When the chips are down: China’s semiconductor supply chain hit by US embargo and lockdowns

Data Insight Dealspeak 10 May

When the chips are down: China’s semiconductor supply chain hit by US embargo and lockdowns

The stakes are rising in China’s semiconductor industry, as disrupted supply chains and an ongoing US ban on cutting-edge technology exports to the country stack the odds against domestic players.

Chinese semiconductor companies are striving to remain operational via closed-loop systems at a time when Shanghai, the most important of the four integrated-circuit (IC) centers in the country, is beset by coronavirus (COVID-19) lockdowns, with no apparent end in sight.

Shanghai operates an entire industry chain, providing chip design, fabrication, materials, equipment, assembly, packaging and testing. The city racked up revenue of CNY 257.8bn (USD 38.9bn) from semiconductor sales in 2021, accounting for around 25% of China’s overall sector haul, according to data from the Shanghai Integrated Circuit Industry Association.

As the current situation drags on, lockdown-induced supply-chain disruption is forcing some fabrication firms to mothball capacity expansion, with the logistics of sourcing materials and equipment increasingly becoming a lottery.

Delays to chip deliveries are spilling over to downstream clients in automotives and electronics. Auto chip firm OnSemi’s recent call to temporarily close its Shanghai logistics center, which only resumed operations in late April, has left industry observers wondering if the sector has become a busted flush.

The only consolation for China’s semiconductor companies is that domestic M&A remains strong, largely thanks to the country’s chip manufacturers turning away from imports as a result of the US tech embargo.

Still in the game: domestic M&A is holding up

Despite unpredictable supply-chain logistics amid perpetual lockdowns, investors and bankers continue to roll the dice and cut deals, with domestic M&A booming in China’s semiconductor industry.

In first four months of this year, domestic semiconductor M&A climbed to USD 8.1bn from 49 deals, already exceeding half of last year’s total deal value, which hit USD 14.4bn across 211 deals, according to Dealogic data.

The country’s domestic semiconductor M&A has been outperforming itself since 2017, peaking in 2020 at USD 24.3bn from 191 deals, suggesting investors and industry players alike are still betting on the sector’s future despite current headwinds.

Nevertheless, the biggest blow dealt to China’s technology sector, particularly the semiconductor industry, remains the US embargo, which represents a potential death knell to domestic players even when chips are down from temporary supply-chain disruptions.

Tough odds: US deals serious blow to Chinese semiconductor M&A

While China’s domestic M&A dealmaking continues to thrive despite the US tech ban, cross-border M&A is feeling the pinch, with both inbound and outbound investment facing major losses. The US embargo has changed the game for Chinese buyers seeking to acquire overseas targets – it is easier, it seems, to endure lockdowns of logistics rather than lockdowns of technology imports.

Only last month, China’s largest memory chip maker, Yangtze Memory Technologies, was reported to have violated American export controls by supplying telecommunications group, Huawei, with chips, sparking an investigation by the US Department of Commerce. In 2019, Huawei was added to a US Entity List of sanctioned companies.

Microfluidic chip maker VACURE Biotechnology, power IC maker AuSemi, and semiconductor packaging equipment maker Teyan Semiconductor Equipment are among Chinese semiconductor firms seeking international investment, as reported by Mergermarket.

International buyers interested in Chinese semiconductor assets have come mainly from South Korea, Japan and the UK since 2020, while investors from Taiwan and Hong Kong remain regular buyers of these assets in mainland China, according to Dealogic data.

However, given biting US sanctions, and supply-chain malaise, cross-border M&A among Chinese semiconductor companies is unlikely to recover any time soon. And the current Shanghai lockdowns could put them out the game for good.

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