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Record number of Chinese chip firms going out of business

A record number of semiconductor-related Chinese corporate entities have ceased to exist in the first eight months of the year, according to the latest data from a domestic business registry service, signalling the sputtering state of the country’s chip self-sufficiency drive.

As many as 3,470 companies – including entities that use the Chinese word for “chip” in their registered names, brands or operations – deregistered in the January-to-August period, according to statistics from business database platform Qichacha. That number surpassed the 3,420 such firms that closed in 2021 and the 1,397 that went defunct in 2020.

“The semiconductor industry is a capital-intensive sector”, Zheng Lei, an adjunct professor at the Shenzhen Finance Institute of the Chinese University of Hong Kong, said on Thursday. He indicated that some newly registered chip firms may find it hard to stay in business against tough competition and the current harsh market environment.

The wave of closures has come after an investment frenzy by China’s public and private sectors in the past two years to help deliver on Beijing’s goal of semiconductor self-sufficiency. The country added a whopping 47,400 new chip-related businesses in 2021 after recording 23,100 in 2020.

While China’s leaders continue to push efforts that address the country’s strategic “choke points”, especially integrated circuits (ICs), the recent spate of chip firm closures show that the faltering domestic economy, weak consumer sentiment caused by Covid-19 lockdowns and other pandemic control measures, and rising tensions between Beijing and Washington are weighing on the semiconductor sector.

The tide of Chinese chip entrepreneurship has “come to an end”, according to Zhong Lin, founder of chip design firm GSR Electronics in southeastern Fujian province, in a post published on September 6 under the WeChat account “Semiconductor Industry Observations”. Zhong indicated that many chip start-ups will go under when investor funding dries up owing to a lack of profit prospects.

Chip design start-up Nurlink, for example, recently made headlines for not paying the salaries of its employees in May and June. That comes less than a year after the firm completed a financing round of 200 million yuan (US$28.73 million).

The extended lockdown in Shanghai, where many multinational and domestic manufacturers are located, also dimmed the prospects for many chip firms. Many of the companies permitted to operate during that period worked at a fraction of their full capacity amid broken supply chains and disrupted logistics.

That two-month lockdown, which ended on June 1, saw demand for consumer electronics plunge, curbing the growth of China’s semiconductor industry in the first half, Yu Xiekang, vice-chairman of the China Semiconductor Industry Association, said in August.

China’s import volume of ICs declined more than 12 per cent in the first eight months of the year amid weakening demand and disrupted production, according to official customs data.

In August, China’s factory activity contracted for the first time in three months amid weakening demand, as power shortages and fresh coronavirus flare-ups disrupted production, according to the Caixin/Markit manufacturing purchasing managers’ index (PMI) survey. It said the PMI slid to 49.5 in August from 50.4 in July.

That echoed China’s earlier released official PMI reading of 49.4 in August. The 50-point mark in PMI, which measures the prevailing direction of economic trends in manufacturing, separates growth from contraction on a monthly basis.

Washington, meanwhile, has been working on an executive order that would allow the US government to review and block certain American investments in hi-tech sectors abroad, especially in China, on the grounds of national security.

That would follow the US government’s ban on Nvidia Corp and Advanced Micro Devices from selling chips used for artificial intelligence chips and high-performance computing work to China.

In August, new export controls on technologies for the production of advanced chips were rolled out by the US. That came several days after US President Joe Biden signed into law the Chips and Science Act, which provides nearly US$53 billion in semiconductor production incentives on American soil. South China Morning Post

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