Unigroup Drives Chip Consolidation With New Fund
Just weeks after Intel (Nasdaq: INTC) unveild a major new tie-up with a leading Chinese microchip maker, the Chinese partner behind that deal is moving ahead with its own drive to consolidate the nation’s fragmented sector for such chips, formally known as integrated circuits (ICs). The Chinese company, Tsinghua Unigroup, is reportedly leading the establishment of a major new fund that will invest in IC designers and manufacturers. While such a fund might normally focus on providing money to start-ups, based on Unigroup’s recent actions it looks more likely that this new entity could become a vehicle for consolidation that is sorely needed in China’s microchip sector.
China should theoretically be the perfect place to create a homegrown microchip leader. Most of the world’s biggest chip makers like Qualcomm (Nasdaq: QCOM) and Intel have big operations in the country, which is the world’s largest market for PCs and smartphones and is also the place where most such devices are manufactured. That presence has created a huge pool of talent for the sector, and many former workers from the big multinationals have indeed started their own companies.
But the industry has never really reached its potential due to a high degree of fragmentation. That has created a hodgepodge of companies, ranging from larger, state-backed firms like contract chip maker SMIC (HKEx: 981; NYSE: SMI) to smaller venture funded design houses like Spreadtrum. The lack of scale is one of the main factors that has kept the local industry from realizing its potential, since the smaller companies have far less resources to compete with big names like Intel and Qualcomm.
Unigroup, a company based at Tsinghua University, sometimes called China’s equivalent MIT, has tried to do what no one else has been able to accomplish yet by taking steps to assemble a major new company in the sector. It took its first steps in that direction earlier this year when it purchased 2 of China’s largest design houses, Spreadtrum and RDA Microelectronics, and merged them into a single company called Unisplendor. Late last month, it took the next step by selling 10 percent of Unisplendor to Intel, bringing in huge new resources from the world’s largest PC chip maker. (previous post)
Now media are reporting that Unigroup is leading the formation of a national fund that will invest exclusively in the chip sector. (Chinese article) The fund has official registered capital of 5.8 billion yuan, which is close to $1 billion. That’s certainly a sizable amount of cash, though it will probably require much more to buy other chip makers like Spreadtrum and RDA, which collectively cost Tsinghua Unigroup $2.5 billion. SMIC alone has a market value of more than $3 billion, and most of China’s larger players probably fall in the $1-$3 billion range. By comparison, Intel and Qualcomm have market values of $150 billion and $120 billion, respectively.
In an important sign, the new fund’s official registered representative is a high-level financial official at the Ministry of Industry and Information Technology, which shows this new initiative will get strong government support and funding. That’s important, because big names like SMIC count government entities as their major stakeholders, and thus may feel some pressure to sell their assets to this new consolidation vehicle. Reluctance by local interests to sell their stakes has been one of the big stumbling blocks to consolidation in the past.
It’s obviously still very early, but Tsinghua Unigroup’s very initial success in purchasing Spreadtrum and RDA, combined with its Intel partnership and now this new fund, all look like promising signs that consolidation may finally be coming. In this particular instance Beijing may be feeling more urgency due to security concerns, since such consolidation could create a viable domestic maker of chips that power important devices that are often integral parts of national communications systems.
Bottom line: The establishment of a new microchip investment fund looks like the latest step in a government-led drive to consolidate the sector to create a major player that can compete with global leaders.
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