• The worst-kept secret in tech is that Nvidia’s customers are all trying to reduce their dependence on Nvidia by building their own silicon, but it’s a slow process and with Nvidia’s product cadence, I don’t see it being in danger anytime soon.
• Meta is working with TSMC (and I presume Arm (see here)) to develop an in-house chip that it will use for all of its AI activities including training and inference of regular machine learning and generative AI.
• If successful, this would reduce or remove its dependence on Nvidia which given the size of Meta as a customer, would have significant and negative implications for Nvidia.
• For a large client of Nvidia to switch to its silicon is much easier than it is for a small company as the large company has its in-house captive market to drive the economics.
• It also does not have to worry about the dominance of Nvidia’s silicon development platform CUDA as it can make its systems vertically integrated and use its development tools.
• It does, however, have to make the platform as good as CUDA and its in-house silicon as economically viable as the latest and greatest from Nvidia.
• Hence, as always, the devil is in the details as:
  • First, product cadence: which I have long argued is one of Nvidia’s key differentiators.
  • Here, the latest product from Nvidia (currently Blackwell) is always at least one generation ahead of everyone else meaning that it will be the most cost-effective to operate even with Nvidia’s 70%+ gross margins.
  • This is the classic build vs. buy dilemma that any company has to weigh up and, at the moment, everyone else is far enough behind to make it more cost-effective to buy Nvidia.
  • Second, developers: where anyone who wants to have 3^rd party developers using their silicon has to solve the development platform problem.
  • Developers already know how to use CUDA and as it is the most mature in the industry, it remains a key control point and the reason why developers prefer Nvidia.
  • Consequently, with 3^rd parties, the CUDA problem needs to be overcome and given how far ahead it is, I think that unlikely that anyone will succeed in this generation.
  • However, RFM Research has long argued that the developer market will move from developing on silicon to developing on foundation models as models become increasingly commoditised.
  • The big foundation model providers are likely to ensure that their models can be trained optimally on Nvidia, their own silicon or anyone else as greater competition means purchasing the silicon for their data centres will cost less.
  • This is how the CUDA control point may weaken, and I think that it is not until then, that we will see any real pressure on Nvidia’s business model.
• Hence, I think that while Meta will have some success with its in-house silicon for its uses when it comes to 3^rd parties, it is going to be stuck with Nvidia for some time.
• RFM Research has also concluded that it will take a while for developers to shift towards foundation models meaning that for a few years yet, Nvidia’s market share is unlikely to change much.
• Consequently, Nvidia remains subject to the whims of demand which remains higher than it can deal with.
• Hence, revenues are likely to be a factor of how much capacity it has booked at TSMC for the coming 12 months as opposed to how much customers want to buy.
• The net result is that Nvidia’s short to medium visibility remains pretty good and so I do not expect any surprises in the next few earnings reports.
• However, this also means that the scope for a further large run-up in the share price is limited meaning that the share price is likely to remain in line with revenue and profit growth.
• Nvidia’s valuation is still relatively undemanding for the growth that it is likely to see in the next year or two, and so if I were forced to hold a direct AI investment, this would be it.
• However, I still prefer the adjacencies of AI inference at the edge of the network and nuclear power to solve the energy shortage both of which remain pretty cheap and underinvested.

