Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Tsinghua Unigroup's latest deal shows just how much of a struggle it is for China's chip industry to catch up with the West.

Instead of getting its hands on leading-edge technology from overseas, the venture capital affiliate of China's most prestigious university is folding Wuhan-based XMC into its own portfolio, Bloomberg News reports.

The consolidation somehow seems forced, as though Unigroup Chairman Zhao Weiguo was asked by government officials to do the deal. It's certainly not the direction Unigroup needs to be moving in.

XMC, or Wuhan Xinxin Semiconductor Manufacturing Corp., is a foundry. That means the company focuses on manufacturing chips, like Taiwan's TSMC and UMC, rather than designing them.

XMC also makes memory chips, which are ostensibly commodity semiconductors. The company says its focus is on flash memory -- a type of chip used to store data in progressively smaller devices. Details aren't clear, but the company website indicates standardized products such as memory and sensor chips are its mainstay, as opposed to more complicated and specialized components like processors.

The problem for Unigroup is not so much that the consolidation doesn't make sense. It kind of does, since the company is keen to be a player in memory. But getting bigger doesn't necessarily help Unigroup or China in their move toward getting better, and that's what the nation needs to do if it's to realize President Xi Jinping's dream of becoming technology independent. Chip manufacturing is all about having the best technology possible to make circuitry smaller. Global leaders in the field include Intel, Samsung, TSMC and Micron.

They do this by following a semiconductor precept known as Moore's Law, which states that the number of transistors on a chip will double approximately every 24 months as continued development enables reductions in the size of circuitry. The chipmaker that can produce the smallest circuits wins, as can be seen in the ongoing TSMC versus Samsung tussle for Apple orders.

Profit Challenge
Despite having some of the best memory-chip manufacturing technology in the world, Micron has struggled to hold onto margins while foundry TSMC has remained steady
Source: Bloomberg

Micron is another good example. Along with Samsung, the U.S. company is the world's best maker of memory chips. It not only has massive manufacturing capacity, but the leading-edge technology to ensure its chips are the tiniest, lightest and most power-efficient available, which in today's mobile age is what device makers demand.

Yet the memory-chip industry is extremely volatile, and being the best is no guarantee of continued sales growth or sustained profit margins. Even then, Micron has done better than most simply by surviving while competitors have gone under.

Income Inequality
Being at the top of the memory-chip industry hasn't guaranteed a quarterly net profit for Micron
Source: Bloomberg

What's telling about XMC is that it is only now moving into 45-nanometer manufacturing -- a technology that Micron was using at least four years ago, with the U.S. giant currently on the more advanced 20-nanometer process. 

At one point it looked like Unigroup was ready to make a play for Micron, but security concerns in the U.S. killed that idea before it could take hold. Other Chinese attempts to buy Western technology have ended for similar reasons.

It seems like these acquisition setbacks have forced China, and Unigroup, to become more desperate and push toward internal mergers. For sure, we can expect more such deals. But no amount of domestic consolidation can get around the fact that China's chip industry doesn't need to go big, it needs to think small.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net