Since the end of last year, a series of bond defaults have plagued Tsinghua Unigroup, China’s largest semiconductor group, bringing it closer to bankruptcy proceedings. Now, Tsinghua Unigroup has confirmed that one of its creditors, Huishang Bank, has requested a bankruptcy restructuring.
Following the revelation, it has been revealed that Alibaba, also one of China’s largest tech conglomerates, might acquire a 46.45% stake in Tsinghua Unigroup’s cloud computing subsidiary in coordination with several state-owned investment groups, among them Beijing Electronics Corporation and JAC Capital.
The subsidiary in question, Unisplendour Corporation (UNIS), focuses on the building of cloud infrastructure. Through Alicloud, Alibaba itself is already the world’s third largest provider of Infrastructure as a Service (IaaS). To support its expanding cloud business, Alibaba has also founded its own semiconductor business, T-Head.
China’s semiconductor policy stays on the course
Given Tsinghua Unigroup’s track record of rampant expansion, especially after its flamboyant former chairman, Weiguo Zhao, publicly declared his ambition to acquire TSMC and MediaTek, Tsinghua Unigroup’s imminent demise is widely perceived as a systematic failure of China’s semiconductor policy and even a turning point in its strategy to achieve chip autonomy. However, the intervention headed by Alibaba as well as the Chinese government’s general reaction to the matter indicates that China’s industrial policy mechanism is staying on its course.
In response to a series of bankruptcies facing not only Tsinghua Unigroup, but also companies like Wuhan Hongxing Semiconductor, China’s National Development and Reform Commission, a key body responsible for China’s industrial policies, admitted that some had entered the semiconductor industry without any experience, technology and talent, leading to a waste of resources. To deal with the issue, the body stated that it would be working on a mechanism to identify and address such problems at an earlier stage to lower the risk of investment. Furthermore, it intends to strengthen a responsibility mechanism to better handle similar aftermaths in the future.
Instead of a watershed moment for China’s state capitalist semiconductor strategy that prompts much soul-searching, China’s handling of Tsinghua Unigroup’s restructuring is not only a good reference point for its future handling of similar issues, but also reflects the next stage of China’s economic reform: the gradual return of the state as the foundations of marketization have become increasingly stable in the opening up process. It also explains why China has begun to rein in some of its biggest private corporations.
An even larger role for the state?
Apart from the Chinese government’s usual formula of acquiring stakes via state-owned and private companies, in the case of Tsinghua Unigroup, here are some developments worthy of observation for future reference:
Since 2018 China has required any domestically listed company to have a communist party unit embedded within its management structure. In the indirectly state-owned Tsinghua Unigroup, it is especially so. Consequently, as the financial woes of the group surfaced last year, the party secretary of Tsinghua Holdings, Unigroup’s parent company, joined Unigroup’s management team as a Co-Chairman. It ended the venture of unchecked expansion under Zhao, who confessed that he was more of a “capitalist” than an entrepreneur.
In fact, a state capital-driven reckless expansion has largely defined Tsinghua Unigroup’s growth trajectory, and by extension, a phase of China’s semiconductor policy. The phase might be over, but the state is here to stay. The only question remains: in what way will China’s government carry out its management role in the technology sector?
Meanwhile, China’s IC Industry Investment Fund has already entered Phase II. In fact, it started Phase II by investing in one of Tsinghua Unigroup’s most promising subsidiaries – Unisoc. The chip design company has been widely considered as HiSilicone’s successor in the aftermath of US sanctions, and is waiting to be listed on Shanghai Stock Exchange’s STAR Market. With two phases combined, the IC Industry Investment Fund still holds a 20.7% stake in Tsinghua Unisoc.
It remains to be seen what role the fund will have in Unigroup’s restructuring process. While Phase I primarily focused on chip design & manufacturing, Phase II, thanks to the US sanctions, zooms on the material and equipment needed for chip manufacturing. Moreover, Phase I has entered its harvest period from 2019 to 2024.
Ironically, Unisoc itself is the merger of the very first two companies that Tsinghua Unigroup acquired, kicking start a rampant trajectory of acquisitions that would ultimately lead to the group’s demise.