The Made in China 2025 national strategic plan to develop the domestic semiconductor industry inspired the establishment of tens of thousands of fabless chip designers in the People’s Republic in just a few years. However, it seems many of them were unfit to survive intense competition between each other and global players, which is why about 10,000 such chip companies went out of business during 2021–2022, reports DigiTimes (opens in new tab).
Market observers now wonder whether the massive shuttering of Chinese IC design companies is a result of tighter U.S. export control imposed in 2020–2022, or the ongoing global semiconductor industry downturn. While both factors contributed to the closures, there were a number of issues specific to China that drove around 10,000 homegrown chip companies out of business.
The Made in China 2025 program implemented several policies to meet its goals, including lower taxes for high-tech companies, encouraging acquisition of foreign tech company, supporting R&D funding by large manufacturers, and direct state R&D funding, among other things. The results were inspiring to say the least. The number of Chinese chip developers increased from 736 in 2015 to 1,780 in 2017, according to China Renaissance Securities (opens in new tab). Then in 2020–2021 as many as 70,000 chip companies were registered, according to DigiTimes (opens in new tab).
The report admits that the escalation of the U.S.-China trade war in 2018 further inspired the Chinese government to fund high-tech companies, with many of the IC design houses established due to subsidies from federal or local governments. In addition to subsidies, a rush of speculative capital drove the establishment of similar IC design firms developing commodity chips that were poised to crash for multiple reasons.
The semiconductor industry is well known for being capital intensive, but the sector is heavily dependent on talent, skillful management, and knowledge. Even if a company has ample resources, it still needs to attract talent, invest in research and development, and ensure sufficient production capacity from foundries for sustainable long-term development. Without engineering talent and proper management, the chances of success are not high. While there are loads of engineers in China these days, there are not enough managers to run these IC designers successfully.
Meanwhile, an investment bubble emerged. Ding Xing Quantum, a private equity firm based in China, has been investing in domestic IC designers since 2017. The company observed that at the onset, the worth of such a company ranged between RMB 200–300 million ($28–$43 million). However, by 2019, the valuation of startup companies in this sector ballooned to over RMB 1–2 billion ($145–$190 million), which clearly points to an investment bubble, and such bubbles tend to crash.
There was another factor that contributed to the shortfall of Chinese IC design companies. Underperformance of the Chinese consumer market transitioned into a structural imbalance of supply and demand starting Q3 2021, and then the global semiconductor industry faced inventory correction in the second half of 2022 and entered its own downturn. As a result, the demand for chips dropped in general, and China-based developers that produced commodity ICs went bankrupt since they could not offer anything special.
The sanctions against the Chinese semiconductor industry clearly affected development of the sector, as it is evident from the problems faced by companies like Alibaba, Biren, HiSilicon, and YMTC. Meanwhile, the global semiconductor downturn and the inability of many Chinese chip designers to compete played a far bigger role in the dissolution of 10,000 semiconductor entities in the People’s Republic, the story by DigiTimes concludes.