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Semiconductor Players Riding The Chip Upcycle

World semiconductor sales 2019 - 2021 (forecast)

The semiconductor upcycle is underway spurred by increasing demand for smartphones, PCs, game consoles and other devices as people around the world, forced to remain indoors as a result of the Covid pandemic, turned to technology for reasons such as remote working, remote learning, entertainment etc. After posting double digit growth of 6.8% growth in 2020, WSTS projects global semiconductor demand to accelerate in 2021, with global semiconductor sales growth of 10.9% for the year.

World semiconductor sales 2019 - 2021 (forecast)

The CEO of the world’s largest foundry – Taiwan Semiconductor Manufacturing Company (TSMC) – said in a letter to customers that its fabs are running at 100% capacity over the past year, but demand still exceeds supply. U.S. chip giant Qualcomm reported a 52% jump in revenues on an annualized basis for the quarter ended March 2021 driven by strong smartphone sales. Meanwhile the gradual increase of electric vehicle production (which had been curbed at the start of the pandemic) triggered an ongoing chip shortage resulting in a number of automotive companies being forced to temporarily suspend production.

Longer term, emerging technologies such as 5G, IoT, AI, Industry 4.0 are expected to drive increasing quantities of semiconductors presenting a long term structural uptrend for the semiconductor industry, presenting growth opportunities for players along the entire value chain from design to fabrication. 

Against this backdrop, some notable chip players to watch include Taiwan’s MediaTek, Dutch lithography giant ASML, and Singaporean precision tools player Micromechanics, and Singaporean test solutions provider AEM Holdings.  

MediaTek (聯發科)

Taiwanese chip supplier MediaTek overtook U.S. chip giant Qualcomm to emerge as the world’s largest mobile chip supplier in 2020, driven by the U.S. government’s sanctions on Chinese smartphone company Huawei which turned to MediaTek chips to power its smartphones. Meanwhile, Chinese smartphone manufacturers Xiaomi, Vivo, and Oppo, also turned to MediaTek in an effort to diversify their supply chains to avoid becoming the next Huawei. The supply chain reshuffle saw MediaTek emerging as the number one spot mobile chip supplier in China while Qualcomm settled for second place. Data from CINNO Research revealed that Qualcomm’s shipments in China shrank 48.1% year-on-year, while its market share dropped to 25.4% in 2020 compared with 37.9% in 2019. 

MediaTek’s rise to pole position in China, the world’s biggest smartphone market appears to have helped it capture the number one spot worldwide as well. According to data from consultancy firm Omdia, MediaTek commanded a 27% market share of the global smartphone chipset market in 2020,  while Qualcomm held 25%. MediaTek’s worldwide shipments rose 48% YoY in 2020, compared with an 18% decline for Qualcomm’s Snapdragon.

Chipset series 2020 2019 Market share (2020) YoY 
MediaTek 352 238 27% 48%
Snapdragon 319 386 25% -18%
Apple 204 195 16% 5%
Kirin 147 177 11% -17%
Exynos 115 177 9% -35%
Unknown 100 146 8% -32%
Exynos or Snapdragon 36 55 3% -35%
UNISOC 23 12 2% -89%
Armada 0 0 0% -100%

Grand Total

Data: Omdia

1,295 1,387 100% -7%

MediaTek’s stellar market performance showed up its financials as well; revenues rose to a record high of TWD 322 billion in 2020 for the financial year ended December 2020, representing a YoY growth of 30.8%, while operating income shot up to TWD 43.2 million, a 91.5% growth YoY. By contrast Qualcomm (whose financial year ends September 2020) saw revenues contract 4.8% YoY.  The momentum carried on to 2021 with the Taiwanese player reporting a 77.5% YoY increase in first quarter 2021 revenues (which reached TWD 108 billion) and net profits of TWD 25.77 billion, up 347% YoY. MediaTek expects revenues to grow 40% this year and expects the momentum to remain strong going into 2022.

Micromechanics

Singapore-listed Micromechanics makes high precision tools and parts used in process critical applications for wafer fabrication and assembly. Apart from its portfolio of proprietary consumable tools , the company also offers contract manufacturing services of high precision parts to OEMs in the semiconductor, aerospace, laser, and medical industries. Its diverse customer base includes IDMs, wafer fabrication equipment manufacturers, and semiconductor assembly and test service providers in more than 10 countries around the world.

