Alphabet spells out more AI capex, China+1 doesn’t add up

Hello from Yifan in Silicon Valley. I hope everyone (in the northern hemisphere) is enjoying the falling leaves and sweater season.

Wall Street got a proper scare from Alphabet’s earnings before Halloween. On Wednesday, Google’s parent company reported solid third-quarter revenue growth, with record sales for the cloud business unit. But its shares plunged more than 10 per cent at one point during extended trading, despite all signs indicating that more people and companies are now using Google’s AI services and even its in-house AI chips.

After several years of tech companies pouring billions and billions of dollars into AI, revenue growth alone is no longer enough to impress the market. Google’s spending of $51.4bn in capex for AI infrastructure build-out in three months and ending the quarter with negative free cash flow of $9bn turned out to be a warning sign for many rather than a boost to confidence in continued AI investment.

Samsung Electronics got a similar cold shoulder from the market after its earnings report Thursday. Despite the South Korean semiconductor giant saying it became the first global technology company to top Won100tn ($75bn) in quarterly operating profit, thanks to continued demand for memory chips amid the AI build-out, its shares slumped following the earnings report.

Investors are now growing increasingly worried about the massive spending on AI by companies such as Google and are starting to demand proper returns here and now, not in five years.

As Wall Street awaits this week for other US Big Tech companies to release their third-quarter earnings and future AI investment guidance, we are seeing similar reality checks on AI across global markets, including in China, where AI stocks have fallen sharply in recent weeks due to similar concerns about the profitability of AI.

Tech illuminati such as Elon Musk have long criticised the public market for being short-sighted and overlooking the long-term benefits of investing in technology that’s expensive to build.

But it has been almost four years since the ChatGPT-led AI boom began, so how patient should the market be?

As if it were not jittery enough, the US midterm elections next week are casting another shadow over AI trades. More US voters are turning against AI and data centres than ever before.

Around 40 local ballot measures nationwide on data centre development will go to a vote on November 3. The implications will reach far beyond the US, as the entire Asian tech supply chain, from Taiwanese server makers to South Korean chipmakers, eagerly awaits the results.

China+1 not adding up for PC makers

Leading PC makers, including HP of the US and Asus and Acer of Taiwan, are combating soaring component costs by shifting some production from Thailand and Vietnam back to China and using a new generation of contract manufacturers, Nikkei Asia’s Lauly Li and Cheng Ting-Fang report.

Multiple sources told Nikkei Asia that the PC makers are seeking greater manufacturing efficiency as their bill of materials rises, with demand from AI causing acute memory and storage shortages.

The shift marks a partial reversal, for now, of the global tech supply chain’s “China+1” diversification strategy, which moved some production from China to other south-east Asian countries as US-China tensions led to trade restrictions.

The PC makers are now turning to lesser-known Chinese contractors whose larger rivals have become increasingly occupied with higher-margin orders for AI data centre servers. Dell of the US, the third-largest PC maker behind Lenovo and HP, is also evaluating a similar move, according to the sources.

Industry insiders say China remains the best option for making computers, with its experienced workforce, lower prices and a complete supply chain ecosystem that can offer full access to components.

Could Toyota be the world’s biggest robot maker?

Toyota is setting its sights on becoming a global robotics powerhouse, as the world’s largest car manufacturer modernises production lines to compete with China and diversify beyond the auto industry, write Harry Dempsey and David Keohane from the FT’s Tokyo bureau.

Its top executives have been drumming up global investor interest for its robotics strategy, including plans to deploy 400,000 robots as part of a $6.4bn annual investment to automate factories and establish a dedicated robotics team.

“I think that Toyota could be the biggest humanoid robot company on the planet — they just need to get after it,” said Carl Vine at M&G, a Toyota investor.

The auto market is offering less room for growth, and the price tag for a humanoid robot is likely to be significantly higher than the cost of a new car. Goldman Sachs analysts estimate that Toyota could capture 3 per cent to 8 per cent of the humanoid market by 2035.

But that might not be enough to boost Toyota’s overall growth. “It’s the kind of thing that’s rewarded if Toyota’s core car business is doing well and dismissed as a distraction if the car business is suffering,” one Asia-based Toyota investor said.

China’s AI stocks in freefall

Mounting concerns over the profitability of AI are weighing on Chinese stock markets, despite homegrown AI being crucial to the country’s strategy of technological self-reliance, Nikkei Asia’s Kensaku Ihara and Anne Chan write.

The CSI Artificial Intelligence Index, which tracks major Chinese AI-related companies, has fallen nearly 40 per cent from its June peak, led by state-backed semiconductor companies such as Cambricon Technologies, often dubbed “China’s Nvidia”.

China Merchants Securities International has warned investors of increasing volatility in AI-related stocks, advising them to “pay greater attention to defensive stocks in the sector”.

Concerns about the earnings prospects of AI players are growing in China, following a sell-off of US AI stocks driven by questions over whether their massive infrastructure investments will pay off.

A stellar sevenfold profit increase for SK Hynix

SK Hynix’s third-quarter operating profit soared more than sevenfold to Won83.3tn ($62.9bn) from a year ago, driven by strong demand for its advanced memory chips critical to AI computing, as global hyperscalers increase investment in servers, data centres and other AI infrastructure.

The world’s second-largest memory chipmaker said on Wednesday that revenue more than quadrupled to Won104.6tn in the three months through September. The South Korean company’s net profit more than tripled to Won39.8tn, Nikkei Asia’s Kim Jaewon reports.

The stellar performance of SK Hynix, a key supplier of high-bandwidth memory (HBM) chips to US chipmaker Nvidia, comes as investors express concern through volatile stock markets about massive AI investments by major tech companies such as Google, Meta and OpenAI.

On Thursday, Samsung Electronics, another major memory chip supplier, also reported record third-quarter earnings. Its semiconductor unit’s operating profit surpassed Won100tn. But rising memory chip prices backfired on its smartphone business, as higher manufacturing costs led the unit to post an operating loss of Won0.6tn.

Alphabet spells out more AI capex, China+1 doesn’t add up

China+1 not adding up for PC makers

Could Toyota be the world’s biggest robot maker?

China’s AI stocks in freefall

A stellar sevenfold profit increase for SK Hynix

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