China's Chip Consolidation Accelerates With SMIC, Hua Hong Buyouts

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China's Chip Consolidation Accelerates With SMIC, Hua Hong Buyouts

Benzinga_recent_news01-06

Two of the country's leading fabs announced buyouts of government partners in their non-wholly owned subsidiaries last week What do you do when your semiconductor industry has too many players, ...

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What do you do when your semiconductor industry has too many players, inefficient capital deployment, and mounting pressures to compete with global giants?If you're China, the answer is that you consolidate. The clearest signal of such intent came last week, when leading chipmakersSMIC andHua Hong, which collectively account for over 7% of global foundry capacity, nearly simultaneously announced they would buy out minority stakes held by government investment funds in their key subsidiaries.Both deals involve buyouts of the same minority investor: China's National IC Fund, also known as the \"Big Fund,\" alongside various other local government investment vehicles. The close timing of two similar announcements appears to be more than coincidental. These state-backed funds need to recoup some of their capital for new investments, as the industry itself has become cr","collect":0,"end_time":0,"defaultTopTitle":"benzinga.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"688347":"华虹公司","688981":"中芯国际","LU1997244956.HKD":"ALLIANZ CHINA A-SHARES \"AT\" (HKD) ACC A","SGXZ81163826.USD":"UNITED CHINA A-SHARES INNOVATION \"A\" (USD) ACC","SGXZ49509284.SGD":"United China A Shares Innovation A Acc SGD","LU2399975544.HKD":"ALLIANZ ALL CHINA EQUITY \"AT\" (HKD) ACC","BK1607":"新IT概念","BK1614":"港股-半导体","BK0125":"芯片国产化","LU2148510915.USD":"FULLERTON LUX FUNDS - CHINA A EQUITIES \"R\" (USD) ACC","BK1526":"科网股","LU2495084118.USD":"ALLIANZ CHINA A-SHARES \"ATH\" (USDHDG) ACC","SG9999003461.SGD":"United Asia Pacific Infrastructure SGD","01347":"华虹半导体","LU1820825898.SGD":"Aberdeen Standard SICAV I - China A Share Equity A Acc SGD-H","LU2289578879.USD":"ALLIANZ CHINA A OPPORTUNITIES \"AT\" (USD) ACC","LU1655091616.SGD":"JPMorgan Funds - China A-Share Opportunities A (acc) SGD","LU1328615791.USD":"FULLERTON LUX FUNDS - ALL CHINA EQUITIES \"I\" (USD) ACC","LU1064130708.USD":"FULLERTON LUX FUNDS - CHINA A EQUITIES \"I\" (USD) ACC","LU2328871848.SGD":"Eastspring Investments - China A Shares Growth AS SGD","LU0823437842.USD":"PARVEST GREEN TIGERS \"C\" (USD) INC","LU1997245177.USD":"安联神洲A股基金","LU1720050803.USD":"安联全方位中国股票基金","BK0214":"IT设备","LU1039395188.USD":"BNP PARIBAS GREEN TIGERS \"C\" (USD) ACC","LU1961090484.USD":"ALLIANZ ALL CHINA EQUITY \"A\" (USD) INC","BK1610":"ETF&股票定投概念","LU1255011170.USD":"JPM CHINA A-SHARE OPPORTUNITIES \"A\" (USD) ACC","LU2476274308.USD":"ALLIANZ CHINA FUTURE TECHNOLOGIES \"AT\" (USD) ACC","BK0188":"融资融券","LU1969619763.USD":"EASTSPRING INV CHINA A SHARES GROWTH \"A\" (USD) ACC","LU2506952253.HKD":"BNP PARIBAS GREEN TIGERS \"CRH\" (HKD) ACC","BK1163":"半导体产品","SG9999001093.SGD":"United Greater China Fund A Acc SGD","LU1794554557.SGD":"Allianz All China Equity AT Acc H2-SGD","LU2778985437.USD":"ALLIANZ CHINA FUTURE TECHNOLOGIES \"A\" (USD) INC","LU1997245094.SGD":"安联神州A股基金AT Acc SGD","BK0251":"专用设备","BK0028":"国家队","LU1146622755.USD":"安本中国A股股票基金A Acc","LU2476274720.SGD":"ALLIANZ CHINA FUTURE TECHNOLOGIES \"AT\" (SGDHDG) ACC","LU1064131003.USD":"FULLERTON LUX FUNDS - CHINA A EQUITIES \"A\" (USD) ACC","00981":"中芯国际"},"translate_title":"中芯国际、华虹收购，中国芯片整合加速","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"688347":1.93,"688981":1.95,"01347":1.93,"00981":1.95},"content_text":"Two of the country's leading fabs announced buyouts of government partners in their non-wholly owned subsidiaries last week\nWhat do you do when your semiconductor industry has too many players, inefficient capital deployment, and mounting pressures to compete with global giants?\nIf you're China, the answer is that you consolidate. The clearest signal of such intent came last week, when leading chipmakers SMIC (0981.HK; 688981.SH) and Hua Hong (1347.HK), which collectively account for over 7% of global foundry capacity, nearly simultaneously announced they would buy out minority stakes held by government investment funds in their key subsidiaries.\nBoth deals involve buyouts of the same minority investor: China's National IC Fund, also known as the \"Big Fund,\" alongside various other local government investment vehicles. The close timing of two similar announcements appears to be more than coincidental. These state-backed funds need to recoup some of their capital for new investments, as the industry itself has become crowded with a wide range of players.\nThis investment cycle of government funds backing new ventures, then exiting once they mature, is precisely the playbook Beijing has used to build its semiconductor industry. The SMIC and Hua Hong transactions showcase the model at its best: early state capital helps establish domestic champions, then withdraws at higher valuations to pocket big profits to fund the next generation of technology.\nBoth SMIC and Hua Hong have histories that date back before the strategy began in earnest, and things haven't always worked so smoothly in the era of highly targeted chip investment. China's chip sector is also plagued with massive losses from failed projects and stranded investments in lackluster companies — complications that help explain why consolidation has become urgent. We'll explore these challenges shortly. But first, let's examine the SMIC and Hua Hong deals in more detail and what's driving them.