Amid the current geopolitical turmoil, Micromechanics stands out as one of the few Southeast Asian players with a broad production range, scale, and geographical presence. And that unique positioning amid growing chip demand, along with prudent financial management is reflected in its financials; Micromechanics posted record revenues of SGD 36.9 million (up 16.9% YoY) and record net profits of SGD 9.1 million (up 31% YoY), pushing ROE to 32% for the first half of 2021, an exceptional performance for a company with zero borrowings.

To further strengthen its market positioning amid a rapidly changing chip market, Micromechanics is working towards becoming a “Next Generation Supplier” which sees the company investing in developing its product portfolio to serve chip manufacturers’ needs at 10nm and below. In fact, Micromechanics’s R&D team in Singapore has already produced several proprietary materials that are essential for 10nm and below device geometries.  

ASML

Dutch lithography giant ASML dominates the global lithography market with a market share of more than 80% in the mature DUV market and a market share of 100% in EUV – the next generation lithography technology that is seeing rising penetration as more chip makers move to leading edge process technologies driven by anticipated demand growth for advanced chips such as those used in 5G smartphones and other high-performance devices such as those with AI capabilities. About 80% of TSMC’s USD 28 billion capex allocated for this year will be spent on the company’s most advanced chip making  processes – 7nm, 5nm, and 3nm. Meanwhile Samsung is racing to catch up to TSMC in terms of leading edge manufacturing process capacity; TSMC claims to have more than 50% of the world’s EUV base and 60% of the world’s cumulative EUV wafer production. With 5G increasingly gathering pace, Samsung has ramped up orders of ASML’s EUV machines placing a multi-billion dollar order of 20 machines when Samsung vice-chairman Lee flew to ASML’s headquarters last year to press the Dutch giant for early delivery of the machines. DRAM giant SK Hynix plans to use EUV in volume production in the coming years having signed a five-year contract worth USD 4.3 billion with ASML for the supply of EUV systems. SK Hynix’s DRAM rival Micron Technologies aims to use EUV a few years ahead.  

Given that ASML currently has a production and installation capacity of about 50+ machines annually, the company appears to be sitting pretty with demand potentially outstripping supply in the coming years as demand for advanced chips continues its upward march. The impact on ASML’s financials are significant; revenues jumped 18% YoY to nearly EUR 14 billion for the financial year ended December 2020, while net profits rose 37% YoY to 3.5 billion, helping push up the company’s return on equity (ROE) to 25.6%. 

Rising EUV sales also boosted profitability with gross margins rising from 44.6% in 2019 to 48.6% in 2020. Rising gross margins helped push up net profit margins as well which rose to 25.4% in 2020 from nearly 22% a year earlier. As sales of EUV sales continue to trend upwards in the coming years, there is potential for continued margin improvement. 

Meanwhile the potential for top-line growth is significant as well. ASML shipped 31 EUV machines last year (generating  EUR 4.5 billion) and Cowen expects ASML’s EUV shipments to rise to 40 units in 2021, 53 in 2022, and 56 in 2023. Not only does this drive EUV revenues, but DUV revenues are should benefit too as every order for an EUV system drives demand for DUV systems as well. Indeed ASML’s DUV business (a market that ASML dominates with a market share of more than 80%) is large and going strong; ASML generated EUR 5.38 billion in revenues from its DUV business (accounting for 52% of 2020 revenues) which included 68 immersion systems – the most advanced DUV machines – which accounted for EUR 4 billion in revenue alone in 2020.

ASML net system sales per technology - 2018 - 2020

A growing installed base of EUV machines could further add to top line growth in the form of service revenue which rose to EUR 3.6 billion in 2020, up from EUR 2.8 billion in 2019, a 28% increase YoY. 

AEM Holdings Ltd

Semiconductor and electronics packaging and test services company AEM Holdings is headquartered in Singapore but has a global presence with offices and manufacturing plants located in Asia, Europe, and America. Riding on strong demand for IC testing, AEM Holdings generated record revenues of SGD 519 million (up 60% YoY) and net profits of SGD 97.6 million (up 84.9% YoY) which translated into a whopping 46% return on equity (up from 39% in 2019) for the financial year ended December 2020. 

The company isn’t resting on its laurels however; with an eye on future growth, AEM Holdings has been making strategic acquisitions to expand its technical capabilities and product solutions in an effort to better serve existing customers, capture new customers, as well as penetrate into new markets such as China. In 2020, the company scooped up two companies, with more acquisitions expected going forward as the company leverages its balance sheet (AEM Holdings sits on a cash pile of about SGD 134 million while total long term liabilities stood at just 13.3 million as at December 2020, equivalent to less than 7% of equity) to make strategic acquisitions aimed at strengthening its capabilities and market positioning.

