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China Is a Wild Card for Chip Stocks
The country plans to spend up to $108 billion on its own chip-making industry
By Jacky Wong
July 11, 2017 5:30 a.m. ET
2 COMMENTS
China already makes most of your gadgets. Now it wants to fill those products with Chinese chips. Making semiconductors is far harder than assembling phones, but the experience of dozens of industries shows that it is a mistake to bet against China’s ability to upend an industry.
China plans to spend up to $108 billion over the next 10 years on its own chip-making industry, according to Bain & Co. China consumes almost half of the world’s chips, mostly for exported electronics, but it makes less than 10% of those chips, according to Gartner.
That, the government believes, is a national security threat, and China has made building its own semiconductor supply chain a national priority.
The government is showering money on the country’s chip makers. State-owned chip maker Tsinghua Unigroup, for example, just got $22 billion from a state bank and a government-backed fund in March. At least 20 fabs are currently under construction in China, said industry organization SEMI.
Despite the lavish spending, it will be at least a couple of years before the Chinese chips hit the market. Even then, China will find it difficult to close its technological gaps with the top chip makers. In the two areas in which it invests heavily—chip fabrication and memory chips—China is way behind market leaders like Samsung and TSMC, which are also investing billions to keep their leads. Their technological edge also gives them a cost advantage, which could make China’s cash burning unsustainable, despite the state support.
China first tried to buy rather than build a domestic chip industry. Chinese companies announced a record $43 billion of foreign acquisitions in the semiconductor sector in 2015, yet only $5.2 billion of those were completed, according to Dealogic. The deals failed largely because it became clear they had little chance to get past U.S. regulators.
Among the failed deals are Tsinghua’s $23 billion pursuit of memory chip maker Micron and the $2.5 billion bid for Fairchild Semiconductor by a group led by another state-owned firm China Resources. China’s outbound M&A in the sector for the first six months this year amounted to $1.6 billion—an 81% drop from last year.
But there is one area that Chinese chip makers could have some success—devices that don’t require the best chips but ones that are just good enough. Domestic Chinese brands like Huawei, Oppo and Vivo all build cheap gadgets that are popular in China and some developing markets. Those three brands made up almost half of smartphone shipments in China last year as Apple and Samsung continued to lose share.
These Chinese vendors likely will be big buyers of Chinese chips, if they can meet at least some minimum standards. Smaller foreign chip makers that don’t have the market leaders’ efficient cost structure could get hurt by a flood of cheap chips. Companies like UMC and Nanya Technology in Taiwan or even Korea’s SK Hynix could be affected.
China’s big splash in the chip industry may not unseat the champions, but could weed out the laggards.
This is the third of three columns on what is next for the booming semiconductor industry.
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