The Chinese technology sector is at the centre of a new trend with companies now investing into in-house operations to create microchips built specifically around their requirements.ByteDance, the owner of TikTok, is the latest to announce plans to become a quasi-microchip manufacturer. Unfortunately, it is not simply a case of switching on the investment tap and creating a ready-made microchip, this takes time and detailed planning.


Suppliers unable to meet requirements


Even though ByteDance is grabbing the headlines today, Chinese giants such as Baidu and Alibaba are already creating their own self designed chips. Historically, the microchip industry has been under huge pressure with demand continually outstripping supply. The introduction of a range of new technologies, even greater focus on online services and continued expansion of smartphone services has made many companies rethink their long-term strategy. Ongoing demand for electric vehicles has also placed yet more pressure on the chip manufacturers.


On the surface, companies with zero microchip manufacturing experience appear to be entering the market. In reality, those companies moving into this field will still require chip manufacturers to manufacture the components, many of which will be foreign companies. Interestingly, despite the huge investment required to create focused microchips for the likes of ByteDance, their technology will remain in-house and not be available to third parties.


Have chip manufacturers been slow to react?


The world of microchip manufacturers is complex and challenging, requiring continuous investment in often short, medium and long-term projects. From the outside looking in, it would appear that the chip manufacturing sector has been slow to react but this is not necessarily the case. When you consider that ByteDance requires microchips able to handle video platforms and entertainment apps together with ever increasing data-processing requirements, the manufacturing of microchips will always be under pressure.


The Chinese government has been extremely supportive of the domestic technology sector and encouraged companies to look toward self-sufficiency when it comes to microchips and processing power. Consequently, much of the technology-based business which left the Far East for the likes of the US will be encouraged to return in the short, medium and longer term.


Hong Kong critical for the technology sector


Taking a step back and looking at this change in the technology sector further emphasises the importance of Hong Kong when it comes to stock market listings and fundraising. The Hong Kong stock exchange “Connect” system allows Chinese companies to operate secondary listings in Hong Kong. Effectively acting as a bridge between Chinese-based companies and foreign investment, there are two benefits. Companies are able to raise funds whilst also maintaining a relative liquid market in their shares, tradable on both the Chinese and the Hong Kong stock exchanges.


This greater liquidity and enhanced opportunities to raise funds as and when required is attracting both institutional investors and day traders. In general, the technology sector has suffered something of a de-rating in light of the ongoing global economic challenges but Hong Kong has performed better than most.


Challenging times ahead!


While there is no such thing as a one size fits all microchip, historically, microchip manufacturers created components which accommodated a variety of processing power requirements. Consequently, technology companies were forced to build their systems around the processing power of individual microchips. 


Even though the headline suggests that microchip manufacturing is been taking in-house by companies such asByteDance this is not necessarily the case. Microchips will be designed and continually enhanced in-house but they will still depend on chip manufacturers to create the actual product. Could this place further pressure on the supply of microchips rather than resolve a crucial problem?

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