Microsoft steps further from China, rare earth miners get a boost

Hello from Tokyo, this is Katherine Creel, your host for this week's #techAsia.

Here in Japan, the big question in political circles is "Who will be Japan's next prime minister?" The answer seemed pretty cut-and-dried after Sanae Takaichi won the Liberal Democratic Party leadership vote, but an unexpected bout of political upheaval has thrown that certainty out the window

In the world of global tech and investment, meanwhile, the question is: "When will the AI bubble burst?"

Former Intel CEO Pat Gelsinger is the latest tech figure to argue that the rush of spending on chips and data centers means we are indeed in a bubble ("Of course we are," he recently told CNBC). No one, however, is in a rush to predict its imminent end. Chip tool maker Applied Materials, like Gelsinger, says the boom has years of life left in it.

Questions over the rationale of this funding frenzy are growing alongside evidence that, in the real world, AI is falling short of promises. Back in June, Gartner projected that 40% of agentic AI projects will be canceled by the end of 2027. (AI agents purport to take over more complex human-like decision making processes.) A more recent report by SEO agency Graphite found that around half of articles online are now generated by AI -- but with the caveat that they are probably not being viewed in proportion by actual humans.

So, AI agents are not very good at being agents and AI writers aren't great at reaching readers, at least yet. Reassuring news for journalists and creative types worried about their jobs. Less so for anyone wondering when the trillions of dollars in AI infrastructure investments will start to pay off.

And yet those investments rumble on. Just this week, Google announced it will spend $15 billion over five years building AI data center capacity in India, while Singaporean data center operator BDx is planning a "significant" investment focused on Indonesia as part of its growth plans for the region.

In South Korea, association with AI chip king Nvidia and ChatGPT developer OpenAI has boosted the fortunes -- and share prices -- of Samsung Electronics and SK Hynix, two of the most important suppliers of advanced memory for artificial intelligence chips. Samsung is on track to post its best quarter in three years.

Back in 2007, Chuck Prince, then CEO of Citigroup, described his banking strategy thus: "As long as the music is playing, you've got to get up and dance." It is not hard to see a similar ethos at work in the current investment supercycle. But if AI applications don't start living up to their hype, there will be a lot of sore feet when this tune ends.

The divide deepens

Microsoft and AWS are stepping up efforts to shift production away from China, particularly for sensitive products like data center servers, Lauly Li and Cheng Ting-Fang report in this Nikkei Asia exclusive.

Executives at suppliers to the U.S. tech companies say Microsoft aims to have its new Surface laptops and data servers made completely outside of China as early as next year, even down to components. AWS similarly wants to have as much of its data center supply chain as possible located outside of the country given the political sensitivity of those devices, sources said.

While some components remain hard to source from alternative locations for logistical or economic reasons, these companies' stepped-up efforts underscore their desire to mitigate geopolitical risks stemming from ongoing U.S.-China tensions.

Chips under scrutiny

China has escalated enforcement of its semiconductor import controls, mobilizing customs officers at major ports to conduct stringent checks on advanced chip shipments, the Financial Times' Zijing Wu and Cheng Leng write.

The inspections began with the aim of ensuring local companies stop ordering Nvidia's China-specific chips following guidance from Chinese regulators to discourage their purchase, according to three people with knowledge of the matter.

But one person said the checks had been extended more recently to all advanced semiconductor products in an attempt to target the smuggling of high-end chips that breach U.S. export curbs. Chinese customs had previously done little to prevent chip imports as long as the appropriate duties were paid at the border.

The crackdown, coordinated with the Cyberspace Administration of China, underscores Beijing's determination to ensure its tech sector breaks free from American technology and help the country win the AI race.

The funding frontier

Space and defense investment has been a key driver of venture capital deals this year. But from Japan and China to Europe, the activity is being driven largely by governments, not private money, writes Nikkei Asia's Mitsuru Obe.

Governments see startups as an important avenue for boosting national security amid growing geopolitical tensions and uncertainty. Their support for the sector takes various forms, from direct funding to contracts for projects.

Private investors, meanwhile, are showing signs of impatience with the lack of profitability and exit opportunities that the sector offers.

It is not all doom and gloom, however. In Japan alone, for example, five space startups have gone public since 2023.

Squeezed higher

Beijing's move to further restrict exports of rare earths roiled supply chains and foreign governments, but it has been a boon for Chinese miners, Nikkei Asia's Kenji Kawase writes.

Shares in China Rare Earth Resources and Technology touched an all-time high on Tuesday, while Xiamen Tungsten surpassed the recent high it marked in September 2021. Shenghe Resources Holding, backed by China's Finance Ministry, issued glowing profit guidance the same day.

China is the world's leading producer of rare earths, essential ingredients in a wide range of tech and defense applications. Prices have been elevated since April, when the Chinese government imposed export restrictions on seven of 17 key minerals amid a trade war with the U.S. On Thursday, the Ministry of Commerce announced it was adding five more rare-earth minerals to the export control list.

One of the big questions now is whether this latest measure is "just" a negotiating tactic or the new normal.

Podcast: Tech Latest

Japan bets on 'physical AI' with flurry of tech deals

Welcome to the Tech Latest podcast. Hosted by our tech coverage veterans, Katey Creel and Shotaro Tani, every Tuesday we deliver the hottest trends and news from the sector.

In this episode, Shotaro speaks with Tokyo tech correspondent Tsubasa Suruga about Japan's big week in AI deals and what it means for its place in the future market.

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