• Huawei is making some bold claims with regard to the yield that it is achieving on the AI chips it is making which, if verified, would have a substantial impact on China’s quest for technological independence.
• The FT’s article (see here) that makes these claims declines to name its sources but I suspect that they are Huawei executives who have been permitted to speak to the FT, but not on the record.
• Huawei’s latest AI chip, the Ascend 910C, is a significant advance on the 910B and according to testing by DeepSeek (see here), it can deliver inference with 60% of the performance of the Nvidia H100.
• If verified, this represents a good advance as the 910C is made on SMIC’s 7nm (N+2 node) which is two generations behind TSMC’s N4 node where the H100 is manufactured.
• The performance statistic should be fairly easy to verify when the 910C is widely available, but the big claim is yield which I think is far more important.
• SMIC and Huawei have long been denied access to advanced semiconductor manufacturing equipment and so they have been forced to go below 10nm using older equipment (deep ultraviolet (DUV)).
• This is where all of the question marks arise as both Intel and TSMC tried to go to 7nm using only DUV using a much more complicated multi-patterning technique and quickly shifted to EUV when it was reliable enough for commercial use.
• EUV allowed TSMC to have a simpler process with much better yields and cost efficiency explaining why it quickly shifted away from using only DUV at 7nm.
• It is this process that Huawei and SMIC are using and given the problems that Intel and TSMC had with it, I have always been sceptical that Huawei and SMIC would ever be able to get yields up to a level which would be sustainable economically.
• Huawei’s first chip using the SMIC 7nm process was the Kirin 9000 series which is an SoC that has been used to power its smartphones.
• These chips are much smaller than AI training chips used in the cloud and so it is much easier to get a higher yield and even here Huawei has had problems.
• I have long speculated that yields are low and that Huawei was either having to charge a lot more for its devices or the process was receiving some state financial aid somewhere in the process to keep it going.
• The Ascend 910C has a much larger area than the Kirin 9000 series and so it is much harder to make a working chip without accumulating errors that would render the chip useless.
• Here, the benchmark is the H100 which is manufactured by TSMC on its N4 process where the yield is somewhere between 60% and 80%.
• This is where Huawei’s claims are surprising as it is claiming that its yields are close to 40% (up from 20% a year ago) with the goal of bringing yields to 60%.
• All of this is being done on a process that TSMC and Intel abandoned as too complicated where economic yields were very hard to achieve.
• Huawei is also claiming that at a 40% yield, it is now profitable meaning that should it reach 60% or higher, then this would become a very profitable line of business.
• In theory, this is possible as it depends on the price that Huawei can charge for its chips which is another area where the state could be helping the economics look better than they really are.
• At face value, this represents a big step forward for China’s long-term goal of becoming self-sufficient when it comes to technology and semiconductor manufacturing in particular, but I remain sceptical.
• All of these claims come from anonymous sources meaning that they are inherently unreliable.
• Furthermore, both DeepSeek and Huawei have links to the Chinese state and although the private sector is back in the state’s good books, it will keenly remember who runs the show.
• China is world-class when it comes to maximising the publicity and buzz surrounding its technological achievements and so without independent verification, I remain extremely sceptical that reality is able to live up to the claims.
• Hence, I continue to think that Huawei and SMIC lose money with every Ascend chip that they make meaning that some form of state will continue to be needed to keep the process going.
• This means Nvidia is likely to continue selling its chips into China for a while yet, but it is clear that China wants to remove this dependency.
• Fortunately, demand is so high that the capacity can be reallocated elsewhere and there will be no meaningful impact on Nvidia’s financial performance.
• This is yet another sign of the Balkanisation of the technology that RFM Research and Alavan Independent have been predicting for some time.
• We see China going one way while the rest of the world goes another resulting in separate and incompatible networks with smaller countries having to choose one standard over the other.
• This is good for no one as the growth of the global technology sector in the long term will be lower than it otherwise would have been.