In early 2020, AEM Holdings acquired Mu-TEST, a French semiconductor test solutions provider for EUR 7.5 million (about SGD 11.3 million). Following on that in mid 2020, the company acquired California-based DB Design Group, a world-renowned supplier of automation fixtures, device kits and other test-related products. The purchase price of USD 3.3 million (about SGD 4.5 million) is comfortably affordable for AEM Holdings and could potentially drive top line growth as the acquisition expands AEM Holding’s Serviceable Available Market to include the automation fixture and device kit markets. 

“We are now able to offer almost 24-hour R&D services to our customers leveraging our US and Asia based teams, as well as rapid prototyping and supply chain resiliency via high mix production run support in the US.” – Loke Wai San, Executive Chairman AEM Holdings

The momentum continued in 2021 with the company acquiring Lattice Innovation, an American company offering design, simulation, and process services in the thermal control space. The acquisition is expected to further strengthen AEM’s semiconductor test solutions. AEM also announced the acquisition of majority stakes in CEI Limited and ATECO Inc this year. Apart from the potential strengthening of market positioning, these acquisitions also help reduce AEM’s customer concentration risk (Intel which has been AEM’s biggest customer for years, accounted for 95% of AEM’s revenues in 2020). 

AEM Holdings is a crucial partner of global semiconductor giant Intel, supplying it next generation test handlers. Intel’s recently announced IDM 2.0 strategy, which sees Intel expanding its chip manufacturing capacity, is expected to be a positive for AEM Holdings as expanding chip capacity from its sole major customer should result in greater demand for AEM’s semiconductor testing solutions as well.  While AEM’s heavy dependence on one major customer for bulk of its revenues presents a customer concentration risk, there is little reason to expect Intel to switch to an alternative test vendor given AEM’s competitive advantage as a longstanding partner and cost competitive supplier for Intel;  AEM and Intel have worked together for years to design, and manufacture test handlers which are well customized for Intel’s needs and according to analyst estimates from Singaporean financial services giant DBS, Intel incurs a 10% manufacturing cost when using AEM’s solutions versus 20% during traditional testing.

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India edtech startup Genius Teacher raises USD 2 million

Indian education technology startup Genius Teacher has raised USD 2 million from Whiteboard Capital, and VKG Venture, along with 50 other angel investors including  Abhijit Bose (Whatsapp CEO, India), Kunal Shah (CEO, Cred), Sandeep Tandon (Co-Founder, Freecharge), Dhruv Agarwal (CEO, Proptiger), Justin Sway (CEO, Mmone online), Dan Lapus (Co-Founder, Cvent), Nimish Kampani (President, Let’s Venture), Gaurav Gupta (ex-VP, Snapdeal), Bikram Bedi (ex-MD AWS India) and Farooq Adam (Co-Founder, Fynd). The fresh capital will be used for production development and onboarding new students.

Largely focused on the K-12 segment, Genius Teacher offers students a quiz-based learning platform, with the aim of making education and learning more engaging and interesting. The startup has developed more than 5,000 quizzes and nearly 10,000 interest-based personalized videos.

India’s edtech sector has witnessed a boom in venture capital funds with a spate of edtech-related fundraisings announced this year, attracting the likes of global venture capital investors including Silver Lake, Tiger Global, General Atlantic, Blackrock, and Qatar Investment Authority to name a few. India’s biggest corporation by market capitalization Reliance Industries also jumped into the arena with an investment of nearly INR 6 billion in AI-based edtech startup Embibe in return for a majority stake.

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India E-Commerce: Trends And Notable Players

Column chart showing GDP per capita (PPP) growth, 4 selected countries. In 2016 GDP per capita rose 8.26% in Bangladesh, 4.58% in China, 6.86% in India, 0.85% in Pakistan, 5.77% in Sri Lanka, 3% in Malaysia, 2.77 percent in Singapore, 7.71% in Vietnam, and 2.41% in Indonesia. In 2017 GDP per capita rose 8.11% in Bangladesh, 5.69% in China, 5.93% in India, 3.66% in Pakistan, 2.94%, 4.46% in Malaysia, 6.21% in Singapore, 8.86% in Vietnam, and 4.2% in Indonesia. In 2018 GDP per capita rose 9.26% in Bangladesh, 8.77% in China, 7.5% in India, 6.13% in Pakistan, 4.64% in Sri Lanka, 5.63% in Malaysia, 5.38% in Singapore, 8.52% in Vietnam, and 6.44% in Indonesia. In 2019, GDP per capita 8.9% in Bangladesh, 7.57% in China, 5.78% in India, 0.69% in Pakistan, 3.43% in Sri Lanka, 4.75% in Malaysia, 1.32% in Singapore, 7.84% in Vietnam, and 5.69% in Indonesia. Data from The World Bank and LD Investments analysis.

