China's independent and controllable industries have once again attracted the world's attention.

Recently, according to the "Wall Street Journal", my country's regulatory agencies have issued instructions to telecom operators, requiring large domestic telecom operators to phase out foreign chips by 2027. This decision covers all telecom operators such as China Telecom, China Mobile, and China Unicom.

In addition, the Financial Times also reported last month that the new procurement demand standards will affect the business of U.S. companies such as Intel and AMD in China.

It is understood that foreign media reports have had a certain impact on Intel and AMD, and the stock prices of both companies have been declining in the past half month.

Intel and AMD stock prices (Source: Google)

In fact, my country's telecom operators have been implementing the replacement of domestic chips for a long time, and foreign media reports have lagged behind. However, judging from the reports and its impact, my country's independent and controllable industries are already small-scale.

01 Chip sanctions, shooting oneself in the foot?

In 2023, China will be Intel's largest market, accounting for 27% of its US$54 billion in sales; China is also an important market for AMD, accounting for 15% of its US$23 billion in sales.

Looking back at the time when U.S. sanctions forced China to accelerate its autonomy and control, and now have affected the Intel and AMD markets, it is not difficult to find that the series of operations by the United States are like "shooting a stone and hitting itself in the foot."

The instructions mentioned in the report are my country's "Xinchuang" (Information Technology Application Innovation Industry) - which aims to conduct independent research and development on hardware, cloud and other infrastructure, and core technology products of the IT industry chain to prevent core technologies from being controlled by others.

Different from policies such as the US Chip Act, Xinchuang is more for "self-protection" rather than restricting the development of other countries.

Judging from the performance, my country's Xinchuang industry has basically completed domestic substitution in server chips by stimulating domestic demand. This is also the reason that may affect Intel and AMD's business in China.

Through the server procurement situation of the three major operators from 2020 to 2022, it can be found that the proportion of domestic chips is increasing year by year, and the share of major international manufacturers is also constantly being eroded.

In addition, from the perspective of requirements, my country is also continuing to update Xinchuang's procurement standards.

On December 16, 2023, China's Ministry of Finance and the Ministry of Industry and Information Technology released the "Desktop Computer Government Procurement Requirements Standards (2023 Edition)", which clearly added compliance for central processing units (CPUs), cryptographic hardware and operating systems. Require. On the same day, the China Information Security Evaluation Center announced the first batch of processors that meet the "safe and reliable" standard.

With the refinement of standards, although China does not have an "entity list" to name foreign companies, cutting off demand will also have a certain impact on foreign companies. After all, China's market is very large. According to the "2022 China Server Market Tracking Report" released by IDC, China's server market size will be US$27.34 billion in 2022, a year-on-year increase of 9.1%. China's server market size accounts for 24.5% of the world's total.

At the same time, China's server chips are an industry that must be independently controllable. Because China lacks a say in the industry, it has suffered a lot.

02 Server chips, an industry that must be independently controllable

In the server industry, China has received two warnings due to its lack of core technology.

The first time was the famous "Glass Room" incident.

Before and after reform and opening up, China lacked the technology to develop its own supercomputers. In order to carry out oil exploration, China's Ministry of Petroleum Industry spent a lot of money to purchase an IBM mainframe.

But you can buy equipment with money, but you can’t have access to technology. Because IBM put forward harsh additional conditions after selling the product: placing the machine in a transparent "glass room" that Chinese people are not allowed to enter to facilitate 24-hour monitoring by American experts, and the monitoring logs of American experts must be submitted to U.S. government censorship.

Since then, the "glass house" has become a metaphor, reminding us that if the technology industry falls behind, we will be beaten and suffer losses.

As time goes by, as Western countries continue to block high technologies, my country's core technology progress in servers has also been slow. Although the top domestic servers are all domestic brands, Inspur, Huawei, H3C, and Lenovo have all entered the Top 5 in global shipments. However, most of the chips used by these brands come from abroad. Taking the most common x86 architecture in servers as an example, this market has almost been monopolized by Intel.

In the first quarter of 2023, market research organization Mercury Research announced the market situation of X86 chips.

