Chips are down as China semiconductor plant goes belly-up

China’s ambitions to become self-sufficient in the production of chipsets have been dealt a serious blow with the closure of a state-backed semiconductor plant.

Wuhan Hongxin Semiconductor Manufacturing Co (HSMC) is letting go of all of its staff, according to local press reports, a clear sign that the troubled company is shutting up shop. Staff at the plant received a WeChat message asking them to resign, making it clear that there are no plans to restart production, the South China Morning Post reported, citing information shared by Caixin Media. The move affects 240 staff.

An $18.5 billion project, HSMC has been beset by problems pretty much since it opened for business in late 2017, and funding issues drove it into the ground last year. It was taken over by the local government at the back end of last year, but it now appears it is closing for good.

The news is significant because it comes as China battles with a shortage of chipsets due to US supply chain restrictions. With the new administration in the US showing little sign of thawing relations with Beijing thus far, the country needs to take matters – chipset production, that is – into its own hands.

However, the closure of HSMC may not be as great a blow as it might first appear, despite the fact that it is one of many failures in this market.

The Global Times quotes industry analyst Ma Jihua as saying that the project’s collapse is not indicative of the state of China’s semiconductor industry as a whole. Furthermore, since HSMC has been in trouble for a couple of years, its failure is in line with industry watchers’ expectations.

“There may be more failures in the sector in the future, as there [were] too many start-ups established two or three years ago,” Ma told the paper. People should take a longer-term view of the Chinese semiconductor market, he said. Growing investments in that market will be unaffected by the collapse of HSMC or indeed any other similar start-ups, he predicted.

Indeed, the South China Morning Post notes that 10 or more high-profile, government-sponsored semiconductor projects are reported to have gone bust over the past two years. In October the state’s National Development and Reform Commission (NDRC) said the government would increase supervision of new entrants in the semiconductor space to protect against the potential for wasted resources.

Many of China’s semiconductor projects have been poorly planned and financed, the paper pointed out. HSMC was a notable example of this, and had the added issue of being run by people with no experience of the market. Few in the semiconductor space had even heard of HSMC founders Li Xueyan and Cao Shan, it said, which raised concerns from the outset of the project.

China needs to make its own chipsets in large enough volumes to meet its technology needs. That is certainly a concern. But it can probably afford to lose a handful of start-ups along the way.