MULTINATIONALS: AMD Flees China’s Crumbling Chip Sector

Bottom line: AMD’s sell-down of its China assets, and a record fine against Qualcomm earlier this year reflect China’s fading attraction for global chip makers due to technical and bureaucratic obstacles.

AMD sells down China operations

A trio of headlines from the chip-making sector is showing just how much China has lost its luster for big multinationals, as logistical and technological issues dog this once-promising industry. Leading the headlines is word that struggling US chip maker AMD (NYSE: AMD) is selling most of its Asia-based foundry business, including sizable China operations, to a Chinese partner.

That was followed by announcement of a new very domestic chip-making joint venture anchored by SMIC (HKEx: 981), China’s largest contract foundry that at one time had hopes of becoming a global giant. Last but not least is a headline showing that US giant Qualcomm (Nasdaq: QCOM) was the main recipient of China’s recent anti-monopoly fervor, paying 90 percent of the penalties meted out by one of the nation’s main anti-trust regulators in 10 cases so far this year.
Big multinationals once held out big hopes for making high-tech chips in China, and I can remember a time just a decade ago when many believed the country could produce the next Intel (Nasdaq: INTC) or TSMC (Taipei: 2330). That halcyon period lasted about 5 years starting around 2003, and saw names like Intel, AMD, STMicroelectronics (Paris: STM) and TMSC invest billions of dollars into China-based foundries. The period also saw the establishment of many homegrown players, led by SMIC, whose founder had close ties to Taiwan’s well-established industry.

Fast-forward to the present, where struggling AMD has just announced it is offloading its factories in Malaysia and China into a joint venture with Chinese partner Nantong Fujitsu Microelectronics. (English article; Chinese article) Under the deal, AMD will put its foundries in Suzhou and the Malaysian city of Penang into the venture, and will get $371 million cash and 15 percent of the new entity in return.

That would value the 2 Asian foundries at a relatively meager sum of about $500 million, though perhaps the valuation might be slightly higher if the Chinese partner is providing other assets. Still, even if the 2 foundries are worth up to $1 billion, the sum is probably still far less than AMD has poured into the pair of facilities over the years, reflecting limitations of such plant-building in Asia and China especially.

Made-in-China Chip JV

Next there’s the domestic joint venture, which will see SMIC pair with the Beijing-backed China IC Fund and several other partners in a new company with a relatively sizable 5.68 billion yuan ($900 million) in registered capital. The venture will mostly engage in equipment and property leasing, and I suspect SMIC will sell the venture a lot of its equipment and land and then lease them back. SMIC will hold just over 10 percent of the new venture.

The fact that SMIC had to turn to Chinese partners for this venture shows how far the company has fallen since its headier days a decade ago. In those earlier times many foreign firms like Intel and AMD might have jumped at the chance to invest in a company that held out big potential to become a global player. But now few if any big global firms would consider such an investment.

Finally there’s Qualcomm, which accounted for the lion’s share of 6.6 billion yuan imposed by the National Development and Reform Commission (NDRC) on 10 firms in anti-trust cases this year, according to a report from the regulator. (English article) Qualcomm was in headlines earlier this year when it settled an anti-trust case being conducted against it by the NDRC, resulting in a record 6.1 billion yuan fine. That investigation marked the crescendo or a broader campaign of probes against mostly major foreign firms in China.

China is the main manufacturing base for the majority of the world’s PCs, smartphones and many other consumer electronics, which is why the market is so important to Qualcomm and other chip makers. But the NDRC’s actions, which came largely after complaints from its Qualcomm’s local Chinese customers, certainly won’t help to reverse China’s reputation as an increasingly unfriendly place for investment by big global chip makers.

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