India’s e-commerce market has been booming but the story is just beginning. Out of India’s 1.3 billion population (the world’s second largest after China), an estimated 574 million are active internet users according to consulting company Kantar representing an internet penetration rate of about 44%. That is bigger than the entire population of the United States. This makes India the second largest online market after China which has 904 million internet users as of March 2020 according to CNNIC.

There is still tremendous opportunity for internet users to grow in number. Kantar estimates an 11% growth rate for 2020, with India’s internet users reaching 639 million. As India’s online population grows propelling to country’s digital economy, e-commerce is poised to grow as well. With about 100-110 million online shoppers as of 2019 according to data from a report by Bain & Co, about 17% of India’s internet users shop online.

By comparison, representing 78.6% of China’s internet population, China has 710 million online shoppers as of March 2020,. That is about seven-times that of India’s online shopper population, suggesting an enormous growth opportunity in India. As Indian incomes grow and consumption increases, consumers will seek greater product variety, and quality, at competitive prices. E-commerce can help unlock consumer spending as incomes rise. India’s GDP per capita growth has exceeded 5% since 2016.

Column chart showing GDP per capita (PPP) growth, 4 selected countries. In 2016 GDP per capita rose 8.26% in Bangladesh, 4.58% in China, 6.86% in India, 0.85% in Pakistan, 5.77% in Sri Lanka, 3% in Malaysia, 2.77 percent in Singapore, 7.71% in Vietnam, and 2.41% in Indonesia. In 2017 GDP per capita  rose 8.11% in Bangladesh, 5.69% in China, 5.93% in India, 3.66% in Pakistan, 2.94%, 4.46% in Malaysia,  6.21% in Singapore, 8.86% in Vietnam, and 4.2% in Indonesia. In 2018 GDP per capita rose 9.26% in Bangladesh, 8.77% in China, 7.5% in India, 6.13% in Pakistan, 4.64% in Sri Lanka, 5.63% in Malaysia, 5.38% in Singapore, 8.52% in Vietnam, and 6.44% in Indonesia. In 2019, GDP per capita 8.9% in Bangladesh, 7.57% in China, 5.78% in India, 0.69% in Pakistan, 3.43% in Sri Lanka, 4.75% in Malaysia, 1.32% in Singapore, 7.84% in Vietnam, and 5.69% in Indonesia. Data from The World Bank and LD Investments analysis.

India’s youthful population bodes well for e-commerce growth; as of 2020, 43.82% of India’s population was aged 24 years and below according to data from the CIA World Factbook. As they enter the workforce they will continue to be a major driving force for Indian e-commerce in the long term. India’s e-commerce market is expected to quadruple from US$ 48.5 billion in 2018 to US$ 200 billion by 2026 according to the International Trade Administration representing a CAGR of 19.37%.

Trends and notable players

Social commerce

Riding on India’s vast user base of social media users, social commerce is on the cusp of growth. India had the biggest rise in social media users in 2019, seeing 130 million new users (a 48% YoY) according to Hootsuite. Yet, at just 29% of the total population as at January 2020, India’s social media penetration is lower than the world average of 49% indicating ample room for growth. As more Indians get social, social commerce is poised to flourish.

Bar chart showing social media penetration for selected countries as of January 2020. The worldwide social media penetration at 49%. Social media penetration was 99% in the UAE, 88% in Taiwan, 87% in South Korea, 81% in Malaysia, 79% in Singapore, 78% in Hong Kong, 75% in Thailand, 72% in China, 70% in the United States, 67% in Vietnam, 67% in Philippines, 65% in Japan, 59% in Indonesia, and 29% in India. Data from Hootsuite.

