level that remains fairly constant over the years.

With only three of the 11 months of Chinese mobile phone shipments in 2024 being above the monthly 5-year averages, one might think that the Chinese mobile phone market continued the long-term decline it has been in since 2017.  While 2024 Chinese mobile phone shipments will not wind up anywhere near the heady levels seen eight or ten years ago, we expect 2024 to be the second year of improvement after hitting a low in 2022 (see Figure 1).  Based on our expectation for mobile phone shipments in China for December, we estimate that 2024 will see shipments increase by 6.9% y/y.  This is a bit better than shipment growth in 2023, which was 6.5%, but comes after the extremely weak 2022, which saw y/y Chinese mobile phone shipments down 22.6% y/y.  

In isolation (see Figure 2), the last three years of Chinese mobile phone shipments present a picture of growth, however the shipment level for 2024, the better of the three years shown in Figure 2, are only slightly above the level of shipments in 2020 and are still below all other years, other than the previous two.  Given the strength of 4Q of 2023, much of the y/y growth in 2024 came in late 2Q and 3Q.  That said, while we would expect 2025 to again see some y/y growth in Chinese mobile phone shipments, we would expect overall y/y growth to be lower than in the two previous years as the comparisons become more difficult throughout the year.  However there are two factors that could influence shipments in 2025.
First, AI.  The Chinese market has had a number of AI enabled models available to consumers, with the Vivo (pvt) X100, released in November of 2023, the first we can find that had advanced generative AI features, and also the first to use the Mediatek (2454.TT) Dimensity 9300 Ai chipset.  By 3rd quarter of 2024 ~22% of all Chinese smartphone shipments were AI capable and Chinese brands held a roughly 92% share of the 28m Ai capable smartphones that were shipped in that quarter in China (Samsung (005930.KS)) had a 4% share along with ‘others’, also at 4%).  This data points to Chinese smartphone brands looking to use AI in 2025 as a way to push the upgrade cycle on the mainland, in what has been a relatively weak retail environment. 
While the success of this strategy is far from certain, Chinese consumer seem to be more enthusiastic about AI, we believe, in part, because China itself has been quite aggressive in AI development, and started from a point similar to others, rather than having to play catch-up.  While trade restrictions on semiconductor development could slow that growth a bit, we expect a continued push from Chinese smartphone brands to offer AI features as a selling point this year.
Second, the Chinese government has recently included smartphones in its ‘New for Old’ consumer subsidy program, which helped to spur sales for a number of CE products in 4Q ’24.  Details of the smartphone subsidies are not yet available, but other products covered under the program typically garner a subsidy between 10% and 20% of the retail price, which we believe is substantial enough to move the needle, at least at the onset.
With these two potential factors as influencers early in the year, and an early Chinese New Year (1/29), we expect 1Q ’25 could see continued y/y growth, but we expect that it will lessen as the year progresses, as comparisons get more difficult and the enthusiasm behind the subsidies wears thin.  All in we expect Chinese smartphone shipments to stay in the low 300-million-unit range for the year, with much of the y/y growth in the 1st half, and, barring any unforeseen trade issues, we see similar results for 2026 at this time. 
As Chinese smartphone brands have a small share of the US market, potentially onerous trade restrictions on Chinese phones would have little effect on US consumers, with Xiaomi (1810.HK) having the largest share, albeit a small one (~1.2%).  However the implications for non-Chinese brands, particularly US smartphone brands in China could face a bit of additional nationalistic pride from Chinese consumers, who tend to opt for Chinese brands during periods of trade tension with the US.  2025 presents a fair number of variables that can have an influence on the Chinese mobile phone market, but we believe the longer-term picture is one where it become similar to other more mature markets, finding a shipment level that remains fairly constant over the years.

Alibaba (BABA) Cloud announced that it was lowering the price of its LLM model for the 3rd time to remain competitive in the Chinese AI market.  The model, known as Qwen-VL has a number of primary features, such as multi-modality (Can accept both text and image input), High-resolution processing (>1m pixels), enhanced image extraction, and multilingual support (Eng, Chinese, Japanese, Korean, Arabic, Vietnamese) and is closest to Google’s (GOOG) Gemini, which has similar features.  The model is part of Alibaba’s cloud-based AI chatbot family, which focuses on enterprise customers rather than the consumer market as a way to differentiate itself from Chinese and other AI competitors.
While much has been said about the competitive nature of Chinese companies, that rhetoric has been typically focused on manufacturing, however it seems that the AI market in China has spurred an even more intense competition to gain share in its own market.  In June of 2024 there were over 230 million AI product and services users in China, according to state-sponsored data, which grew to over 600 million by the end of October, with almost 200 LLM commercially available models to choose from.  While we believe the share of the potential user base that is using an AI on at least a weekly basis is higher currently in the US than in China, and generated more sales in 2023, expectations for industry growth over the next seven years are higher for China (25.6% CAGR for China v. 23.3% for the US[1] ), which is the impetus for the even more aggressive nature of Chinese AI Chatbot brands.
With this intense level of competition among AI Chatbot model providers, we were curious to not only to see if we could quantify the rate of price reductions but also compare those to model price reductions outside of China.  We note that this is an unscientific comparison, as each of the models has its own set of features and characteristics, and the availability of this data is, at best, poor, but we gathered as much data as possible, and converted the Chinese price data to US dollars for comparison.  Most notable is that the price of the most recent Tencent (700.HK) model, which has been available for roughly one month, is now the same as the Alibaba Qwen-VL model, which has been available for well over a year, and while the non-Chinese model prices have come down at a similar rate to the Chinese models, the current prices of the non-Chinese models are appreciably higher.  Overall, one might question the viability of the current business models behind commercial chatbots based on the data.
We note also that Baidu’s (BIDU) ERNIE model is now free, and Google’s BARD has morphed into Gemini.  We can find no specific data on how the MetaAI (FB) models are broken out pricewise and we note also that there are newer models for some (GPT-4 for example) that have much higher performance and cost, but this is as close to a comparison as we could make given the time involved.  The prices are for 1,000 tokens of input data in all cases.