• It is said that a company is more than just one man but when almost all of the brains of the company are no longer there, one has to wonder what this means for product launches, revenues and of course, value.
• In a tweet clearly drafted by a lawyer, Mira Murati, CTO of OpenAI has announced that she is leaving the company which in my opinion is a heavy blow to OpenAI.
• This is because she was the brains of the operation and the additional departure of Chief Research Officer, Bob McGrew and Barret Zoph, VP of research compounds my concerns even further.
• Furthermore, despite plenty of hyperbolic commentary, GPT-5 is nowhere to be seen, and Sora (video generation) still has not shipped despite being demonstrated in February of this year.
• There are two possibilities for these departures.
  • First, Start-up where Mira and her colleagues found their own company and create a competing product.
  • This is happening with increasing frequency and there are now many start-ups headlining with alumni from OpenAI and Deep Mind.
  • Given how important Mira was to OpenAI and how frothy the market is, I suspect that she will have no difficulty raising money for her new venture if that is the path she has chosen to take.
  • Second, disagreement: which has also been fairly common where founders reach an impasse on the direction that the company should take and part ways.
  • Ilya Sutskever, one of the other main founders of OpenAI also recently left for this exact reason and has started his own company focusing on AI safety as this is where his opinions and those of Sam Altman diverged.
• On top of the fundamental implications of Murati’s departure, the timing could not be worse.
• OpenAI is currently raising money at a pre-money valuation of $150bn putting the company on 30x 2025 revenues in an optimistic scenario.
• This assumes that the company will become a proper for-profit (highly likely in my view see here) and that revenues grow very quickly and that fat profits will follow.
• With the brains of the operation gone and possibly gearing up to compete with OpenAI directly and rapid growth in competing offerings, this proposition is becoming more fanciful with every passing event.
• OpenAI is no longer miles ahead of the competition and with Meta’s party-blowing release of its flagship model and its weights into the open-source community, the stage is set for rapid price erosion.
• There are already signs of this as more features are making their way into free generative AI services, but it is not until prices begin to fall that anyone will notice.
• This is the pin that bursts the bubble in my opinion and given how much it has been inflated, there will be a significant correction to reality.
• This is why I remain very nervous about the valuations that are being paid for these companies and am staying well away from them.
• If I were forced to invest in this area, it would be Nvidia which actually has revenues and profits now or Qualcomm which is in a very good position to benefit as generative AI starts to be implemented at the edge.
• I already own Qualcomm which remains reasonably valued and has further upside from its position in automotive as well as the potential to take share from Intel and AMD in laptop processors.

• Yet another delay to the EV transition comes as no surprise as the criteria for mass adoption is still far away meaning that the EV targets set by governments across the world will also be pushed back significantly.
• Volvo Cars has pushed back its target to be fully electric indefinitely from its ambitious 2030 that it set some time ago.
• Instead, it is focusing on plug-in hybrids which are more complex to make but they solve the two biggest problems of being fully electric which are range anxiety and charging.
• Volvo was one of the first to make the commitment to go fully electric, but it follows Ford, GM and several others who have also quietly walked back their ambitions.
• Volvo will now aim to make 90% or more of its vehicles either electric or plug-in hybrid by 2030 but has stated that demand for its premium EVs is still growing.
• This is in contrast to market numbers which seem to indicate that demand for EV’s is in decline in 2024 and that market penetration will remain roughly flat compared to where it was in 2023.
• The problem with EVs is very simple in that they were over-hyped back in 2021 with proponents promising an experience that has yet to be delivered.
• RFM’s criteria for EVs to take off remain as follows:
  • First, price: where the equivalent EV compared to its petrol version at the same trim level must have broadly the same price.
  • This will be difficult to achieve given that a battery is much more expensive than a fuel tank, but the many fewer moving parts than an EV should help.
  • The price of energy also needs to be equivalent as in Europe particularly the cost of electricity has risen markedly since 2021 while the cost of gasoline has fallen.
  • This has also diminished the appeal of EVs to the mass market.
  • Second, charging: which needs to be no less convenient than going to the petrol station and filling up the tank in a few minutes.
  • This will be a really tough nut to crack but I think it could be largely mitigated by charging overnight at home, although there needs to be good solutions for those that live in apartment blocks.
  • Third, truly green: RFM research indicates that EVs cause pollution and in some cases, they cause more.
  • Only a fraction of the world’s electricity is generated by methods that do not involve the production of carbon dioxide.
  • This means that an EV that uses electricity generated by burning gas, coal or oil is causing pollution with the only difference being that it is not doing so directly.
  • Furthermore, because EVs are meaningfully heavier than their petrol equivalents, they cause more rubber pollution and wear out their tyres more quickly than petrol cars do.
• If these criteria can be met or just gotten close to, then I think that EV’s become a no brainer for the mass market.
• This is because their total cost of ownership will become far less than a petrol variant (RFM estimates $5,000 per year) making the EV proposition compelling for almost all users.
• However, this is going to take time to achieve and while the companies are finally admitting to reality, governments have yet to do so.
• The net result is the outlook for EVs remains difficult in the short-term but once the problems with EVs are solved, then there is a strong case for them to become the majority of the market over time.
• However, this is going to take a while, and I think that we will see many more targets rolled back by both EV makers and governments will eventually join in.
• Against this backdrop, the shakeout is far from over and there is more blood to be let meaning that I would stay away for now.

