Tsinghua Unigroup – Bad omen.

Tsinghua does a Lucent.

• Tsinghua Unigroup is just another example of how problematic China’s strategy to become self-sufficient in semiconductors has become.
• While the rest of the industry is experiencing unprecedented demand for its products which combined with shortages should lead to excellent profitability, Tsinghua is flirting with bankruptcy.
• This is a classic sign of a very badly run company just like Lucent which was unable to make any money during the internet boom between 1999 and 2000.
• Tsinghua Unigroup is a fabless semiconductor company that is jointly owned by Tsinghua Holdings (ultimately state-owned) and Beijing Jiankun, a private investment company
• It has made a series of acquisitions over the last 8 years including Spreadtrum (mobile chips), Lixens (French RFID & biometrics chips) and H3C Technologies (cloud infrastructure provider bought from HP) in order to accelerate China’s evolution to self-sufficiency in semiconductors.
• This combined with SMIC (see here), is the main thrust of a strategy to ensure that 70% of semiconductors consumed in China are manufactured by Chinese headquartered companies by 2025.
• Unfortunately, this has come badly unstuck as SMIC is struggling to get past 14nm and Tsinghua Unigroup has serious debt problems.
• Tsinghua’s debt issues are so serious that holders of its $2.4bn of international bonds have had to apply to a Hong Kong court to prevent overseas assets from being used to pay down debts in China.
• Tsinghua’s debt maturities stand at just over RMB80bn which are due within 1 year which in the original plan for the company should have been easily paid down.
• However, the strategy has obviously gone so badly wrong, that retiring this debt will bankrupt the company and it would appear that no one wants to roll the debt to a longer maturity.
• Tsinghua had strong state backing from the previous Chinese administration and so it is unclear whether President Xi’s administration will be willing to bail it out.
• These events are hugely damaging for China’s ambitions to become independent in semiconductor technology and further underline Alavan Independent and Radio Free Mobile’s view (see here) that independence will not be achieved while semiconductors are manufactured using the current techniques.
• This is mostly because the USA has a stranglehold on the supply of critical equipment needed to make semiconductors which has made it very difficult for Chinese companies to build the necessary factories.
• However, Tsinghua is a fabless semiconductor maker meaning that it sends its designs to third parties and this too also appears to be in serious difficulty.
• I suspect that this is because it has assembled a motley array of mediocre assets and the task of tying them all together and making something great from them has proved to be too difficult for Tsinghua’s management.
• The net result is likely to be some form of restructuring but clearly, the international bondholders are concerned that they will be unfairly treated compared to Chinese creditors.
• Consequently, I think that the outlook for the semiconductor industry in China is pretty bleak especially as it appears to be unable to make the most of the current high demand for semiconductors.
• I see no way for China to extricate itself from semiconductor dependence, but in the areas of AI, Autonomous driving and quantum computing, China is a world leader capable of challenging the best that anyone else can offer.
• It is in these areas where the second and most telling phase of the technology war will really be fought.