Deal-making in the semiconductor sector likely to accelerate with Beijing’s upcoming $143bn support package
Deal-making in the semiconductor sector likely to accelerate with Beijing’s upcoming $143bn support package
Venture capital (VC) is stepping into the gap opened up by the global shortage of semiconductors. This scarcity was driven by the higher demand generated when the pandemic accelerated digitalization, against a backdrop of US-China trade tensions.
Last month, Wuxi-based Hua Hong Grace (H-Grace) raised $4bn in the largest round of VC financing for a semiconductor company in history (Fig. 1). H-Grace focuses on the production and sale of integrated circuits and 12-inch (300mm) wafers. These are larger than their 8-inch predecessors, provide more space for intricate circuitry, and help create the advanced and complex microchips typically used in electric vehicles and smartphones.
H-Grace is the joint venture of Grace Semiconductor Manufacturing Corp, Hua Hong Semiconductor, SINO-IC Capital, and a Wuxi municipal entity. Judging by the investor profile, the outsized financing is part of a continued government effort to develop a homegrown semiconductor industry.
Beijing-based SINO-IC Capital was set up in 2014 to manage assets of the state-backed China Integrated Circuit Industry Investment Fund, commonly referred to as the ‘Big Fund’. The ‘Big Fund’ helped propel the growth of the two largest wafer foundries on the mainland: Shanghai-headquartered Semiconductor Manufacturing International Corporation (SMIC) and listed company Hua Hong Semiconductor. The latter is also one of the investors in H-Grace. The ‘Big Fund’ and SINO-IC Capital were recently in the news over corruption scandals among top executives, but remain vehicles through which the government commits VC to semiconductor companies.
China will be upping the ante in the face of export restrictions imposed by the US in October last year. These included barring American semiconductor companies from selling to China and banning the supply of graphics processing units, crucial for artificial intelligence applications. Reuters reported that Beijing is about to roll out a $143bn support package for its semiconductor industry, which will also include tax credits and subsidies for production and research.
With such strong government support, China dominates VC deals in the semiconductor space, accounting for around 90% of the total number in the past five years. APAC, led by China, stepped up regional investments in semiconductors in 2021 and 2022. From 242 deals in 2019 and slightly over 300 deals in 2020, the number of VC deals in the semiconductor sector shot up to 534 and 564 in 2021 and 2022, respectively. Annual aggregate deal values in those two years also jumped to $11.1bn and $9.5bn, respectively (Fig. 2).
China aims to catch up with its Asian counterparts by way of sizeable state funding. South Korea is home to Samsung and SK Hynix, two of the largest semiconductor manufacturers in the world, while Taiwan is home to TSMC and accounted for 64% of global foundry population, as of 2022. TSMC has plans to more than triple investments at its newly-built plant in Arizona to $40bn, while also building a factory in Japan. Japan also announced this month that it will subsidize capital investment in power chip factories, in exchange for 10 years of guaranteed production there.
Given the strong international relations between the US and Taiwan, as well as Japan, achieving semiconductor supply chain independence has become one of China’s key priorities.
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