Peloton FQ4 24 – The turn

• Peloton reported revenues that grew YoY dispelling fears of the company being in a death spiral which, combined with finally breaking even on a cash flow basis, gives hope that the ship has finally stopped sinking.
• The result was a 35% jump in the share price but given how far the shares have fallen from their 2021 high of almost $175, this is a tiny blip that can hardly be seen on the chart.
• Q4 revenues / EPS of $643.6m / LOSS$0.08 ahead of estimates of $628m / LOSS$0.17 and guided for FQ1 25 broadly in line with expectations.
• The real surprise came in both operating profit where the company almost broke even and in operating cash flow which posted a $32.7m cash inflow for FQ4 24.
• These are strong signs of stabilisation which combined with subscribers remaining loyal to the company, allows the focus to shift to the future.
• This is where the recruitment of a new CEO (yet to be announced) will be crucial.
• Now that the company is generating cash, the question will be what to do with that cash as there is a strong argument for running the company for cash and giving it back to the shareholders.
• The subscriber business has 3m subscribers that generate $1.6bn in revenues from which the company earns 70% gross margins which with a hardware business that breaks even and modest OPEX, it is possible to value the company at around $8bn with no growth at all.
• Take off $1bn for the debt and one ends up with a per share valuation of $19 compared to $4.55 (after rallying 35% on August 22^nd).
• This all depends on hardware no longer draining the business of value and a greatly reduced operating expenditure both of which are now well underway.
• It also relies on the new CEO not making bad strategic decisions and wasting the value that is being generated by the subscription business as the original management did on hardware.
• However, with the biggest risk factors receding into the rear-view mirror, the possibility of a major rerating is now in the cards.
• I have a half position in Peloton and am considering adding some more here as even with the 35% rally, it is still below where I originally bought it.

Snowflake FQ2 25 – Not enough

• Snowflake reported good results but the weak guidance and the bad PR from the cyberattack suffered earlier this year meant that the shares sold off underlining that this remains one to avoid.
• FQ2 25 revenues / EPS were $869m / $0.16 broadly in line with forecasts of $851m / $0.18 but guided weakly for the coming quarter.
• Here FQ3 25 revenues are expected to be $850m – $855m which is below $899m which is what has triggered the latest disappointment in a company where the story is all about growth.
• This is because even excluding stock-based compensation, the company is still barely profitable despite an annualised revenue run rate of over $3.2bn.
• Hence, to generate value for shareholders it needs to have a much larger revenue base over which to spread its huge operating expenditure.
• The company does generate cash and so there are no fears of its solvency but it is more a question of what this business is worth.
• Even after falling 14.7% on August 22^nd, the market capitalisation of the company remains $38.4bn which when adjusted for net cash gives a FY 25 EV / Sales of 11.0x.
• This would be fine if the company were generating excellent profits and cash flow but this is far from the case as the FY 2025 PER of 191.7x clearly indicates.
• Hence, even without the stigma of a cyberattack and the possibility of being disrupted by generative AI, I would not be enticed to own this one.

