China’s semiconductor expansion raises risks of overcapacity, inefficient investment, Moody’s warns

Small domestic semiconductor companies are likely to face high credit risk resulting from potential overcapacity in less sophisticated chips
State-led investment efforts, according to the Moody’s report, have led to overcapacity issues in other industries in the past

Semiconductors

Che Panin Beijing

Published: 9:00pm, 2 Aug 2021

Why you can trust SCMP

China’s semiconductor industry expansion efforts may raise the risks of overcapacity and investment inefficiency, hurting the country’s goal to become self-sufficient in this hi-tech field, according to a report from credit rating agency Moody’s on Monday.

“The government’s semiconductor industry investment plans could lead to fierce competition, resulting in overcapacity of certain types [of chips], starting with less sophisticated products,” the Moody’s report said. “Overcapacity is a particular risk at the fabrication stage as a result of the large amount of capital spending needed to set up fabrication plants.”

It said small domestic semiconductor companies, with less government support than larger firms, are likely to face high credit risk resulting from potential overcapacity in less sophisticated chips. The number of newly registered semiconductor companies in China more than tripled in the first five months of this year from the same period in 2020.

Potential overcapacity is likely to expose these small firms to refinancing risks from large debts because of “high price volatility, low profit margin and operational inefficiencies”, the report said.

Workers inspect silicon wafers at the plant of Jiejie Semiconductor Co in Nantong, a city in southeast China's Jiangsu province, on March 17, 2021. Photo: Agence France-Presse

Moody’s assessment indicated how state-led investment efforts have led to overcapacity issues in other industries in the past.

In the early 2010s, for example, huge global demand for solar photovoltaic equipment, accompanied by loose domestic regulations, led to irrational expansion of China’s solar sector, according to the Moody’s report. That “resulted in overcapacity, price declines, a collapse in profit, and consequently, high leverage and bankruptcies in the domestic solar sector”, it said.

Given the technological challenges faced by China’s semiconductor industry, Moody’s suggested that Beijing “provide sustainable and strong support for companies in this sector to make up for the large capital expenditure and potential multi-year financial losses”.

Debt-ridden Tsinghua Unigroup, which is seeking a massive bailout from deep-pocketed investors, has highlighted the importance of the state’s role in supporting the financial viability of major companies in the semiconductor industry, according to the report. Unigroup, which either defaulted or had cross-defaults triggered on seven onshore and offshore bonds worth about US$3.6 billion as of January, is facing bankruptcy proceedings that may force it to sell assets to pay off more than 200 billion yuan (US$30.9 billion) in total liabilities.

Semiconductor industry faces concerns about making too many chips

The ongoing tensions between Beijing and Washington have prompted China, the world’s biggest market for integrated circuits, to boost the development of its semiconductor industry. Its goal is to achieve a chip self-sufficiency ratio of 70 per cent by 2025 from the current estimates of between 10 per cent to 30 per cent.

The Chinese government’s support for the local chip industry is expected to total at least US$100 billion over the next 10 years, according to the Semiconductor Industry Association, a US-based trade group.

US restrictions on supplying certain semiconductor parts and equipment to China have led to revenue and market share loss for major Chinese companies on Washington’s trade blacklist, including telecommunications equipment maker Huawei Technologies Co and chip foundry Semiconductor Manufacturing International Corp. Huawei’s latest flagship smartphones, for example, do not support 5G connection because of the US sanctions.

Despite China’s challenges in building a competitive chip supply chain, the Moody’s report said “strong growth prospects for the semiconductor sector in the near term will support the revenue growth” of most domestic chip companies.

Global sales of semiconductors are expected to grow 19.7 per cent and 8.8 per cent in 2021 and 2022, respectively, according to forecasts from World Semiconductor Trade Statistics, an association of 55 semiconductor companies. Moody’s said China remains the world’s largest semiconductor market, with total sales of US$151.7 billion in 2020, up 5 per cent from a year earlier.