Hi, this is Kenji from Hong Kong.
As a leading commercial hub, the government here likes to boast about how business-friendly the place is. Those boasts became more insistent after Beijing imposed a draconian national security law almost three years ago that restricted various freedoms and led thousands of residents to move to places like the UK and Canada.
One of the key aspects of business friendliness — along with a simple, low-tax regime — is the ease of establishing a company. The government’s online registry is open 24 hours to accept applications literally anytime. To stimulate economic activity, the local government slashed the cost of business registration certificates to as low as 150 Hong Kong dollars ($19.10) for the first year, until the end of last month.
But being able to set up companies too easily can open the door to other problems, for example making it difficult to crack down on shell companies enabling trade with sanctioned countries such as Russia.
A Nikkei investigation into Russian chip imports reveals just such a risk, with one industry source saying there are “many formless shell companies and small trading companies in Hong Kong that serve as receptacles for secondary sales” of chips to Russia.
In a broader sense, doing business with Russia is not a topic many Hong Kong-listed companies seem eager to discuss these days, despite a recent agreement between Chinese president Xi Jinping and Russian president Vladimir Putin to boost economic ties in face of rising tensions with the west. Top executives from China’s top three state oil companies, for example, were largely quiet on the issue at their recent earnings press conferences.
Even Great Wall Motor, China’s largest SUV maker, was similarly tight-lipped despite the fact its revenue in the country surged 73 per cent on the year last year.
Following the flows
The US imposed a sweeping ban on exports of semiconductors to Russia following the invasion of Ukraine last year, with only a few exceptions, including humanitarian purposes. But that has not stopped American-made chips from flowing into the country, largely through small intermediaries based in Hong Kong and mainland China, an investigation by Nikkei reporters has found.
According to Nikkei’s analysis of Russian customs data, there were nearly 3,300 chip transactions worth at least $100,000 each between February 24 and December 31. About 70 per cent of them were labelled as US products, and of those transactions, about three-quarters were shipped from Hong Kong or mainland China.
Particularly eye-catching was the prices involved. Some chips were worth more than $10,000 apiece, indicating their likely use in advanced weapons. Junichi Nishiyama, a senior research fellow at the Institute for Future Engineering who specialises in defence technology, told Nikkei, “A large number of semiconductors with high-performance processing power is needed to control missiles and defence systems.”
Chipmakers contacted by Nikkei all stressed their full compliance with applicable laws and regulations, including the US export ban. But industry insiders and legal experts say controlling the global semiconductor trade is extremely difficult given the nature of the supply chain and China not being party to sanctions against Russia.
Big numbers at ByteDance
ByteDance, owner of the viral video app TikTok, raked in a record underlying profit in 2022, overtaking China’s long-reigning tech titans Tencent and Alibaba for the first time, write the Financial Times’ Eleanor Olcott and Ryan McMorrow.
The group’s earnings before interest, tax, depreciation and amortisation surged 79 per cent to about $25bn last year, based on revenue of almost $85bn, according to people familiar with the Beijing-based company’s finances.
These impressive growth figures put the private company ahead of Tencent and Alibaba, which have been hit hard by Beijing’s two-year regulatory crackdown on tech.
It’s not all rosy for investors in ByteDance. The group faces a rocky path to an IPO, with Washington threatening to ban TikTok over national security fears and a lingering negative investor sentiment from Beijing’s action against ride-hailing group Didi after it went public in 2020.
Any forced sale or ban of TikTok would hit ByteDance’s potential earnings. Although the company generated about 80% of its revenues in China last year and TikTok was lossmaking, it nonetheless represents an important future profit engine.
MacBook’s next chapter
Apple is preparing to produce MacBooks in Thailand, and has been making Apple Watches in the country for more than a year, writes Nikkei Asia’s tech correspondent Lauly Li in Taipei.
This marks another move by the US tech company to diversify its production away from China amid mounting geopolitical tensions. It is also an indication of the growing importance of south-east Asia as an alternative manufacturing base to China. Apple aims to start mass production of MacBooks in Vietnam in the first half of this year. The laptops are the company’s final flagship product still produced solely in China.
It is not easy for Apple to shift away from China, given the level of production and supply chain sophistication it has created over decades. But even as CEO Tim Cook described the company’s “symbiotic kind of relationship” with the country during his first visit there in three years last month, the geopolitical tensions that have pushed the company to diversify show few signs of easing.
It is not all smooth sailing in south-east Asia, however. The region has been a key beneficiary of the shift away from China, but the influx of manufacturers has exacerbated labour shortages, especially for skilled technicians and engineers in Vietnam.
“The labour costs also increased so fast . . . In just a few years, the basic wage we offer in Vietnam is already 80 per cent of the offer in our Shenzhen facility,” said an executive from an Apple supplier in the country.
SoftBank and the new Alibaba
Even two weeks after the announcement, Alibaba’s plan to break up into six business groups is a source of debate and speculation, including over the position of major shareholder SoftBank Group, writes Nikkei Asia’s Cissy Zhou in her deep-dive report.
According to anonymous sources, the Japanese conglomerate has been “pretty worried” in recent years about Beijing’s pressure on Alibaba. For Masayoshi Son, the founding chairman of SoftBank, Alibaba is arguably the best investment decision of his career. He made up his mind to invest in the company in six minutes, but Alibaba has been supporting his business empire for decades.
The recently announced restructuring is seen as a “crucial step in the normalisation of Alibaba’s capital operations,” one of those people told Nikkei. “SoftBank will support the reorganisation as long as it benefits Alibaba Group as a whole and boosts the share price,” which has been depressed since the crackdown intensified.
Shinji Moriyuki, senior analyst at SBI Securities, believes that by breaking up, “the risk of the Chinese government’s sudden restrictions on Alibaba’s business can also be dispersed.”
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China slaps security reviews on AI products as Alibaba unveils ChatGPT challenger (FT)
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#techAsia is co-ordinated by Nikkei Asia’s Katherine Creel in Tokyo, with assistance from the FT tech desk in London.
Sign up here at Nikkei Asia to receive #techAsia each week. The editorial team can be reached at techasia@nex.nikkei.co.jp