Start-ups – AI pollution

• The best part of every trade show be it CES, MWC or similar is the opportunity to descend into the bowels of the show and filter through thousands of start-ups which have a huge range in terms of quality.
• The problem this year is that 70% of the start-ups have put AI somewhere in their name or their one-sentence description meaning that the obviously mediocre offerings have become much more difficult to identify.
• To fix this problem, I ignored every company that used the AI term and focused on those that did not and here I found the quality to be far better.
• I suspect that this is because to get noticed without the AI moniker one has to have something that stands on its own merit.
• One theme that I found particularly interesting is gestures as an input method which Apple has brought back into the limelight with the release of the Apple Vision Pro.
• Two companies in particular stood out.
  • First, Doublepoint: which is based in Finland and uses the sensors available on Android Wear devices to enable pinch to click as well as flick to scroll.
  • One can also use hand movements to act as a mouse on an iPad with a pinch as the mouse click.
  • The secret sauce here is error detection as Doublepoint can tell when fingers are pinched deliberately as opposed to when they are not.
  • Apple got around this problem by requiring a double pinch which almost never happens by accident.
  • Android Wear is a bit limiting in terms of what it allows the company to do but with its prototype device on one’s wrist, one can point at lights and turn them on and off by pinching which is a pointless, but very cool gimmick.
  • It is worth remembering that pointless gimmicks often cause devices to sell in their millions.
  • Second, Neuranics which is a company that uses magnetic fluctuations in the body to read body signs and it claims this can also be used to decode gestures.
  • The company is currently demonstrating a prototype device that can work anywhere on the left side of the chest which can very accurately (presumably to medical grade) provide a full ECG.
  • The company says that this is good enough to get FDA clearance, but I see this more as a proof of concept of what the company can do as medical devices is not its goal.
  • A device on the wrist will be able to measure heart rate and HRV which offers an alternative to light which can struggle to work well on people with darker skin.
  • Most interestingly the company thinks that this could also be used for gesture-based input which could be both very accurate and detailed.
• This is a long-term theme as Apple has demonstrated that when it is implemented well, it is a perfectly good system for input although typing is an issue.
• Using these solutions rather than very expensive sensors offers a way to get pricing down in terms of sensors, power consumption and weight.
• It is an emerging theme which has a new lease on life and one worth keeping an eye on.

ORAN – ORAN? What ORAN?

• Missing in action at this year’s show is OpenRAN (ORAN) which was all the rage last year but has been completely sidelined by AI in 2024.
• ORAN is the idea of having all of the interfaces between different pieces of network equipment open and available meaning that operators can pick and choose different vendors for each piece.
• I was expecting this to be a big deal this year as for years ORAN has suffered from poor performance but with a recent update, this problem was largely solved.
• Hence operators should be going gangbusters on mixing and matching equipment and getting excellent prices, but at the show this year, ORAN is hardly anywhere.
• No one is talking about it, there are no banners anywhere leaving it to the existing ORAN supporters to wave the flag.
• It seems to me that AT&T’s deal with Ericsson should have pushed this to the top of the agenda but the nature of this deal has done precisely the opposite.
• This is because instead of picking and choosing components from different vendors, AT&T has taken the whole lot from Ericsson making this look just like any other deal for network infrastructure.
• In my opinion, this really undermines the whole proposition of ORAN as it makes it look just like any other network deal that uses closed interfaces.
• The only real winners here are 3^rd parties who offer network software as they will still be able to plug into the network even if the whole lot has come from one vendor.
• AT&T could theoretically use 3^rd parties for capacity upgrades but there is no indication that it will do this, and I suspect that Ericsson will do everything it can to ensure that it keeps the business.
• This means that ORAN could still take a piece of the market, but it does not look like the equipment vendors that specialise in the mix-and-match idea will get much of a look in.
• Hence, it looks like tough times will continue for them despite the large boost in confidence that ORAN has just received.

