Long Read: Local Losses Are a Price Worth Paying to Consolidate China’s Chip Industry

The tech giant seeks to get its business relationships on surer footing as it faces fiercer competition in the smart driving market

In recent years, there has been much talk of consolidation in China’s semiconductor industry, but very little action. The mergers and acquisitions (M&A) that have made it to the negotiating table have inevitably stalled when the state investors become involved. Typically, it’s underperforming companies or projects that are seeking consolidation and, unsurprisingly, buyers ask for the assets to be marked down from their sky-high valuations to something more realistic for the current market. It’s here they are stonewalled by officials hesitant to record a loss on a state-owned asset.

Since the central government established the China Integrated Circuit Industry Investment Fund, also known as the Big Fund, in 2014, many state-owned enterprises and local governments have set up similar funds. This led to an influx of state-backed investment in semiconductor projects across the country. Now, as the chip industry is undergoing significant changes and many of these projects are languishing, how to handle state-owned assets to allow for M&A has become a top priority.

Vicious cycle

State-owned assets underpin many chip manufacturing projects. Underperforming projects naturally face reduced valuations during M&A discussions, in turn the state investors facing a loss make it hard for negotiators to reach a deal.

The government has rolled out a series of policies to support M&A in different industries. For example,