Considered to be the second wave of e-commerce in the country notable Indian social commerce players looking to capitalize on this vast and growing userbase include Meesho, Bikayi, and JioMart. While first wave e-commerce giants such as Walmart-owned Flipkart, Amazon, and Snapdeal offer the opportunity to open an online store on their marketplace platforms, Meesho, Bikayi and JioMart leverage on social media platforms to offer businesses and individuals a chance to sell online, somewhat similar to WeChat’s mini-programs which enabled businesses to open stores within the WeChat app. China’s third biggest e-commerce player Pinduoduo for instance was born out of a WeChat’s mini-program.

Whatsapp is the number one messaging app in India with more than 400 million Whatsapp users, making India the country with the world’s biggest Whatsapp user population. Not surprisingly, Whatsapp is a popular social media platform for social e-commerce. Y Combinator-backed Bikayi’s app enables businesses to create a Whatsapp-integrated e-commerce store in a few minutes. The startup reportedly has more than 100,000 businesses using its app. For micro and small SMEs with little capital for a full-fledged e-commerce store, Bikayi’s app is an ideal solution for them to offer their catalogs online. From a consumer point of view, Bikayi is an ideal solution for a mobile-first market like India where 97% of internet users are mobile internet users.

Bikayi’s larger rival Meesho, also enables businesses to open a social media store but its app supports not just Whatsapp, but several other popular social media platforms as well such as Facebook, Twitter, and Instagram. There are more than 260 million Facebook users in India, making it the leading country in terms of Facebook users.

New social commerce startup Bulbul meanwhile has attracted investor interest with Bulbul raising USD 14.7 million from Sequoia Capital this year. 

The elephant in the room however is JioMart, the online grocery arm owned by petrochemicals behemoth Reliance Industries which has also jumped into social commerce arena; already available to shoppers via app or e-commerce website, JioMart recently piloted a Whatsapp-based grocery ordering platform that allows shoppers to order essentials through Whatsapp. The order is then routed to one of the 1,000+ mom-pop ‘kirana’ stores nearby the customer to fulfill the order.

The social commerce opportunity is driven not just through rising social media penetration but also from a growing number of online shoppers in rural India where internet penetration is less than 30% but growing considerably faster than urban India. According to data from the Telecom Regulatory Authority of India (TRAI), urban internet users grew 1.54% during the quarter ended march 2020 while rural internet users grew 6.53% during the same period.

For these new online shoppers, there is a general lack of trust for the millions of unknown online merchants on e-commerce marketplaces such as Flipkart. Social commerce on the other hand enables merchants to interact with first time online shoppers, clear their doubts and essentially provide a ‘face’ to the online store, helping bridge the trust deficit. Meesho for instance generates about three-quarters of its business from outside the top six cities.

Vertical e-commerce

While Amazon, Walmart’s Flipkart, and homegrown newcomer Reliance JioMart focus on the horizontal e-commerce marketplace arena which is crowded with other rivals such as Snapdeal, and ShopClues to name a few, India is increasingly seeing a growing number of vertical e-commerce marketplaces the e-commerce landscape. Flipkart’s fashion marketplace Myntra, Reliance Industries’ fashion marketplace Ajio, beauty e-commerce marketplace Nykaa, and furniture e-commerce marketplaces Pepperfry, and Urban Ladder are some notable established vertical e-commerce marketplaces. As they increasingly gain popularity along with growing e-commerce popularity in India, the number of specialized vertical e-commerce marketplaces is anticipated to continue an upward march in the coming years.

A report by research firm Redseer expects vertical e-commerce marketplaces to grow their share of India’s online retail Gross Merchandise Value (GMV) from 20% in 2019 to 30% by 2022. Marketplaces in industry verticals that have a strong advantage against horizontal e-commerce marketplaces highlighted in the report include pharmaceuticals, furniture, mom and baby care, and beauty and personal care, owing to their differentiated supply chain, and non-standard product which leads to consumer expectations of greater variety, quality and specialized service.

Mom and baby care e-commerce marketplace FirstCry achieved unicorn status this year with a valuation of US$ 1.2 billion, after Softbank committed to investing US$ 400 million in February.

Homegrown startup Livspace, an interior design marketplace connecting homeowners with trusted interior designers, vendors, and customers, currently serves 9 metro areas in India (Bengaluru, Chennai, Hyderabad, Delhi, Gurugram, Noida, Mumbai, Thane and Pune) and plans to expand locally and overseas (its only overseas market is Singapore currently) having raised US$ 90 million in September this year in Series D equity funding, and Indian Rupees 300 million in debt funding in October. Livspace is expected to generate US$ 500 million within the next 24-30 months.