• The issue of AM radio in vehicles sold in the USA has been debated for many years, but electrical vehicles (EVs)bring this issue to a head meaning that the most likely outcome is that AM radio becomes an option rather than standard in electrical vehicles.
• Although the relevance of radio broadcasting has declined substantially in most parts of the world, in the USA it remains an important medium by which consumers receive news, information and entertainment.
• I have long thought the main reason for this is that US consumers spend more time in their cars daily than anywhere else and, in the vehicle, radio has long had the best user experience.
• This is because almost all the time the driver is busy driving and when the user gets into the car either the radio automatically starts or it can be accessed by one press of a big round button.
• There is no fiddling around with Bluetooth settings or cables or trying to find the right app as when the car turns on, the radio works.
• Radio is also popular because in a country the size of the USA, local programming is more important and the easiest way to deliver that historically has been through radio broadcast.
• AM radio broadcasts began 118 years ago in the USA and many local radio stations and emergency broadcasts still use it and according to Neilsen, 78m Americans tune into it.
• This is down from 107m in 2016 (roughly a decline of 3.5% annually) which is surprising in the era of smartphones, streaming services and increasingly digitised vehicles meaning that there is a case to keep it in vehicles.
• The problem is that AM radio has issues in EVs because the onboard electrics cause interference in the AM frequency meaning that shielding is required to ensure good reception of AM radio stations.
• According to the automotive industry, this would increase the cost of making EVs by $3.8bn over 7 years explaining why all of the OEMs are keen on following Tesla’s lead and dropping support.
• Tesla dropped support for AM several years ago but the inclusion of the TuneIn app in the head unit means that there is an alternative for anyone who wants to listen to AM radio.
• The user experience will be a little more cumbersome but, crucially, it is still there for those that want it and I would expect that most of the OEMs will try to do something similar.
• However, some are not happy with this compromise and are lobbying to get Congress to mandate the inclusion of an AM receiver in all vehicles using emergency broadcasting as the reason.
• This will only mean that prices of EVs rise even further postponing the time when they can compete head-to-head with petrol vehicles on price.
• Furthermore, given that almost everyone has a smartphone, there are alternatives for emergency broadcasting that did not exist when the emergency radio broadcasting system was first deployed.
• Hence, I think that the best (and most likely) outcome is that AM radio becomes an optional extra in EVs as the case for keeping it is not strong and there is more than one viable alternative for all of its uses.
• Radio broadcast looks set to remain a significant part of how Americans consume content as its decline in the face of easily available alternatives with greater functionality and choice have been unable to accelerate the decline.