• In the field of desktop CPUs, AMD has a market share of 19.2% and Intel has a market share of 80.8%;

• In the laptop/mobile device CPU field, AMD has a market share of 16.2% and Intel has a market share of 83.8%;

• In the field of server CPU, AMD accounts for 18% of the market and Intel accounts for 82%;

• In the entire X86 data center market, AMD's share is 25.8% and Intel's market share is 74.2%.

Precisely because they are in an industry where core technologies are monopolized, Chinese companies also suffered losses in 2020.

At that time, the sudden news that Inspur Information was cut off from Intel chip supply directly caused Inspur Group's stock to almost fall to the limit. After all, in Inspur Group's 2019 financial report, Intel was its largest supplier.

Although Intel later put pressure on the U.S. government, stating that it could not lose the Chinese market, and in the end only suspended supply for two weeks, this incident was enough to demonstrate the importance of independent control of core technology.

Now in the AI era, server chips are becoming an important part of AI training, cloud reasoning, and supercomputing centers, and our country cannot continue to teach others what to do in the new era.

03 In the AI era, domestic chips compete for the monopolized market

As mentioned earlier, Intel is undoubtedly the leader in the server market, and it is extremely difficult to take away its market share. However, with the development of my country's Xinchuang industry, it will support a batch of chip companies with strong product capabilities. In the future, it may It will radiate to other non-innovation industries and start using domestic server chips.

And in the long term, both the stock and incremental server markets have huge potential.

On the one hand, Internet giants and technology companies have huge demand for data centers.

It is understood that almost all online service platforms require a huge amount of server chips to build "infrastructure." The huge amount of online streaming data transmission, as well as scenarios such as video encoding and decoding, cloud inference acceleration, etc., force manufacturers to continue to purchase massive amounts of of server chips to maintain the normal operation of self-built data centers around the world.

According to data disclosed in Alphabet's financial report, Google purchases more than 300,000 server chips from the market every quarter for businesses including Google Cloud and YouTube.

Not to mention that China, which has Internet/technology companies such as Baidu, Alibaba, Tencent, and ByteDance, has a greater demand for server chips. Although some companies are choosing to develop their own chips, outsourcing servers is still the mainstream.

On the other hand, the rapid development of AI also brings another opportunity.

According to IDC, the AI server market size will reach US$24.8 billion in 2023, a year-on-year increase of 27%. Research firm TrendForce estimates that global AI server shipments will be close to 1.2 million units in 2023.

It is reported that model deployment is currently a larger market than training. The application's maximum load capacity requirement for the server is to meet the peak load, that is, to meet the access requirements of the CPU at all times. Based on this calculation, the domestic demand for servers driven by AI is approximately 50,000-166,000 units, and the demand for chips is 500,000-1.66 million units.

According to calculations in a research report from CICC, the core components of AI servers in descending order of value include GPU, DRAM, SSD, CPU, network card, PCB, high-speed interconnect chip and cooling module. Calculated based on 75,000 training servers and 175,000 inference servers, the corresponding market sizes are US$24 billion, US$8.8 billion, US$4.8 billion, US$3.4 billion, US$500 million, US$300 million, US$250 million and 150 million respectively. Dollar.

Currently, the development potential of domestic server chips is huge. Chip companies include Zhaoxin, Feiteng, Huawei Kunpeng, Loongson and Shenwei, which are mainly engaged in the Xinchuang market. There are also Yuxian Micro, Hongjun Micro and Qiling Core that are deployed in multiple markets. wait.

Server companies are also actively participating in the layout. For example, Inspur Information has released three generations of AI server products, implemented multiple AI computing products with more than 10 chip partners, and launched the AI Station platform, which can efficiently dispatch more than 30 types of AI chips. In addition, there are also purely domestic solutions that work closely with upstream and downstream, such as the iFlytek Spark all-in-one machine jointly released by iFlytek and Huawei. It is based on Kunpeng CPU + Ascend GPU, and uses Huawei storage and network to provide a complete cabinet solution. The FP16 computing power reaches 2.5 PFLOPS.

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