China’s two largest pure-play foundries, SMIC and Hua Hong Semiconductor, are in the middle of significant consolidation efforts that demonstrate how industrial policy is reshaping the country’s chip sector, with SMIC about to take full control of a subsidiary for US$5.8 billion and Hua Hong set to acquire 97.5% of Shanghai Huali Microelectronics from its state-owned parent for US$1.2 billion.
The two multi-billion-yuan deals come as China’s access to advanced manufacturing equipment remains constrained by U.S.-led export controls, forcing domestic players to rethink how they scale, where they invest, and which parts of the semiconductor market they prioritize. While the most obvious and immediate aim is capacity and operational efficiency, the broader objective is to harden China’s semiconductor supply chain against external pressure while consolidating state resources around a smaller number of national champions.
Consolidation over expansion
According to the South China Morning Post, SMIC’s proposal to acquire its Beijing-based subsidiary, SMIC Jingcheng, for roughly ¥40 billion is emblematic of what is becoming an emerging trend. The Beijing fabs are already majority owned by SMIC, but bringing them fully onto the parent’s balance sheet simplifies governance, capital allocation, and future expansion planning. Meanwhile, Hua Hong is pursuing a similar approach by acquiring Shanghai Huali, its closely linked sister foundry, in a deal valued at more than ¥8 billion.
These might look like internal restructurings on paper rather than straight-up mergers between rivals, but they represent a deliberate pivot away from the fragmented growth model that defined China’s foundry build-out over the past decade. Instead of creating new entities to chase specific technologies or regional subsidies, Beijing now appears to be encouraging consolidation around existing leaders, with state investors providing the financial backstop.
Why? Because building and equipping fabs has grown dramatically more expensive, even at mature process nodes. At the same time, export controls have reduced the returns on chasing leading-edge manufacturing, particularly below 7nm. By consolidating, SMIC and Hua Hong can pool cash flows from profitable legacy production, reduce duplicated R&D and administrative overhead, and present a more coherent face to regulators and customers.
A deliberate focus on mature nodes
(Image credit: SMIC)
Perhaps the most striking feature of China’s current foundry strategy is not what it is building, but what it is not. While SMIC has demonstrated limited capability using DUV lithography, the bulk of new capacity tied to these consolidation moves sits at 28nm and above, including 40nm, 55nm, and 65nm processes.
These nodes are far, far away from the prestige of leading-edge 2nm or 3nm, but they remain both commercially viable and important. Automotive microcontrollers, power management ICs, display drivers, connectivity chips, and a wide range of industrial and consumer components still rely on mature manufacturing. Global shortages during the pandemic — and the recent, still-ongoing Nexperia-Wingtech spat — highlighted just how fragile supply at these nodes can be.
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