Tsinghua Unigroup: China’s hopes of semiconductor self-sufficiency rest on a bailout

Debt-ridden Chinese chipmaker Tsinghua Unigroup needs a champion with deep pockets. A consortium led by ecommerce giant Alibaba would fit the bill. It is reported to be considering a Rmb50bn ($7.8bn) takeover. The true cost could be far higher.

Alibaba’s interest makes a certain amount of sense. Its cloud computing business is growing quickly, accounting for about a tenth of the group’s total, up 29 per cent to $2.5bn in the quarter to June compared with last year. Sourcing a stable supply of server chips matters. Supply chain constraints and the risk of Chinese companies being cut off by chipmakers based in the US or those using US technology all pose a threat to the business.

Yet buying Unigroup would be more of a bailout than a strategic acquisition. Unigroup owes more than $16bn to bondholders. It has defaulted on $3.6bn worth of bonds. Local governments are reluctant to take on the 51 per cent stake that Tsinghua University is attempting to offload, wary of the debt pile.

For China, a Unigroup deal with Alibaba would avoid a messy bankruptcy that might add to domestic property sector woes. It would bolster Chinese hopes of chip self-sufficiency, which requires the ability to both design and manufacture advanced chips. Alibaba’s years of research in chip design would help.

For the buyer, however, Unigroup’s debt is just the beginning. Unigroup has burnt through a cash pile of $47bn with little to show for it in terms of global chip market share. Free cash flow was minus $1.8bn in the first half of last year. Net debt is many times even its peak ebitda from 2018. Producing large quantities of quality chips will require considerable investment.

Alibaba is relatively new to the semiconductor industry. It has successfully designed an advanced Arm-based semiconductor this year but its core strengths do not lie in engineering, manufacturing and restructuring. Shares are down more than 15 per cent this year. Taking on Unigroup would be an expensive way to win favour with Beijing.

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