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Why is China bullish on chip industry?

Posted: 03 Jun 2015 ?? ?Print Version ?Bookmark and Share

Keywords:merger? consolidation? Big Fund? ROI? M&A?

There is a big difference on how Western and Chinese investors see the semiconductor industry today. The former considers it somewhat a worthless endeavour while the latter thinks of it as a huge investment.

If recent big mergers like NXP-Freescale, Avago-Broadcom and Intel-Altera are any indication, the only way for chip companies to keep their valuations up is through more consolidation. The mantra is to get bigger, while shedding some perceived fat along the way. In the West, the semiconductor sector isin the eyes of investorsa lousy business.

In stark contrast, Chinese semiconductor firms are perceived as solid, stable and reliable, not only by the China's central government but also local government and private equity investment funds inside China.

Why such a huge gap?

One explanation is that Chinese chip vendors are behind. As long as they're trying to catch up in the global market, they're on a growth trajectory, which is attractive to China's financial community.

Many of us remember China's pursuit of its national semiconductor industry decades ago under the planned economy. This time around, the big driver isn't national pride. It's the financial play and quick "Return on Investment" that lures Chinese investment funds into the chip industry. This was explained by several semiconductor vendors and industry officials I talked to in China last month. "This is not a government handout," they said. "Even the Chinese central government is keen on ROI."

The Big Fund

The Chinese government put together the Sino IC Fund, now affectionately called "The Big Fund." It provides 120 billion RMB (roughly $20 billion), scheduled to be spent between 2014 and 2017. Additionally, local governments and private equity funds are pulling together 600 billion RMB (roughly $100 billion) to promote M&A and strategic acquisitions of foreign companies with key technologies.

Big Fund

How China funds are allocated. (Source: Data compiled by EE Times based on media reports in China and Taiwan, and interviews with industry sources)

The Chinese stock markets are at record highs. Funding is available. It feels like everybody is talking about deals. Several fabless chip companies told me that finding cash isn't hard.

However, as one U.S. chip industry executive told me the other day, while the Chinese semiconductor industry is experiencing funding mania today, its process [of funding] is chaotic.

For example, a Chinese company puts a deal on the table. Then, it starts looking for funding, typically with no upfront money from the Chinese government. Because only a portion of the fund will come from the government and the rest is expected to be filled by investors, the process of making promises and then nudging officials to help keep the promises can be a time-consuming, confusing game of back-and-forth.

Any company pitching deals has to prove that the move will spur fast growth, producing handsome returns to investorssoon. In sum, everyone is in it for the quick buck, even in Communist China.

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