A new topic has arisen in Chinese media lately: almost 10,000 chip companies were closed and deregistered in 2021 and 2022. Whether that is the result of the U.S. government's export control is a hot discussion topic in the industry.
Chinese state media, including People's Daily and CCTV, reported the data in February 2023, but at that time it was more a call to the Chinese chip companies, saying they should recognize reality, give up fantasy, and turn towards R&D. The call urged not to repeat the mistake of being subject to technology restrictions.
The closure of nearly 10,000 chip companies 2021 and 2022 has again come up for discussion as China's consumer electronics market now faces stagnant demand the downward cycle of the semiconductor industry is not yet approaching the bottom. Some believe China's policy of localization in its chip industry is now entering the "slow lane."
The past two successive U.S. presidential administrations have enacted multilple bans and export controls against China, but it was not this that caused the closure of chip companies. Nearly 70,000 chip companies were newly registered in 2020 and 2021. It is no surpprise to observe this massive deregistration. Hot money flowed into the establishment of these highly homogeneous IC design companies in recent years, but with insufficient competitiveness, failure comes quickly. The rush to cash in on the semiconductor industry after the escalation of China-US trade war in 2018 contributed to the easy-come funding of "fake tech companies" and, quickly thereafter, their easy-go closure.
Short supply in the Chinese consumer market has turned into structural suppy-demand imbalance since 3Q21. Specifically, multiple black swans appeared in 2022, forcing the semiconductor industry enter a down cycle of inventory digestion in 2H22.
Ding Xing Quantum, a Chinese private equity firm, has invested substantially in IC design companies since 2016. At that time, an IC design company could be worth around RMB200–300 million (US$28–43 million), but the amount soared to over RMB1–2 billion in 2019 for a startup – a sign of an investment bubble.
The semiconductor industry is capital-, technology-, and talent-intensive. Even with sufficient funds, the company needs to recruit talents, invest in R&D, and secure enough capacity from foundries to survive in the long term. Now that the gloal economy is in a downturn, chip companies face a dual-decline of price and shipment, climbing costs in the most recent two years due to inflation, and the shortage and costliness of high-end chip talents.
The massive closures of Chinese chip companies in the past two years is a clear sign of this semiconductor downturn.