Indian agriculture marketplace DeHaat meanwhile, raised US$ 12 million from Sequoia Capital this year,  after raising US$ 4 million in Series A funding in March last year, bringing the total amount raised to US$ 16 million to date.

Direct-to-consumer (D2C) e-commerce

India’s vast retail market features numerous local brands, and with e-commerce gaining popularity in the country, there been a trend of these brands going directly to consumers, essentially eliminating ‘online middlemen’ e-commerce marketplaces.

According to a report by e-commerce-focused SaaS company Unicommerce, there was a 65% increase in brands developing their own websites in June 2020. Meanwhile, an increasing number of online shoppers too appear to be going direct to brand websites, bypassing marketplaces. According to the Unicommerce report, brand websites reportedly saw an 88% increase in order growth compared with 32% for marketplace platforms during India’s lockdown period in June 2020 which led to an increase in self-shipped orders. Given the many advantages of a brand going direct to the consumer, such as greater control over brand perception, and direct interaction with consumers, it is likely that brand e-commerce popularity will continue growing in the years ahead.

The rise of D2C e-commerce in India looks set to follow a path similar to that of China, where rising brand e-commerce has led to the birth of brand e-commerce SaaS (Software as a Solution) companies such as Baozun. India too, has its own homegrown brand e-commerce SaaS solutions companies, notable ones include Zoho and Zepo.

Last year, Indian SaaS major Zoho Corp which has millions of users in more than 180 countries, launched an e-commerce solution enabling small retailers to set up their own e-commerce sites. Unlike other solutions that charge users on a per transaction basis, Zoho will charge a flat monthly fee for stores earning up to US$ 1,000 monthly after which a transaction fee of 1.5% is imposed (for its most basic plan). Zoho is a very established SaaS player offering a plethora of SaaS applications including productivity tools, CRM, and cloud solutions for finance and HR to name a few. This extensive suite of SaaS solutions and an existing customer base gives Zoho ample cross-selling opportunities for its new e-commerce SaaS solution which puts the company in great position to capitalize on India’s rising brand e-commerce market.

Homegrown e-commerce enabler Zepo which raised INR 31.9 million in August 2017 in funding from angel investors Kunal Shah (co-founder FreeCharge), Anupam Mittal and Hetal Sonpal, has its own advantages in the brand e-commerce race. The company offers merchants an integrated platform that enables them to manage their own e-commerce website, as well as manage orders from their online stores on marketplace platforms such as Amazon and Flipkart. For merchants wanting to maintain official marketplace stores while running their own e-commerce website, Zepo could be the player with the ideal solution.

Shopify, one of the world’s most popular e-commerce SaaS solution providers is another notable player in this space. Having begun operations in India in 2014, Shopify now has thousands of Indian merchants on its platform including Blue Tokai Coffee, apparel company Raymond Group, clothing brand NUSH by Anushka Sharma, John Jacobs Eyewear to name a few. Shopify said the number of merchants in India using their platform grew 44% in 2019 and GMV grew 59%. Shopify supports ten languages in India which is an advantage as more non-English or Hindi speaking Indians increasingly shop online (according to the latest census data from The Office of the Registrar General and Census Commissioner of India, Hindi was spoken by 43.63% of the population which means more than 56% of India’s population speak other languages).

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The Technology Trends Powering China’s Agrifood Sector

Column chart showing crop yields in China vs United States for selected crops during crop year 2018/19. During crop year 2018/19, coarse grain yields in the United States stood at 10.44 metric tons per hectare compared with 5.95 metric tons per hectare in China. Wheat yields were 3.2 metric tons per hectare in the United States and 5.42 metric tons per hectare in China. Corn yields were 6.11 metric tons per hectare in China and 11.07 metric tons per hectare in the United States. Barley yields were 3.64 metric tons per hectare in China and 4.17 metric tons per hectare in the United States. Oats yields were 1.15 metric tons per hectare in China and 2.33 metric tons per hectare in the United States. Sorghum yields were 4.79 metric tons per hectare in China and 4.53 metric tons per hectare in the United States. Rice yields were 7.03 metric tons per hectare in China and 8.62 metric tons per hectare in the United States. Soybean yields were 1.9 metric tons per hectare in China and 3.4 metric tons per hectare in the United States. Cottonseed yields were 3.11 metric tons per hectare in China and 1.26 metric tons per hectare in the United States. Peanut yields were 3.75 metric tons per hectare in China and 4.48 metric tons per hectare in the United States. Sunflower seed yields were 2.71 metric tons per hectare in China and 1.94 metric tons per hectare in the United States. Rapeseed yields were 2.03 metric tons per hectare in China and 2.09 metric tons per hectare in the United States.