\nThe SMIC deal, announced last Monday, centers on SMIC Beijing, a subsidiary operating a fab using cutting-edge 12-inch wafer technology. SMIC will acquire the remaining 49% stake in SMIC Beijing for 40.6 billion yuan ($5.81 billion) from multiple sellers, including the Big Fund and two Beijing municipal investment vehicles, according to a company announcement.\nThe Hua Hong deal, announced two days later, follows a similar pattern. Hua Hong will acquire an additional 38.4% stake in Shanghai Huali Microelectronics, which operates two 12-inch wafer fabs in Shanghai. The transaction, which involves shares in one of these facilities, values the stake at 8.3 billion yuan. It involves four sellers, including Shanghai IC Fund, China IC Fund Phase II, and Guotou IC Fund.\nUnlike many companies in China's chip sector, both SMIC and Hua Hong can afford such buyouts due to their relatively maturity – both have around two decades of history – and strong cash flow and access to credit and capital markets. \nBoth SMIC and Hua Hong plan to fund their acquisitions primarily through issuing new shares, an approach that makes sense given their stocks are trading near multi-year highs. For the exiting investors, the transactions almost certainly offer handsome returns.\nFor SMIC and Hua Hong, the transactions are strategic for different reasons. SMIC's case is about profit consolidation. While SMIC Beijing was already contributing revenue to the parent, nearly half of the subsidiary's profits were flowing to minority shareholders. By acquiring the remaining 49%, SMIC will now capture 100% of the earnings from one of the most profitable facilities among its 10 fabs.\nHua Hong's rationale differs slightly. The asset being acquired has been competing directly with Hua Hong's own major Shanghai fab. The consolidation eliminates this internal competition while also bringing Huali's revenue fully onto Hua Hong's books — a move that should produce a significant revenue jump and better profitability.\nThis brings us back to Beijing's strategy of using government funds to promote industrial development. The logic is sound enough. Wafer fabs require massive investment and face heavy depreciation in their early years, making government financing a sensible way to support them in their early stages.\nHowever, the track record reveals such a strategy can also lead to big waste as ill-conceived projects line up alongside the better ones, all in search of big government handouts. One of the most notorious in the former group is Wuhan Hongxin Semiconductor, which aimed to become one of China's most advanced foundries at its launch. Instead, the project collapsed into bankruptcy in 2020 after burning through more than 15 billion yuan without ever producing a single commercial chip.\nMore recent cases suggest such failures aren't uncommon, though they receive less publicity. Wusheng Electronics, a Shanghai project launched in 2019, initially planned total investment exceeding 18 billion yuan with a five-year construction timeline. Less than three years later, the project stalled completely, and the company filed for bankruptcy last year without ever beginning meaningful production.\nFor the broader Chinese semiconductor industry, years of government-fueled expansion have created conditions ripe for consolidation among surviving companies. The \"Big Fund,\" established in 2014, has been the primary catalyst, raising 138.7 billion yuan in its first phase, 200 billion yuan in its second, and 344 billion yuan in its third phase in 2024.\nNow, consolidation is sweeping through every segment, not just chip production, but also chip design, materials, equipment manufacturing, and EDA tools.\nLast September, major wafer manufacturer National Silicon Industry Group (688126.SH) announced plans to fully acquire three of its subsidiaries. Three months earlier, semiconductor equipment leader Naura (002371.SZ) bought 17.9% of rival Kingsemi's shares from two state-backed investors for 31 billion yuan.\nThe pace of consolidation is accelerating. According to data analytics firm IT Juzi, China recorded 93 semiconductor M&A transactions last year through September — a 33% increase from 70 deals in the year-ago period. The total transaction value of those deals reached an estimated 54.9 billion yuan, up nearly 50% year-over-year.\nGovernment fingerprints are visible across these deals. State-backed funds that invested during the expansion phase are now facing strong pressure to exit and recycle capital into new government priorities.\nHowever, not all consolidation attempts succeed. A prominent example is the failed merger between AI chip and CPU maker Hygon and server manufacturer Sugon. Announced last June, the deal was later abandoned by December, with the companies citing the transaction's large scale and the complexity of coordinating multiple stakeholders.\nDespite such setbacks, we can almost certainly expect more consolidation this year. The wave represents a necessary evolution as Beijing pursues self-sufficiency across the semiconductor value chain amid intensifying U.S.-China technology competition. The question is no longer whether consolidation will happen, but who will emerge as the primary consolidators, positioned to become China's answers to global giants like Taiwan's TSMC (2330.TW; TSM.US), South Korea's Samsung (005930.KS) and U.S. giant Qualcomm (QCOM.US).\nImage Credit: Author\nTo subscribe to Bamboo Works weekly free newsletter, click here\nBenzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"corporation","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"isCrawlerRequest":true}