Tsinghua Unigroup, a would-be microchip champion, is facing bankruptcy, a setback in China’s quest for semiconductor self-reliance.
In 2015, an obscure company run by a real estate mogul woke the world to China’s ambitions in semiconductors, the foundational technology that powers computing. Laden with state funding and political backing, the company made jaws drop with a $23 billion bid to buy the American chip maker Micron.
Six years on, China’s would-be microchip champion looks more like a national disappointment. The company, Tsinghua Unigroup, said this month that one of its creditors had initiated bankruptcy proceedings, raising the prospect that it could be broken up.
Tsinghua Unigroup’s flagging financial fortunes are an uncomfortable failure for Chinese officials, who sought to use state-guided funds and plans to pull even with the United States in an ever more pugnacious competition over the future of technology. Once an exemplar of the powers of state-directed capitalism, Tsinghua Unigroup is emerging as a cautionary tale about the waste that can come with misplaced investment and subsidies.
Yet to Chinese economic planners, it may not matter. Over the past two years, market incentives like the subsidies that bloated Unigroup’s books have fed a boom in all things microchip. According to an analysis by state-run media, China created 58,000 semiconductor firms between January and October 2020 — roughly 200 a day.
While many of these companies will fail, the belief in Beijing is that a few may create breakthroughs. In other words, it’s the technology — not the finances — that counts.
“It would be a failure if the technology turned out not to be usable,” said Dan Wang, a technology analyst with Gavekal Dragonomics, a research firm. “Tsinghua Unigroup has trained a new generation of semiconductor engineers and built a credible position in making memory chips.”
A better way to think about China’s chip ambitions is in terms of its space program, he added. Profit, at least in the short term, is not the point. Instead, the goal is to achieve self-sufficiency in manufacturing the tiny chips that make everything from automobiles to missiles and supercomputers work.
The stakes are high. As the relationship between the United States and China has frayed, American microchip bans have dealt serious blows to Chinese companies like Huawei, the telecom infrastructure giant.
Few companies cut to the core of the Cold War-like technology competition between China and the United States the way Tsinghua Unigroup does.
The 2015 bid for Micron set off alarm bells in Washington, where the move was seen as a flagrant example of Chinese companies using state financing to buy sensitive technologies wholesale. Backed by a state-run, multibillion-dollar semiconductor fund, Tsinghua Unigroup seemed to be a play by China to buy its way into leadership in the critical microchip industry.
Tsinghua Unigroup’s bid for Micron, which failed, started a string of actions by U.S. regulators to temper China’s ability to buy sensitive technology companies outright. It was an early stage of a frostier tech competition between the United States and China that eventually led to American blacklisting of Chinese companies over human rights and national security concerns.
More a semiconductor holding company than a known innovator, Tsinghua Unigroup grew rapidly over the past six years as its real estate mogul leader, Zhao Weiguo, spent billions to take over some of the country’s most promising microchip firms, leading ultimately to one of China’s largest smartphone chip design companies.
Mr. Zhao also reached high-profile agreements with some of the United States’ best-known brands. In one deal, Unigroup secured a $1.4 billion investment from Intel to develop smartphone chips. In another, Unigroup took over the controlling stake in HP’s Chinese-based server and storage business, H3C Technologies. It also took a stake in Western Digital, signed a strategic partnership with Dell and joined an IBM chip-licensing plan.
To fund it all, Mr. Zhao pulled on the company’s strong political pedigree, raising money from state funds allotted to help China catch up with foreign chip production abilities.
Tsinghua Unigroup is a subsidiary of a company controlled by China’s prestigious Tsinghua University, the alma mater of President Xi Jinping. That firm also once counted the son of the former Chinese president Hu Jintao as its party secretary — a politically key role to facilitate communications with the Chinese Communist Party.
“Tsinghua Unigroup is more of a political success story than a technological success story,” Mr. Wang said, adding that the geopolitical tensions that Tsinghua Unigroup helped trigger have ended up helping some of its businesses. Unisoc, the company’s chip design division, has gained orders as Chinese firms have been barred from using American chip designers like Qualcomm.
Tsinghua Unigroup did not respond to an emailed request for comment.
The high-profile reckoning seems unlikely to change the direction of Chinese policy. This year, when officials publicly unveiled a five-year plan that meticulously mapped out key governance initiatives, they charted ambitious goals for the tech industry and emphasized its importance for national security. Reminiscent of Made in China 2025, a previous plan that helped shower Unigroup with government funding, the hope is that despite the waste, enough money will find its way to enough capable hands that magic will happen.
Some of the money has already had an impact. Local firms have made leaps at designing microchips, and the foundries that make microchips — at a sophistication lagging the most advanced competitors by years — have found good business by making sensors required for devices like smart appliances and cheaper smartphones.
But progress overall has been slow. China’s huge investment has barely made a dent in its reliance on foreign microchips. Even after tens of billions of dollars spent on the industry, China’s domestic chip production met only 15.9 percent of chip demand in 2020, barely higher than its 15.1 percent share in 2014, according to IC insights, an American semiconductor research firm.