In Depth: Chip Foundries Kick Off State-Backed Consolidation Drive

China’s semiconductor industry is undergoing its most substantial consolidation in years, led by the two largest foundry companies, Hua Hong Semiconductor Ltd. and Semiconductor Manufacturing International Corp. (SMIC). Amid increasing U.S. export controls and a global surplus in mature chip technologies, Beijing is shifting from building numerous fabs to consolidating companies in order to foster strong, globally competitive “national champions” and streamline a fragmented supply chain. The September 2025 internal acquisitions by Hua Hong and SMIC, aimed at tightening control over subsidiaries and reducing competition, triggered a sector-wide rally as investors inferred strong government support for larger, more efficient platforms [para. 1][para. 2][para. 3].

Specifically, Hua Hong announced its absorption of sister company HLMC, while SMIC revealed the full takeover of subsidiary SMNC. The market responded favorably: Hua Hong’s shares rose 45.9% and SMIC’s climbed 22.1% in September alone. These moves are at the vanguard of a wider wave affecting China’s entire semiconductor value chain. According to IT Juzi, 93 semiconductor acquisitions were announced from January to September 2025, a year-on-year increase of 33%, with transaction values jumping nearly 50% to 54.9 billion yuan ($7.6 billion). Over 60% of these involved mainland-listed firms acquiring smaller, private companies [para. 4][para. 5][para. 6].

This acquisition surge reflects both top-down government policies and bottom-up market pressures. Since 2024, regulators have eased approval processes and encouraged industry consolidation: for example, the China Securities Regulatory Commission introduced new policies and the STAR Market implemented reforms to support tech-sector takeovers. Local governments and state capital, such as Shanghai SASAC, are backing sector-specific funds. Meanwhile, funds that invested heavily in China’s “chip self-sufficiency” campaign since 2019 are nearing their exit windows; the industry has attracted over 700 billion yuan since 2020, and many investors are content to exit with annualized returns as low as 4–8% [para. 7][para. 8][para. 9][para. 10][para. 11][para. 12][para. 13][para. 14].

Hua Hong’s acquisition of HLMC, which operates China’s first 12-inch fully automated wafer fab, resolves long-standing competition within the group, letting the company focus on developing 28-nanometer and smaller processes. SMIC’s acquisition of SMNC consolidates resources in mature manufacturing nodes, echoing the strategy that propelled China’s display industry leaders. These deals also allow state and venture funds to exit at favorable valuations while strengthening internal corporate control [para. 15][para. 16][para. 17][para. 18][para. 19][para. 20][para. 21].

The consolidation wave extends beyond foundries. Notable deals include the planned merger of CPU developer Hygon and server maker Sugon, aiming to create a vertically integrated computing platform valued at over 200 billion yuan. Upstream, National Silicon Industry Group is acquiring three subsidiaries to achieve reliable large-scale wafer supply, and equipment makers like Naura are acquiring competitors to build broader product portfolios. These strategies parallel global giants like Nvidia, AMD, and Applied Materials, which have used mergers to create integrated supply chains and product suites [para. 22][para. 23][para. 24][para. 25][para. 26][para. 27].

However, the industry faces challenges: significant numbers of startups are struggling amidst weak demand for conventional chips, and hundreds have closed or filed for bankruptcy in recent years. Structural imbalances persist—AI-related chips are in high demand, but sectors like microcontrollers and analog chips face severe oversupply and price wars. In response, Chinese regulators have initiated anti-dumping investigations into U.S. analog chips [para. 28][para. 29][para. 30][para. 31][para. 32][para. 33][para. 34][para. 35][para. 36].

Despite policy support, integration brings risks such as operational inefficiencies, goodwill impairments, and overcapacity. Ultimately, most industry experts view consolidation as inevitable and essential for survival—scale and efficient supply chains are prerequisites for Chinese chipmakers to compete internationally [para. 37][para. 38][para. 39][para. 40].