Beijing is facing obstacles in its push to consolidate the country’s fragmented semiconductor industry into a handful of national champions that can compete against large US and European rivals.
Earlier this year, the Chinese government convened a group of Chinese chip equipment makers to discuss a potential megamerger that would combine different technologies into a single state-backed giant, according to multiple people familiar with the talks.
The merger plan, led by the National Development and Reform Commission, is part of a broader policy shift aimed at streamlining China’s semiconductor sector, which Beijing sees as vital for strengthening its domestic chip industry amid continuing US export controls aimed at curbing the country’s high-tech ambitions.
However, discussions between the chip manufacturing equipment groups have faltered following opposition from both companies and investors over ownership structure and valuation, the people said. The NDRC did not respond to a request for comment.
“There were too many split interests,” said one person briefed on the negotiations. “The prospective sellers don’t want to sell at a loss and the buyers don’t want to pay a premium.”
Another individual added that talks were ongoing but were unlikely to result in the large-scale consolidation that the government had initially envisaged.
While Beijing’s initiative has hit some roadblocks, a rise in dealmaking indicates some progress is being made to streamline the country’s semiconductor industry.
There have been 26 semiconductor acquisitions announced so far this year, according to data from financial information provider Wind. The most high-profile deal was a merger announced in May between Hygon, which designs central processing units for servers and data centres, and supercomputer maker Sugon.
If completed, the activity would place 2025 potentially on track to match the post-pandemic high of 45 deals achieved last year.
Consolidation in the chip equipment space would help boost China’s bid to build a self-sufficient semiconductor supply chain and replace equipment from US groups such as Applied Materials and Lam Research, said Edison Lee, semiconductor analyst at Jefferies.
Currently, a Chinese fab buying local equipment has to use multiple vendors, whose technology is not well integrated. “In the equipment industry, it is difficult to be very successful as a single-product company. Fabs prefer to buy multiple machines from the same vendor, which makes it easier to use,” he added.
By consolidating, Beijing also hopes to better direct funding to firms deemed strategically significant.
“There has been a realisation that scattered investment doesn’t create the scale necessary to make the sector profitable,” said Lin Qingyuan, a semiconductor analyst at Bernstein. “It is focusing resources to create a few national champions that can compete in the international market.”
Yet scepticism remains about whether consolidation alone can deliver meaningful technological breakthroughs for China’s tech sector.
“A lot of the companies for sale have no defensible technology moat,” said a Shanghai-based chip investor. “It doesn’t mean it’s going to be a successful acquisition unless the partnership is bringing something strategic.”
Lin added that integration risks are high. “Often, the companies best positioned to buy an asset don’t want to buy the company because they understand why it’s underperforming and often believe the valuation is too high.”
The state-led campaign has also attracted a wave of interest from companies outside the chip sector, with listed firms — from real estate developers to fungicide and knitting machinery manufacturers — announcing plans to acquire semiconductor assets.
But many of the deals also fail to close. So far in 2025, eight deals that were previously announced have failed to complete, according to an FT calculation based on Wind data.
Chinese electronic design automation (EDA) leader Empyrean Technology announced a deal to acquire smaller rival Xpeedic in March, an acquisition that would have expanded its tool kit. Last month, the deal was ditched due to a failure to agree on terms.
Zhejiang Aokang, a leather shoe manufacturer, and Ningbo Cixing, which specialises in knitting machinery, have both recently abandoned proposed chip acquisitions, citing valuation disputes.
Valuation mismatches between buyers and state-backed sellers remain a persistent hurdle, according to chip industry insiders. “Many investors are unwilling to offload assets below their book value, even if financial performance has deteriorated,” said one chip investor.
Little progress has yet to be made in consolidating China’s sprawling network of foundries — a segment that remains highly fragmented and politically sensitive.
The past decade saw a surge in foundry projects backed by local governments, many of which built capacity in parallel, resulting in a glut of supply of mature chips and steep price competition.
Chip experts note that China could also benefit from streamlining its advanced fabrication market, to concentrate talent and the most advanced chip equipment machinery in one place instead of being spread across disparate projects.
Despite newer investments in advanced nodes to build cutting-edge chips for smartphones and AI applications — including investments in 7mn lines in Shenzhen and Shanghai — the industry continues to suffer from overlapping efforts and scattered talent.
“This is where consolidation is needed the most. But the local governments, which have a majority stake in these fabs, cannot sell for a big loss — so there are no willing buyers,” said one chip investor. “They do not want to be accused of losing the country’s assets,” they added.
Additional reporting by Nian Liu in Beijing