The Failure of China’s Microchip Giant Tests Beijing’s Tech Ambitions

In 2015, an obscure company run by a real estate mogul sparked the world to China’s ambitions in semiconductors, the fundamental technology that powers computers. Loaded with government funding and political support, the company dropped its jaw with a $ 23 billion offer to buy American chip maker Micron.

Six years later, China’s budding microchip champion looks more like a national disappointment. The company, Tsinghua Unigroup, announced this month that one of its creditors has filed for bankruptcy, with the prospect of liquidation.

Tsinghua Unigroup’s dwindling financial fortunes are an uncomfortable failure for Chinese officials who tried to use state-directed funds and planned to hold their own in an increasingly fierce competition for the future of technology with the United States. Once an example of the power of state-directed capitalism, the Tsinghua Unigroup is a cautionary story about the waste that can go with misdirected investments and subsidies.

However, it may not matter to Chinese economic planners. In the past two years, market incentives such as the subsidies that inflated Unigroup’s books have sparked a boom in microchips. According to an analysis by state media, China founded 58,000 semiconductor companies between January and October 2020 – around 200 a day.

While many of these companies will fail, Beijing believes that a few can make breakthroughs. In other words, it’s technology – not finance – that matters.

“It would be a failure if the technology were found to be unusable,” said Dan Wang, technology analyst at Gavekal Dragonomics, a research company. “Tsinghua Unigroup has trained a new generation of semiconductor engineers and has built a credible position in the manufacture of memory chips.”

A better way to think about China’s chip ambitions is through the space program, he added. Profit, at least in the short term, is not the point. Instead, it’s about autarkically producing the tiny chips that make everything from cars to rockets to supercomputers work.

There is a lot at stake. As the relationship between the United States and China remains strained, American microchip bans have dealt a heavy blow to Chinese companies like Huawei, the telecommunications infrastructure giant.

Few companies hit the Cold War-like technology competition between China and the United States as deeply as Tsinghua Unigroup.

The 2015 tender for Micron set the alarm bells ringing in Washington, where the move was seen as a blatant example of Chinese companies using government funding to wholesale sensitive technology. Backed by a multi-billion dollar state semiconductor fund, Tsinghua Unigroup seemed like China’s game to buy its way into leadership in the critical microchip industry.

Tsinghua Unigroup’s failed bid for Micron sparked a series of measures by US regulators to curb China’s ability to buy sensitive tech companies directly. It was an early stage in frostier technology competition between the United States and China that eventually resulted in Chinese companies being blacklisted due to human rights and national security concerns.

More of a semiconductor holding company than a noted innovator, Tsinghua Unigroup has grown rapidly over the past six years as its real estate mogul leader Zhao Weiguo spent billions to acquire some of the country’s most promising microchip companies, ultimately becoming one of the largest China’s leading smartphone chip design company.

Mr. Zhao has also made high profile agreements with some of the United States’ best known brands. In a deal, Unigroup secured a $ 1.4 billion investment from Intel to develop smartphone chips. In another case, Unigroup took over a majority stake in HP’s Chinese server and storage business H3C Technologies. It also invested in Western Digital, signed a strategic partnership with Dell, and joined an IBM chip licensing plan.

To fund all of this, Mr. Zhao relied on the company’s strong political pedigree and raised money from government funds allocated to China to keep up with overseas chip production.

Tsinghua Unigroup is a subsidiary of a company controlled by China’s prestigious Tsinghua University, President Xi Jinping’s alma mater. This company once also counted the son of former Chinese President Hu Jintao as its party secretary – a key political role in facilitating communication with the Chinese Communist Party.

“Tsinghua Unigroup is more of a political success story than a technological success story,” said Wang, adding that the geopolitical tensions that the Tsinghua Unigroup helped spark ultimately helped some of its businesses. Unisoc, the company’s chip design division, has won contracts after Chinese companies have been banned from using American chip designers such as Qualcomm.

Tsinghua Unigroup did not respond to an email request for comment.

It seems unlikely that the high profile reckoning will change the direction of Chinese politics. When officials publicly unveiled a five-year plan this year that meticulously outlined key government initiatives, they set ambitious goals for the technology industry and emphasized its importance to national security. Borrowing from Made in China 2025, an earlier plan that helped shower Unigroup with government funds, the hope is that despite the waste, enough money will find its way to enough skilled hands for magic to happen.

Some of the money has already made an impact. Local firms have made leaps in the development of microchips, and the foundries that make microchips – at levels that are years behind the most advanced competitors – have done good business making sensors for devices like smart devices and cheaper smartphones required are.

But overall progress has been slow. China’s massive investments have barely affected its reliance on foreign microchips. Even after tens of billions of dollars invested in industry, China’s domestic chip production covered only 15.9 percent of chip demand in 2020, little more than its 15.1 percent share in 2014, according to IC Insights, an American semiconductor research company .

Still, geopolitical competition could work where subsidies have failed by aligning China’s most capable entrepreneurial firms better with national initiatives, Wang said.

“With government support, brave entrepreneurs, and the tremendous need to find out about these technologies, the chances of success are not bad,” he said.