[1] GrandView Research

China has proved to be a tough competitor in the display space, over time, replacing South Korea as the largest producer of LCD displays, however much of that competitive success comes from the fact that the Chinese government has been a very substantial supporter of the Chinese display industry through subsidies that have covered both construction and operating expenses.  We do give credit to Chinese display manufacturers who have taken full advantage of said subsidies and used it to expand capacity when given the opportunity.  As the subsides reduce construction costs, therefore reducing interest costs on loans, reduce operating costs, along with a substantial lower wage base and cost of living, have given China’s display space the ability to outgrow and out-compete South Korea’s LCD display industry.
South Korea’s response, going back a number of years was to reduce its exposure to the generic LCD panel market and emphasize OLED displays and any product that might be considered ‘premium’ or even ‘non-generic’, which has helped Korea to maintain leadership status in the OLED display space.  The US however has no display manufacturing, although it is the world’s 2nd largest consumer (North America) of products that contain display panels (LCD or OLED), and while APAC consumes 54.7% of products with display panels, North America accounts for 22.9% of that market (2022), with Europe at 11.6%.  That said, we do not believe that the US is well suited to host generic LCD display manufacturing, given the salary and cost of living differential with China.

​While the US has made very significant attempts to curtail China’s semiconductor industry growth through onerous trade restrictions and licensing, as the US does not compete directly with China in the display space, there has been little effort by the US to step on China’s dominance of the display industry.  In fact, in July of 2018 the Trump administration targeted $34b worth of Chinese goods, including TVs, laptops, and smartphones, and in September of the same year added tariffs on an additional $160b in Chinese imports that pointedly expanded the range of tariffed CE products.  In January 2020 $120b of those tariffs ended with the signing of the Phase One Economic & Trade Agreement in January 2020.
More recently, there has been talk on Capitol Hill of restoring tariffs on TVs and possibly TV panels that are made in China and considering that China has ~57% of the world’s LCD display capacity, any new tariffs on LCD display panels would add to the price burden already imposed on consumers due to the rising prices of LCD panels themselves.  With ~80% of TV sets (global) produced in China, new tariffs on TV sets would have a similar, if not greater effect on CE prices.  Our issue is that there is no benefit to placing tariffs on Chinese LCD panels or TV sets other than from a political standpoint, and the US consumer will bare the burden of the fiscal cost.  Perhaps it will put the US in a stronger negotiating position with China that will potentially reap other benefits, but especially during a period of inflation and rising panel prices, it is hard to justify same, especially as the US has no generic LCD production industry.
Last year both houses of Congress passed legislation known as the American Competition Act of 2022, a bi-partisan bill that would allocate $250b over 5 years toward R&D, manufacturing, workforce development, and the development of a local supply chain, with a key provision being a 40% tax credit for investments in domestic manufacturing of advanced display technologies.  While the bill passed both houses, it was never enacted as the differences between the bills passed in the Senate and the House could not be ironed out, and the definition of advanced display technologies was left unspecified.   As tax credits are involved, it would eventually be up to the IRS to set the legal definition, but the bill still sits in committee as both sides try to come to terms on the details. 
It would seem more productive over the long-term to use the same subsidies that have been used in China (at least for construction), rather than the financial burdens imposed by new tariffs, but we are but lowly taxpayers and consumers who have little knowledge of the inner workings of the government, especially when compared to the career politicians that remind us regularly that “it’s not as easy as you think.”
Here's the relevant section of the Act:
Section 1002. Advanced Manufacturing Production Tax Credit.
(a) In general—Chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:
(f) Advanced manufacturing production tax credit--
(1) In general—In the case of a taxpayer who manufactures an eligible component in the United States and sells the eligible component to an unrelated party, the taxpayer shall be allowed a credit against the tax imposed by this chapter in an amount equal to 40 percent of the cost of production of the eligible component.
(2) Eligible component—For purposes of this subsection, the term ‘eligible component’ means any component that is--
(A) manufactured in the United States.
(B) used in the production of an advanced display technology; and
(C) not manufactured in the United States by a related person of the taxpayer.

