China's long march to semiconductor independence has hit yet another hurdle: the looming bankruptcy and restructuring of one of the biggest state-backed chip companies, Tsinghua Unigroup.
The company, 51%-owned by prestigious Tsinghua University, has run up debts of around 200 billion ($30.9 billion) in its acquisition spree over the past half a dozen years. After defaulting on multiple bonds worth around $3.6 billion, it faces bankruptcy proceedings brought by one of its creditors, state-owned Huishang Bank.
Unigroup is probably best-known in the US for its unsuccessful $23 billion tilt at memory chip-maker Micron Technology in 2015. Now almost certainly it will be unloading assets, including prized businesses such as chip designer Guoxin Micro, memory-maker Yangtze Memory and mobile chip specialist Unisoc. Unigroup has the depth in assets to survive the crisis, but its plight throws China's chip strategy into relief.
Chips are down
The company is a poster child for a certain kind of high-tech development, beloved by Beijing, of bulking up a state-backed conglomerate, funded by subsidies and low-cost credit. Its impending restructure takes place against the background of the national effort to build an advanced domestic chip industry – the latest in a series of attempts that go back many decades and tens of billions of dollars.
The current high-profile push has become a national crusade. But it is also a deeply fragmented one, which is the other side of the story. According to one widely cited figure, 58,000 semiconductor-related companies were founded in China between January and October last year. Many of these had only the faintest connection to chip design or production. They are incentivized understandably by the tidal wave of cash flooding into the sector.
From the government side, there's the 204 billion yuan ($31.5 billion) National Integrated Circuit Industry Investment Fund and the even larger sums pouring in from provincial governments - in the first half of 2020, 307 billion yuan was invested into more than 140 chip-related projects, according to Taiwan's United Daily News.
Coming up short
In 2020, China semiconductor firms raised around $38 billion through public offerings, private investments and asset sales, according to S&P Global Market Intelligence figures. But this means scattered and unfocused efforts in an industry that requires high-level expertise and very deep pockets.
One executive, Wu Gengyuan, CEO of smart audio chip firm ShenSilicon, part-invested by SMIC, told China Business Daily recently that domestic chip production faced serious shortages, especially for advanced processes, and few mature projects could be completed.
"The main reasons for this situation are that the manufacturing investment cost is too high, the risk control ability is weak, the localization lacks motivation, the verification of domestic equipment and materials is insufficient, and the industrial chain and ecology cannot be formed," he said. Unigroup's fate shows China's chip program caught between two stools.
On the one side it is trying to get scale, on the other it's trying to build competitiveness and technology capabilities. Its success will depend on striking that balance.
— Robert Clark, contributing editor, special to Light Reading