China is one of the world’s largest food producers. With the country’s middle class expanding along with growing incomes, food demand in China has been on a steady growth path. China is the world’s largest wheat consumer, largest fruit consumer, largest egg consumer, and largest meat consumer. China is the world’s biggest importer of soybeans, is the world’s largest tea market, and is the world’s largest market for alternative meat. China is expected to be the world’s largest dairy market by 2022, and the country is expected to overtake the United States to become the world’s largest grocery market as well.

With Chinese per capita incomes standing at less than one-third of the United States, there is tremendous potential for growth in China’s agrifood sector as per capita food consumption grows along with rising prosperity opening interesting opportunities. While China has attracted much attention due to some high profile outbound agri-food acquisitions such as ChemChina’s of Swiss seed giant Syngenta, and China Mengniu Dairy’s  acquisition of Australian dairy company Bellamy’s Australia, business optimism is strong on the domestic front as well. Listed agrifood companies such as New Hope Liuhe Co Ltd, and Muyuan Foods Co Ltd (SHE:002714) have seen share prices jump over the past five years; Muyuan Foods Co Ltd saw its share price jump more than ten-fold during the five years until August 2020 while New Hope Liuhe’s share price quintupled during the same period. Hong Kong-listed China Mengniu Dairy’s share price also quintupled during the same period. On the startup front, China remains the world’s second largest market for agrifood tech startup investing by total deal number and amount invested after the US according to AgFunder.

Much of investor attention is currently on China’s booming eGrocery market, which raked in 60% of agrifood startup investment in 2019 according to data from Agfunder. However, there are numerous other sectors worth watching particularly in agri-tech which has strong government support. This year, the Chinese government released the “Digital Agriculture and Rural Area Development Plan 2019-2025” which aims to have digital agriculture account for 15% of China’s agricultural value-add.

Precision farming

Precision farming is a growth industry and the opportunity is no different in China, one of the world’s largest agricultural producers. China is upgrading is agriculture infrastructure to precision farming. The vast majority of China’s farms are small scale farms with basic machinery. Agriculture 4.0 technologies such as precision and smart farming accounts for just 1% of the nation’s total agricultural production. For instance according to a 2018 article by a Chinese economist HE Fan, agricultural drone penetration is about 65% in the U.S. but just 2% in China. Innovation and advancement in areas such as AI, IoT, remote sensing, and 5G will spur greater adoption.

The regulatory environment is favorable too, with the Chinese government stepping up efforts to boost domestic agricultural yields and production in an effort to reduce reliance on food imports from the U.S.

 

Column chart showing crop yields in China vs United States for selected crops during crop year 2018/19. During crop year 2018/19, coarse grain yields in the United States stood at 10.44 metric tons per hectare compared with 5.95 metric tons per hectare in China. Wheat yields were 3.2 metric tons per hectare in the United States and 5.42 metric tons per hectare in China. Corn yields were 6.11 metric tons per hectare in China and 11.07 metric tons per hectare in the United States. Barley yields were 3.64 metric tons per hectare in China and 4.17 metric tons per hectare in the United States. Oats yields were 1.15 metric tons per hectare in China and 2.33 metric tons per hectare in the United States. Sorghum yields were 4.79 metric tons per hectare in China and 4.53 metric tons per hectare in the United States. Rice yields were 7.03 metric tons per hectare in China and 8.62 metric tons per hectare in the United States. Soybean yields were 1.9 metric tons per hectare in China and 3.4 metric tons per hectare in the United States. Cottonseed yields were 3.11 metric tons per hectare in China and 1.26 metric tons per hectare in the United States. Peanut yields were 3.75 metric tons per hectare in China and 4.48 metric tons per hectare in the United States. Sunflower seed yields were 2.71 metric tons per hectare in China and 1.94 metric tons per hectare in the United States. Rapeseed yields were 2.03 metric tons per hectare in China and 2.09 metric tons per hectare in the United States.

One such area where precision farming holds tremendous potential in China is pesticide use. China feeds about 19% of the world’s population with just 7% of the world’s arable land. While this is commendable, the country also uses about 47% of the world’s pesticides, making it the world’s largest user of agricultural chemicals. China’s heavy pesticide use despite the country’s relatively minute cropland share, is a national concern. In an effort to improve food safety, and minimize environmental damage caused by pesticide overuse and thereby improve the sustainability of Chinese agriculture, the Chinese government has been phasing out highly toxic pesticides from use over the past few years.

