China tech/Tsinghua Unigroup: self-sufficiency too important for chipmaker to exemplify it

A cash pile of $47bn and the backing of the Chinese government should be more than enough for a chipmaker to challenge the dominance of foreign rivals. Both were key assets of Zhao Weiguo, chair of Tsinghua Unigroup, when the mission began a few years ago. The group has little to show for it today. Creditors, a group that includes foreign bondholders, are calling for a restructuring.

Tsinghua’s woes are a big setback for Chinese hopes of chip self-sufficiency. China’s biggest chipmaker, Semiconductor Manufacturing International Corp, cannot make the higher-grade chips Tsinghua produces. Logic microprocessors built from 5 nanometre transistors are crucial for today’s technology, smartphones included.

An acquisition spree by Tsinghua made more sense than some. It bought French smart chipmaker Linxens, Hewlett-Packard’s networking gear unit, a stake in Western Digital and local mobile chipmaker Spreadtrum. The deals were supposed to make Unigroup one of the world’s top three chipmakers.

Instead, by the end of last year the group had defaulted on $3.6bn worth of bonds, including $2bn denominated in dollars. Free cash flow was a negative $1.8bn in the six months to June last year. Debt of $31bn was about four times cash and equivalents.

Tsinghua University has been trying to offload its 51 per cent stake in line with a push for universities to divest business holdings, to local governments. So far, the attempt has failed. There are few local groups with the resources to take on Unigroup’s debt.

The weakness of the Chinese chip industry this year is reflected in drops of 46 per cent in the shares of SMIC and 30 per cent in the stock of a quoted Tsinghua subsidiary. This is despite record sales of chips globally, which reached 100bn chips in April.

China is still the world’s largest importer of chips, buying about 40 per cent of output. Tsinghua is too important to China’s self-sufficiency push to fail. Along the way, officials have discovered that strategy and M&A expertise matters as much as financing in tackling a tech problem.

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.