​Japan has joined the US and its allies in banning the export of a number of semiconductor tools that are used in the production of advanced semiconductors, particularly EUV tools at 10nm – 14nm and lower nodes, and tools used in the etching of stacked memory products.  This follows an agreement with the Netherlands to do the same earlier this month, which choked off all EUV and advanced DUV tool sales from ASML (ASML) to China.  Japan had proposed the rules in March, at which point China had announced some restrictions on Japanese imports, although the Japanese bands are a bit less onerous than the US restrictions.
The Japanese companies most likely to be impacted would be Tokyo Electron (8035.JP), Advantest (6857.JP), Screen Holdings (7735.JP), Nikon (7731.JP), and Lasertec (6920.JP), all to varying degrees depending on product mix, with the Japanese government evaluating potential subsidies or other compensation based on each company’s exposure to the added restrictions.  Based on published data, Tokyo Electron derived 22.5% of sales of semiconductor production equipment from China in fiscal 2023, down from 25.6% in 2022.  Advantest does not break out China specifically but derived 90.6% of 2022 semiconductor & component test (9 months) sales from Asia, with semi test being 71.1% of total sales.  Screen Holdings, for fiscal 2023 (March) generated 80.5% of sales from semiconductor production equipment, and while they do not break out sales by region, ‘overseas’ is 84.3% of SPE sales.  Corporate reps have made little comment, other than saying they will evaluate the situation or China is only a small part of the company’s overall sales strategy.

​Whether you agree that it has been warranted or not, there is no doubt that Chinese semiconductor manufacturers have been severely sanctioned by the US government, increasing the challenge facing the Chinese government’s desire to be a world leader in the semiconductor space.  While China needs US tools and technology to maintain a competitive stature in the world of advanced silicon products, it has done little but lodge complaints, at least up until last week, when China’s National Security Review Office conducted a ‘security’ review of products produced by Micron (MU) that are sold in China.
According to the review, the Micron products did not pass the review and ‘pose a major security risk to the country’s critical information infrastructure supply chain’.  According to Chinese Network Security law, operators of critical information infrastructure in China should stop purchasing Micron products.    The office added “China firmly promotes high-level opening up to the outside world.  As long as it abides by Chinese law and regulations, companies from all countries and various platforms are welcome to enter the Chinese market.”
The US DOC responded with, “We firmly oppose restrictive measures that have no factual basis., while Micron was said to have received notice from the China Cyberspace Administration concerning the review conclusion and would evaluate the conclusion and follow-up options but fell short of acknowledging that it would file a complaint, indicating “We look forward to continuing our discussions with Chinese authorities.”  As Micron is the world’s 3rd largest memory supplier, behind Samsung Electronics (005930.KS) and SK Hynix (000660.KS), with a ~25% share, and generated ~$3.3b in sales to Chinese companies last year, the impact will be felt in the US, while South Korean companies will likely pick up much of the slack.
China is certainly in a less advantageous position than the US when it comes to semiconductors, as it remains years behind the US and others in terms of semiconductor technology and is further limited as to advanced lithography equipment sanctions, and there is little chance that the Chinese government will hit its goal of 70% of Chinese demand being satisfied by Chinese producers.  That said, China’s internal production of its semiconductor memory demand has increased from ~8% in 2020 to 10.7% in 2021 and 16.2% last year., and even with the US ban on DUV tools, China can still buy tools for memory nodes 11nm or above.  Last year 28% of memory sales in China were 14nm or below, which implies that ~75% were above 11nm, which justifies considerable spending by the state and local governments to fill demand.  It seems the Chinese government is feeling sure enough that it can fill the Micron gap with other (non-US) vendors, and eventually fill it itself that it is willing to give the US a taste of its own medicine, a ban with little technology substance and lots of enmity and politics.

​The Bureau of Industry & Security, a Division of the US Department of Commerce, added 6 Chinese companies to the ‘entities list’ based on their alleged participation in the recent “Wandering Balloon” issue that dominated the news in recent days.  According to the BIS, these companies have been added for their support of China’s military modernization efforts, specifically the PLA (People’s Liberation Army) aerospace program, including airships and balloons, specifically using high-altitude balloons for intelligence and reconnaissance.  While any US entity wanting to do business with these companies can submit a request for a trade license, under the column “License Review Policy” in the BIS statement, each was categorized as “Presumption of Denial”.
China’s Foreign Ministry stated that the country has always opposed the US unilateral sanctions on Chinese institutions, enterprises, and individuals, and that the “Chinese civilian unmanned airship that strayed into US airspace was completely accidental incident caused by force majeure”, and has explained such to the US government, and the Chinese press says the US is using the incident to ‘blackmail’ the 6 Chinese companies…
Beijing Nanjiang Aerospace Technology
China Electronics Technology Group
Dongguan Lingkong Remote Sensing Technology
Eagles Med Aviation Science & Technology Group
Guangzhou Tian-Hai-Xiang Aviation Technology
Shanxi Eagles Med Aviation Science & Technology Group