Comment: Gree should not rush into chip manufacturing

Source: The content comes from "China Business Daily", thank you.

In the trend of making chips in the home appliance industry, Gree is the most resolute. In 2017, Gree did not distribute dividends. Gree Electric Appliances Chairman Dong Mingzhu said categorically that chips must be made. Later, Gree founder Zhu Jianghong reminded from a distance: "I don't have much confidence in Gree making high-end chips." TCL Group Chairman Li Dongsheng also warned in an interview with the author recently: "Some people invest 50 billion yuan to make chips, but if they really make wafers, 50 billion yuan is not enough. It is risky for home appliance companies to jump into unfamiliar fields. There is a big gap between domestic and foreign chips, and they lag behind overseas by 20 to 30 years."

In fact, Dong Mingzhu is not such an irrational person. Gree Electric Appliances (000651.SZ) announced on the evening of July 4 that it has spent about 400 million to 500 million yuan to further increase its stake in upstream compressor company Highly to 10%. This means that Gree will not distribute dividends in 2017, and the approximately 50 billion yuan in cash will not be kept entirely for chip production, but will cover several areas of Gree's expansion.

Dong Mingzhu revealed at the shareholders' meeting on June 25 that she was still busy with chip issues the day before. The specific way and form of making chips for Gree still needs to be discussed and decided by the company's board of directors. It is hoped that all Gree air conditioners will use their own chips next year.

As the world's largest household air-conditioning company, Gree, which has always been committed to mastering core technologies, wants to break its dependence on imported air-conditioning chips. Its determination to make its own chips is understandable and even courageous, but "it is not advisable to act too hastily."

First, Gree has already started in the chip field, and it is not difficult to replace low-end and mid-end chips. Zhang Chenchen, an analyst at TrendForce, pointed out that Gree can already package IGBT (power semiconductor devices) into IPM (power modules) required for variable frequency air conditioners, and can also design the main chips of air conditioner indoor units independently. In the future, more core components will be developed by Gree, and the commercial model will be mainly for self-use. Even if the cost of its own chips is slightly higher than that of purchased chips, Gree can easily absorb the cost by shipping 60 million air conditioners a year.

In the latest industrial structure of Gree presented by Dong Mingzhu, chips, IoT devices, mobile phones, and big data are all placed in the communication equipment company sector, which shows that she hopes to have control over the chips as the "brain" in the future smart home ecosystem of Gree. Gree Electric Appliances established the Communication Technology Research Institute in November 2015. Therefore, Gree's chip business is not a plan, but a fact.

Secondly, there are different levels of chips, and the replacement of high-end air conditioner chips is not something that can be achieved in the short term. Dong Mingzhu revealed that an air conditioner has several chips, and Gree spends about 4 billion yuan on chips a year. Currently, most of these chips are still imported. "We have developed chips, and our own designs have achieved some results," but she also admitted that Gree's current progress in chip design is still superficial.

A senior expert in the home appliance industry believes that air conditioner chips are divided into different grades. For example, air conditioner remote control chips are low-end chips with a price of less than a few yuan, so localization is not a problem. However, variable frequency drive chips and host chips are high-end chips, costing about 15 yuan each. This requires long-term accumulation of technology and talents, and cannot be achieved in one or two years. Gree, for example, uses variable frequency drive chips from Texas Instruments.

China is the world's largest air conditioner production base, accounting for about 60% of the world's air conditioner production capacity. However, at present, most of China's air conditioner variable frequency drive chips and host chips rely on imports. The main suppliers include Texas Instruments, STMicroelectronics, Renesas of Japan, and Hanzhi of Taiwan, China. The integrated circuit industry requires a large number of talents and technology accumulation. Once there is an oversupply, it will lose money. Renesas has been losing money for many years and was eventually controlled by the Japanese government. The rise of the smart home and electric vehicle industries in the past two years has stimulated the growth of chip demand, but it is not advisable to enter rashly.

Third, the chip industry chain is very long. Gree can start from chip design, proceed step by step, and eventually it will wear away the stone. However, if it rushes too hastily, it will encounter huge pressure from the capital market.

The chip industry is actually an ecological chain, with professional companies from design, manufacturing to packaging and testing. Qualcomm, MediaTek, and Broadcom are all chip design companies, which design chip solutions and then find chip manufacturers to produce them. Chip manufacturers like TSMC, SMIC, and Yangtze Memory do not design chips themselves, but only make wafers. Even the chips for the Apple 10 mobile phone are outsourced to Taiwanese factories.

As Li Dongsheng said, the investment scale of wafer fabs reaches tens of billions or even hundreds of billions. TCL will not invest because it does not have that many resources. However, TCL will adopt a light-asset approach and start from chip design. It recently invested in SenseTime and Cambrian and will also use their chips.

Therefore, from the perspective of reducing risks, Gree's entry into chip design is a practical and feasible approach. To design high-end chips, it can support or acquire some chip design companies. After 5 to 10 years of continuous design, application, and improvement, a breakthrough may be achieved one day. However, if it is too hasty, even if 50 billion yuan is invested at once, it may not be effective immediately. Instead, as Dong Mingzhu said some time ago, Gree Electric's stock price fell as soon as she mentioned making chips.

Wen Jianping, chairman of AVC, believes that Gree's chip business should be viewed from two perspectives. Home appliance companies are in urgent need of chip support, including core products such as inverter air conditioners and inverter refrigerators, in which the impact of chips is becoming increasingly important. Chips themselves are the most lacking link in the capabilities of Chinese home appliance companies. Therefore, Gree's original intention, starting point and courage to make its own chips are worthy of recognition.

However, the chip industry has a fast technological update and iteration speed, and requires large investments, and is highly talent- and capital-intensive. Gree does not have much of these genes at present, and it is very challenging to enter the chip field rashly, especially if it enters the chip manufacturing link, which is more difficult and risky.

Of course, Gree is a listed company with a market value of over 200 billion yuan and a benchmark enterprise in the home appliance industry. If it is willing to spend a long time planning and preparing and steadily advance, it is not without any chance of making chips. Therefore, Gree should take a long-term view and not rush into it when making chips.

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