Red chips: China's Willsemi seals $2.2b semiconductor deals

Trade tension and the ZTE affair are holding back China's integrated circuit industry, already a decade behind the US. A major M&A deal could help change that.

China's lofty ambitions for its microchip industry have taken a battering in recent months.

Beijing's dreams of becoming an international player in the sector were fuelled by expensive acquisitions abroad, but since US President Donald Trump took office, the powerful Committee on Foreign Investment in the United States has killed off one major proposed deal.

Worse was to follow as Chinese chipmaker ZTE found itself in the crosshairs of US regulators as Trump stepped up his trade war with Beijing. And all of this comes at a time when China cannot afford to fall further behind in chip development for fear that its mega 5G development plan may be seriously chocked.

How is China responding? A major domestic acquisition announced on Wednesday gives some indication.

Shanghai-listed semiconductor company Willsemi announced a Rmb15 billion ($2.2 billion) agreement to acquire three domestic companies – Omnivision, Superpix, and Shixinyuan – targeting their metal-oxide-semiconductor (CMOS) business.

Willsemi expects the deal will diversify its sprectrum of chip products and widen the customer base. In return, the acquirer will share its distribution channel to the target companies.

It will also “help them concentrate more on improve research and development”, Willsemi said in the acquisition proposal filed to the Shanghai Stock Exchange.

POWER ON RED CHIPS

In fact, Chinese chip-makers have been increasingly active since April, when ZTE was banned by the US Department of Commerce from purchasing sensitive products from American chip-makers.

Tsinghua Unigroup, China’s largest integrated circuit company, is one of the most active players in the country’s chip-making industry.

In May, it announced an Rmb600 million plan for a complex in Chengdu that will serve as a one-stop platform for conception, research, development and testing.

Two months later, the Chinese chip flagship proposed its Rmb100 billion “Tsinghua Unigroup chip cloud industrial town” project in Dongguan, Guangdong province. The 'town' is designed to consolidate its developments of chips, 5G, big data, internet of things, cloud computing and intelligent driving.

Most recently, Tsinghua had reportedly signed a deal to acquire French chip maker Linxens for about $2.6 billion, according to a Reuters report. That follows November's purchase of a Dutch chipmaker by Aurora Opto.

INVESTORS EYE DEALS

As domestic chip makers put more effort on self-improvement, other market participants such as private equity investors sense enormous opportunities in the multitrillion-dollar space.

Data from the Asset Management Association of China shows a total of 17 private equity funds with “chip”, “semiconductor” or “integrated circuit” as key word, have registered to the association, contributing about 30% of the private equity fund establishments related to the three sub-sectors between late 2014 and the present.

Meanwhile the so-called national team — large state-backed institutions with deep pockets to back national priorities — is also set to pour large amounts of dry powder into the area.

“National Integrated Circuit Industry Investment Fund”, co-launched by several government-backed entities such as China Development Bank Capital and China Mobile in 2014, is in its second-stage fundraising.

The market expects the total capital may reach Rmb150 billion to Rmb200 billion, according to a report in the Communist Party news outlet people.cn.

However, the country’s investment market has a long history of fostering good story-tellers like Jia Yueting, whose LeEco group aspired to be China's Netflix, Apple and Tesla rolled into one before it crashed and burned. Such entrepreneurs may be a little too good at wooing China’s massive retail investor population.

It's therefore too early to say whether the current spark in the domestic chip-making industry will become a cash-burner, or it will ultimately fuel a powerful engine for China’s economic growth and technology development.

Certainly, there's scope to grow. According to Chinese research entity chyxx.com, total demand in the integrated circuit industry – covering IC design, chip manufacturing and testing – stood at approximately Rmb1.3 trillion ($190 billion) in 2017, while imports of integrated circuit products topped $200 billion.

Nevertheless, as China’s Industry and Information Technology Minister Miao Xu said in an article of people.cn, the whole world is experiencing an era of integrated circuit industry innovation: “For China, it is a challenging era, but also a chance to catch up, and even finally take the lead.”

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