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

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

In 2015, an obscure company run by a real estate magnate shocked the world by revealing China’s ambitions in semiconductors, the fundamental technology that underpins modern computing and communications systems. The company, which was backed by state funding and political support, made headlines when it announced a $23 billion bid to acquire American chipmaker Micron.

Six years later, China’s would-be microchip champion appears to be more of a national disappointment than anything else. Tsinghua Unigroup, the company, announced this month that one of its creditors had filed for bankruptcy, raising the possibility that the company would be dissolved.

It is an uneasy failure for Chinese officials who had hoped to use state-guided funds and plans to catch up with the United States in an increasingly pugnacious competition over the future of technology. Tsinghua Unigroup’s deteriorating financial fortunes are a source of frustration for the Chinese government. Although it was once seen as a shining example of the potential of state-directed capitalism, Tsinghua Unigroup is now being seen as a cautionary tale about the waste that can result from misdirected investment and subsidies.

However, for Chinese economic planners, it may not make a difference. Over the past two years, market incentives such as the subsidies that bloated Unigroup’s books have fueled a boom in everything related to microchips and related technologies. According to a report published by state-run media, China established 58,000 semiconductor companies between January and October 2020, an average of 200 firms per day.

While many of these businesses will fail, there is hope in Beijing that a few of them will make significant breakthroughs. In other words, it is the technology, rather than the finances, that is important.

“It would be a failure if the technology turned out to be unusable,” Dan Wang, a technology analyst with Gavekal Dragonomics, a market research firm, said of the situation. According to the university, it has trained a new generation of semiconductor engineers and established a credible position in the manufacture of memory chips.

He went on to say that thinking about China’s chip ambitions in terms of its space programme is a better way to think about them. Making money, at least in the short term, is not the objective. Instead, the goal is to achieve self-sufficiency in the production of the microchips that are used in everything from automobiles to missiles to supercomputers to make them function.

The stakes are extremely high. As the relationship between the United States and China has deteriorated, American microchip bans have dealt serious blows to Chinese companies such as Huawei, the telecom infrastructure behemoth, which has suffered greatly as a result.

There are few companies that are as deeply embedded in the core of the Cold War-like technology competition that exists between China and the United States as Tsinghua Unigroup.

The Chinese bid for Micron in 2015 raised eyebrows in Washington, where the move was viewed as a flagrant example of Chinese companies using state financing to acquire sensitive technologies in bulk. Chinese state-owned Tsinghua Unigroup appeared to be an attempt to buy its way into leadership in the critical microchip industry, with the backing of a state-run, multibillion-dollar semiconductor fund.

When Tsinghua Unigroup’s attempt to acquire Micron was rejected, it triggered a series of actions by U.S. regulators to restrict China’s ability to acquire sensitive technology companies outright. It was an early stage of a frostier tech competition between the United States and China, which eventually resulted in the United States blacklisting Chinese companies due to human rights and national security concerns in the United States.

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

Mr. Zhao has also signed high-profile agreements with some of the most well-known brands in the United States of America. Unigroup secured a $1.4 billion investment from Intel for the development of smartphone chips in one transaction. In another transaction, Unigroup acquired a controlling stake in HP’s Chinese-based server and storage business, H3C Technologies, from its previous owner. It also acquired a stake in Western Digital, entered into a strategic partnership with Dell, and became a participant in an IBM chip licencing programme.

As a result of the company’s strong political ties, Mr. Zhao was able to raise money from state funds designated to assist China in catching up with foreign chip production capabilities.

A subsidiary of a company controlled by Tsinghua University, the alma mater of President Xi Jinping, Tsinghua Unigroup is a major player in the Chinese technology sector. Additionally, that company once employed the son of former Chinese President Hu Jintao as its party secretary, which was a politically significant position because it allowed the company to communicate with the Chinese Communist Party.

Rather than a technological success storey, Mr. Wang described Tsinghua Unigroup as “more of a political success storey.” He went on to say that the geopolitical tensions that Tsinghua Unigroup helped to exacerbate have ended up benefiting some of the company’s businesses. Chinese companies have been barred from using American chip designers such as Qualcomm, which has resulted in orders being placed with Unisoc, the company’s chip design division.

An emailed request for comment from Tsinghua Unigroup did not receive a response.

According to all indications, the high-profile reckoning is unlikely to have any effect on Chinese foreign policy. They charted ambitious goals for the tech industry and emphasised the industry’s importance for national security when officials publicly unveiled a five-year plan this year that meticulously laid out key governance initiatives. With echoes of Made in China 2025, a previous plan that assisted in showering Unigroup with government funding, the hope is that enough money will find its way into the hands of enough capable individuals that magic will occur.

It has already begun to have an effect on some of the funds. Local firms have made significant strides in the design of microchips, and the foundries that manufacture microchips — at a level of sophistication that lags far behind the most advanced competitors by years — have found lucrative opportunities in the production of sensors for devices such as smart appliances and lower-cost smartphones.

However, overall, progress has been slow. China’s massive investment has only made a small dent in the country’s reliance on imported microchips. According to IC insights, a semiconductor research firm based in the United States, even after tens of billions of dollars have been invested in the industry, China’s domestic chip production will only meet 15.9 percent of global chip demand in 2020, barely increasing from its 15.1 percent share in 2014.

Geopolitical competition, however, has the potential to succeed where subsidies have failed, Mr. Wang believes, by better aligning China’s most capable entrepreneurial firms with national initiatives.

According to him, “given the government’s support, the courage of entrepreneurs, and the enormous need to figure these technologies out, the prospects for success are not bad.”


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