• Ouster reported good results and strongly signalled that it has turned the corner, but the uninhabited conference call gave a strong impression that no one cares.
• Q3 revenues / net income were $22m / LOSS$35m which were ahead of both the company’s guidance and my own expectations.
• Given how little this stock is now covered by the street, it is difficult to rely on the consensus estimate.
• Key to this set of results were some milestone achievements as well as long-term expectations that return Ouster to the kind of expectations that were set when the company originally listed via its SPAC.
• These were firm orders of $38m during the quarter, $120m of cost savings since Q3 2022, successful integration of the Velodyne and Ouster software platforms and a return to 30%-50% growth with 35% – 40% gross margins in the long term.
• The company expects to make meaningful progress on those long-term goals over the next 18 months meaning that the next two years should see an acceleration from the virtual standstill suffered in 2023.
• The $120m cost savings claim also looks a little odd as the OPEX of Ouster in Q3 2023 looks pretty much the same as it did in Q3 2022.
• What one has to remember is that Q3 2022 did not contain Velodyne and it is pretty clear what has happened.
• Velodyne was not really an acquisition but a rights issue as its technology was becoming obsolete, but it had some customers and a large cash balance,
• Essentially what Ouster has eliminated is the cost base of Velodyne, leaving it with pretty much what it had before the acquisition took place but also $200m in cash ($160 net cash).
• Ouster is not and has never really been about automotive Lidar (although it will hit automotive grade with its next-generation) but is much more about the automation of everything else.
• Ouster is selling lidars for industrial robots, forklifts, toll booths, logistics mapping and so on and this is the real story of the company as opposed to the more headline-grabbing autonomous driving and ADAS story.
• Here, there are hundreds of customers already signed up but so far very few have purchased Lidars for commercial deployment but instead have been tinkering and experimenting.
• The rampant inflation and weakness in the global economy caused them to pause the migration from tinkering to commercial deployment which in turn forced Ouster to acquire Velodyne to ensure it had enough money to ride out the bad macro.
• Given the company’s commentary, this now looks to be in the rearview mirror and the company can get on with fulfilling the opportunity ahead of it.
• Factoring in the medium-term expectations that Ouster is putting into the market, I can get to $20 a share without trying very hard.
• This is mainly because, at $5, the company is trading at a market capitalization of $195m or an enterprise value of $55m.
• Even on 2023’s tough year, this represents an EV/Sales of 0.7x.
• The problem is that no one appears to be listening as the conference call was almost uninhabited and so it is going to take some time and a series of excellent quarterly results before anyone cares enough to look beyond the awful share price chart.
• I have a position in Ouster which I substantially increased about 6 months ago at $3.7 per share but there is still a long way to go before I break even.
• However, I think that the outlook for the company to return to $20 a share looks pretty good on a DCF basis.
• I am happy with my position and am sitting tight although it has been very bumpy.

• Huawei is reportedly planning a 5G comeback in smartphones but while there is no reason why it can’t make 5G devices, they will be so uncompetitive that it might as well not bother.
• Furthermore, its inability to access the Google ecosystem means that even if it could make good 5G phones, it would struggle to sell devices outside of China.
• According to several Chinese industry research firms, Huawei is planning to re-enter the 5G smartphone market using a baseband manufactured in conjunction with Semiconductor Manufacturing International Co. (SMIC) which is the leading foundry in China.
• While I see no reason to disbelieve the conclusions of these firms, I think that Huawei’s return will be so problematic that it will end up deciding not to bother.
• The problem begins when one considers what leading-edge semiconductor chips deliver compared to older versions.
• These chips deliver superior speed and performance compared to older generations and they do so while consuming less power.
• Smartphones are battery-powered devices which need to be thin and light meaning that performance and power consumption are crucial to competitiveness.
• SMIC has been hammered by USA, Dutch and Japanese sanctions which means for all intents and purposes it will be unable to manufacture commercial semiconductors more advanced than 20nm.
• Before the sanctions were put in place, SMIC had managed to establish manufacturing at 14nm, but RFM research concluded that the yields were so poor that it could not be used for commercial purposes.
• There are also reports that SMIC has managed to make commercial semiconductors at 10nm and 7nm, but all of the evidence (including SMICs annual report) suggest that this is wishful thinking.
• Consequently, I think that the best that Huawei could manage in conjunction with SMIC would be 5G baseband chips at 14nm, but I suspect that 28nm is more likely given the problems SMIC has been having.
• This means that Huawei’s 5G will be 6-8 generations behind those of MediaTek and Qualcomm which are widely used in all of Huawei’s domestic and international competitors.
• This means that a Huawei 5G smartphone will be fatter, heavier, more expensive with lower performance and shorter battery life as a result of running 5G on a 14nm or 28nm process.
• Consequently, no consumer in his or her right mind would buy a Huawei device over one from Oppo, Vivo, Honor etc all of whom have access to the most advanced chips.
• This is where Huawei is at a great disadvantage as its placement on the entity list means that it can’t buy chips from MediaTek or Qualcomm while all of its competitors can.
• Deep down Huawei knows the reality of its position and while it can talk a good game, it really has nowhere to run.
• This is why I think that there will be no return by Huawei to the 5G smartphone market.
• The situation in 5G base stations is not as problematic because size and power consumption are somewhat less of an issue.
• However, its competitors Ericsson and Nokia already using 7nm and 5nm silicon in their base stations which Huawei will not be able to do.
• This means that on top of being designed out of a large number of Western networks, Huawei 5G base stations are gradually becoming less and less competitive.
• Hence, I continue to expect Huawei to lose market share in mobile networks as new networks are built or upgraded and its products are not selected for reasons of performance and cost.
• The main beneficiary here is Nokia as the infrastructure market has typically been a duopoly between Ericsson and Huawei and no one wants it to become a monopoly.
• I have a position in Nokia which has bounced around thanks to economic turbulence but remains a solid recovery story where I am looking for €6 per share.
• By contrast, Huawei is not a recovery story but looks like it will continue to decline in the area of mobile networks and terminals although there is no reason why it can’t do well in enterprise in China.