Chinese agritech drone startups such as XAG, and McFly are well placed to emerge as solution providers to tackle China’s pesticide issue. XAG is a leader in China’s smart agriculture field, with more than 40,000 of its agricultural drones operating in China. Baidu-backed McFly, which raised US$ 14 million in 2019 is a relatively new player. Both develop AI-powered remote sensing agriculture-focused aviation equipment to help farmers reduce farm pesticide use. For instance McFly’s precision pesticide spray is able to detect with 97% accuracy the presence of pests on specific areas of a farm land and spray pesticide accordingly.

This precise use of pesticides eliminates the need for the current practice of completely spraying an entire farmland with pesticide since more often than not, pest distribution occurs in parts of the farm, not throughout the farm. The benefits are clear; consumers have safer food while farmers benefit from reduced farm input costs.

The growth story is just beginning. Farmers need large sized farms to justify the investment in expensive agricultural drones. In McFly’s case for instance, farmers need reportedly a little more than 13 hectares to justify the investment in McFly’s commercial services. However, unlike in the United States, very few Chinese farmers have farmland of that size. McFly worked around this limitation by offering a group-buying model to make the services more affordable, which has been successful. However, McFly’s bottom margins may be better off dealing with large-scale individual customers as opposed to millions of small scale users. This will likely materialize in the years ahead. 

For centuries, millions of small-scale farms have been dominating China’s rural areas, and these are often managed by farming families themselves. Apart from the cost disadvantage of small scale farming due to their inability to benefit from of economies of scale, it has also been found that agricultural chemicals are often used inefficiently on small farms according to a research study conducted a team of researchers from the Universities of Melbourne, Zhejiang, Fudan, Wuhan and Stanford.

The inefficiencies of small-scale farming along with China’s growing problem of ageing farmers has prompted the Chinese government to clear the path for private investment in large-scale commercial farming, through rural land reform which will allow family farmland owners to collectively rent out their land to large-scale farmers to cultivate the land on a large scale.  Much like the gradual disappearance of America’s small family farms in the in the mid 20th century, China too appears to be on the path towards farm consolidation where small family farms will gradually give way to modernized, large scale commercial farms which suggests good for McFly.

Agricultural e-commerce

According to government data, e-commerce sales of agricultural produce reached CNY 554.2 billion in 2018, representing 9.8% of total agricultural sales. There is still ample room for growth. Under China’s “Digital Agriculture and Rural Area Development Plan 2019-2025” the Chinese government is aiming to boost the proportion of agricultural products sold online to reach 15% by 2025 which suggests bright prospects for agri-marketplaces in China. The competitor landscape however is crowded with players. Pinduoduo is perhaps one of the biggest names in the game having shot up to becoming China’s third largest marketplace after Alibaba and JD.com, by capitalizing on the growth of rural e-commerce. Their strategy was largely based on agriculture e-commerce and their popularity as a platform for rural farmers to sell their wares to city folk hungry to buy fresh agricultural produce straight from farmers continues to this day. Pinduoduo’s group-buying model enabled shoppers to team up with other interested buyers to collectively make a purchase of farm produce. Shoppers earn discounts for the relatively large purchase while farmers get to sell their produce at higher prices (since there is no middleman involved) and in relatively large order sizes thus saving them the hassle of fulfilling a large number of small orders.

Valued at US$ 7 billion,  agri-marketplace unicorn Meicai took a different route, connecting farmers with restaurants and hotel chains instead who also make relatively large purchases (for instance, the minimum order quantity is 5kilograms for vegetables). Meicai started off as an online retailer, directly sourcing and selling the fresh produce themselves. Starting 2017 however, the platform was opened to third party merchants as well.

The company in-house cold chain logistics network which was built with an investment of more than RMB 2 billion. This supply chain advantage is a significant competitive strength, with the company boasting more than 74 cold storage centers scattered in 52 cities with a warehouse area of approximately 800,000 square meters. Meicai has a fleet of more than 17,000 delivery vehicles and the company has a daily parcel handling capacity of more than 5.2 million. Meicai’s sales are expected to exceed RMB 14 billion in 2019 and although the company is currently loss-making, it is cash flow positive and is expected to turn in a profit by 2020.