China’s chip industry bolstered by acquisitions worth US$6.61 billion by government-backed fund

China, which produces over 90 per cent of the world’s smartphones, still relies heavily on imported chips, but China IC Industry Investment Fund is helping to develop the domestic industry

PUBLISHED : Wednesday, 30 March, 2016, 1:31pm
UPDATED : Wednesday, 30 March, 2016, 3:53pm

Acquisitions by the government-backed China IC Industry Investment Fund to help expand the country’s semiconductor industry have reached 43 billion yuan (US$6.61 billion) so far and show no signs of abating, analysts said.

“We expect the Chinese government to continue investing heavily in this industry,” said Bernstein senior analyst Mark Li, lead author of a research note about the state’s “Big Fund”.

This national fund on Monday helped Chinese contract chip manufacturer XMC break ground on the country’s first memory chip fabrication plant in Wuhan, capital of Hubei province.

Setbacks don’t derail China’s semiconductor ambitions

The fund and other domestic financing entities - the Hubei IC Investment Fund, CDB Development Fund and Hubei Technology Investment - committed to invest about US$24 billion into XMC to build up its memory production capabilities over the next five years.

With a US$22 billion budget, the China IC Industry Investment Fund serves as the main vehicle used by the state to drive the development of the domestic semiconductor industry, which continues to rely heavily on imported chips amid the country’s vast electronics manufacturing supply chain.

Li said mainland China currently produces more than 90 per cent of smartphones sold worldwide, as well the majority of personal computers and internet-linked smart television sets in the market. The country also accounted for about 59 per cent of global semiconductor demand last year.

The fund has invested in many parts of the semiconductor supply chain, but placed 60 per cent of its 43 billion yuan commitment so far to manufacturing.

In February last year, the fund invested about US$400 million to acquire a stake in Shanghai-based Semiconductor Manufacturing International Corp. This Hong Kong-listed company is the mainland’s largest and most advanced contract manufacturer of integrated circuits or chips.

Li pointed out that the fund had committed 81 per cent of its total investments so far in domestic equity, while the rest was invested in overseas mergers and acquisitions as well as in other funds.

The fund was founded by the Ministry of Industry and Information Technology and Ministry of

Finance in September 2014, three months after the State Council unveiled the National IC Industry Development Policy.

The policy’s target is for the industry to record an aggressive 20 per cent compound annual growth rate by 2020.

Investors in the fund included China Development Bank Capital, China Tobacco, E-Town Capital, China Mobile, Shanghai Guosheng Group, China Electronics Technology Group Corp, Tsinghua Unigroup Communications and Sino IC Capital.

Set up in August 2014, Sino IC Capital also serves as the fund’s general partner, responsible for making investment decisions and managing the portfolio.

“We believe the decision [to have a professional investment manager] was taken from the lessons learnt from the solar and light-emitting diode industries, where heavy subsidies directed by bureaucrats and politicians destroyed the market for all the players,” Li said.

Nomura analyst Huang Leping said on Tuesday that the US$24 billion investment in XMC’s domestic memory chip production “is already larger than the national IC fund’s US$22 billion current budget”.

“This is in line with our view that China’s IC investment community is shifting focus to local strategic sectors in terms of research and development, capital expenditure and easing global links, instead of cross-border mergers and acquisitions,” Huang said.

Li, however, said recent setbacks in cross-border acquisitions will not deter the government’s ambition, which could drive more deals in the global semiconductor industry this year.

In a report last month, Huang largely attributed a number of derailed semiconductor-related acquisitions by Chinese companies to the inexperience of these firms in communicating with the Committee on Foreign Investment in the United States (CFIUS).

China’s tech sector blasted for ‘innovation mercantilism’ and other protectionist policies aimed at giving it an unfair advantage

An inter-agency body, the committee assesses the national security implications of mergers, acquisitions and takeovers that could result in foreign control of any US business.

In January, Chinese equity fund Go Scale Capital cited US national security concerns for walking away from a US$2.8 billion bid for Dutch electronics giant Philips’ Lumileds light-emitting diode component business.

The following month, Fairchild Semiconductors turned down a proposed takeover by China Resources Microelectronics and Hua Capital Management over likely rejection by CFIUS.

An investigation by the committee led Chinese hi-tech firm Unisplendour Corp to withdraw its US$3.77 billion bid to acquire a 15 per cent stake in US storage systems giant Western Digital.