• Mobile World Congress 2023 is about to start, but Ericsson has gotten things off to a bad start with a further 8,500 layoffs indicating that life remains tough in the world of mobile infrastructure.
• Ericsson is cutting around 8% of its workforce and is taking aim at service delivery, supply, real estate and IT in what looks like a case of moving to address inefficiency.
• Ericsson’s woes underline that the mobile industry is under pressure both from inflation which has reduced smartphone sales but also rising interest rates which have made financing equipment sales more expensive.
• Furthermore, a lot of infrastructure is priced in US$ which has been strong against emerging market currencies further increasing the cost of equipment.
• Coming from behind, Nokia looks nimble with a good quality management team which is doing a good job at taking market share from Huawei as well as steadily improving profitability.
• By contrast, Ericsson looks slow and lumbering and looks to me to be on the back foot.
• I expect a lot more positivity coming from Nokia’s end of hall 3 compared to Ericsson who may have already spoiled the party for everyone.
• I have held Nokia from €3.5 and remain happy to stay put till €6.

OpenRAN – All about performance

• I think that while macroeconomics will be a driving theme of this year’s show, the OpenRAN debate will attract more attention this year.
• This is partly as a result of a lack of other themes but also due to the emergence of small companies who claim to be able to fix the problems that have been preventing OpenRAN from getting real traction.
• OpenRAN is the idea that instead of buying all of one’s basetstation from one place, open and defined interfaces mean that one can pick and choose suppliers and build a base station like a jigsaw.
• This is threatening to the traditional business model where operators are locked into one manufacturer for each basetstation and where the real money for vendors is made on the basestation upgrades post installation.
• This is because one will be able to buy the upgrades from someone else creating pricing pressure and therefore lower margins.
• This sounds great but my early research into this topic indicates that the performance of systems that comply with the OpenRAN standard are far below that which the traditional vendors provide.
• This is why I suspect that there is so much scepticism surrounding OpenRAN and until the performance issues can be addressed, I think that this scepticism will persist and remain justified.
• This is why the claims of those that say that they can fix these problems are particularly interesting.
• Two of these are Aira Technologies which uses machine learning to optimize throughput over the radio interface and Xcom which has a solution to make very dense small cells work much better together by dealing with the interference.
• Both of these have chosen OpenRAN because it makes it easy for them to get their technology into the basestation without having to build the whole thing themselves and face off against Ericsson and Nokia.
• The big question is if these were integrated into a Nokia or Ericsson non-OpenRAN basestation, will they improve their performance and open the gap to OpenRAN once again?
• I suspect that the answer is yes but it is very unlikely that we will see these technologies implemented in non-OpenRAN systems unless they are acquired.
• This is why I remain pretty cautious about the proposition of OpenRAN as history is not on its side and I am not convinced it can close the performance gap.
• I suspect that this will be one of the biggest debates this week.