When you've got too many players, capital spread too thin, and mounting pressure to compete with global semiconductor giants, what do you do? If you're China, you consolidate. And that's exactly what's happening right now.

Last week brought the clearest signal yet of this strategic shift. Two of China's leading chipmakers, SMIC and Hua Hong, which together account for over 7% of global foundry capacity, made nearly simultaneous announcements that they would buy out minority stakes held by government investment funds in their key subsidiaries. The timing appears to be more than coincidence.

Both deals involve buyouts of the same minority investor: China's National IC Fund, also known as the "Big Fund," alongside various local government investment vehicles. These state-backed funds need to recoup capital for new investments, particularly as the industry has become crowded with players of varying quality. It's a natural evolution of Beijing's semiconductor playbook: government capital helps establish domestic champions, then exits at higher valuations to pocket profits and fund the next generation of technology.

The Deals That Signal a New Era

The SMIC deal, announced on Monday, centers on SMIC Beijing, a subsidiary operating a fab using cutting-edge 12-inch wafer technology. SMIC will acquire the remaining 49% stake in SMIC Beijing for 40.6 billion yuan ($5.81 billion) from multiple sellers, including the Big Fund and two Beijing municipal investment vehicles, according to a company announcement.

The Hua Hong deal, announced two days later, follows a similar pattern. Hua Hong will acquire an additional 38.4% stake in Shanghai Huali Microelectronics, which operates two 12-inch wafer fabs in Shanghai. The transaction values the stake at 8.3 billion yuan. It involves four sellers, including Shanghai IC Fund, China IC Fund Phase II, and Guotou IC Fund.

Unlike many companies in China's chip sector, both SMIC and Hua Hong can actually afford these buyouts. They're relatively mature companies, both with around two decades of history, and they have strong cash flow plus access to credit and capital markets. That puts them in a different league from many of the upstart ventures that have struggled or collapsed entirely.

Why These Deals Make Sense

Both companies plan to fund their acquisitions primarily through issuing new shares, which makes sense given their stocks are trading near multi-year highs. For the exiting investors, the transactions almost certainly deliver handsome returns.

But for SMIC and Hua Hong, the strategic rationale goes deeper. SMIC's case is fundamentally about profit consolidation. While SMIC Beijing was already contributing revenue to the parent company, nearly half of the subsidiary's profits were flowing to minority shareholders. By acquiring the remaining 49%, SMIC will now capture 100% of the earnings from one of its most profitable facilities among its 10 fabs.

Hua Hong's rationale differs slightly. The asset being acquired has been competing directly with Hua Hong's own major Shanghai fab. The consolidation eliminates this internal competition while also bringing Huali's revenue fully onto Hua Hong's books, a move that should produce a significant revenue jump and better profitability.

The Government Investment Playbook and Its Complications

This brings us to Beijing's broader strategy of using government funds to promote industrial development. The logic is sound enough. Wafer fabs require massive investment and face heavy depreciation in their early years, making government financing a sensible way to support them initially.

However, the track record reveals this strategy can also lead to spectacular waste as ill-conceived projects line up alongside the better ones, all in search of government handouts. One of the most notorious failures is Wuhan Hongxin Semiconductor, which aimed to become one of China's most advanced foundries at its launch. Instead, the project collapsed into bankruptcy in 2020 after burning through more than 15 billion yuan without ever producing a single commercial chip.

More recent cases suggest such failures aren't uncommon, though they receive less publicity. Wusheng Electronics, a Shanghai project launched in 2019, initially planned total investment exceeding 18 billion yuan with a five-year construction timeline. Less than three years later, the project stalled completely, and the company filed for bankruptcy last year without ever beginning meaningful production.

Both SMIC and Hua Hong have histories that predate this era of highly targeted chip investment, and things haven't always worked so smoothly across the sector. China's chip industry is plagued with massive losses from failed projects and stranded investments in lackluster companies, complications that help explain why consolidation has become urgent.

The Consolidation Wave Spreads

For the broader Chinese semiconductor industry, years of government-fueled expansion have created conditions ripe for consolidation among surviving companies. The "Big Fund," established in 2014, has been the primary catalyst, raising 138.7 billion yuan in its first phase, 200 billion yuan in its second, and 344 billion yuan in its third phase in 2024.

Now, consolidation is sweeping through every segment, not just chip production, but also chip design, materials, equipment manufacturing, and EDA tools.

Last September, major wafer manufacturer National Silicon Industry Group announced plans to fully acquire three of its subsidiaries. Three months earlier, semiconductor equipment leader Naura bought 17.9% of rival Kingsemi's shares from two state-backed investors for 31 billion yuan.

The pace is accelerating. According to data analytics firm IT Juzi, China recorded 93 semiconductor M&A transactions last year through September, a 33% increase from 70 deals in the year-ago period. The total transaction value of those deals reached an estimated 54.9 billion yuan, up nearly 50% year-over-year.

Government fingerprints are visible across these deals. State-backed funds that invested during the expansion phase are now facing strong pressure to exit and recycle capital into new government priorities.

Not Every Deal Works Out

However, not all consolidation attempts succeed. A prominent example is the failed merger between AI chip and CPU maker Hygon and server manufacturer Sugon. Announced last June, the deal was later abandoned by December, with the companies citing the transaction's large scale and the complexity of coordinating multiple stakeholders.

Despite such setbacks, we can almost certainly expect more consolidation this year. The wave represents a necessary evolution as Beijing pursues self-sufficiency across the semiconductor value chain amid intensifying U.S.-China technology competition.

The question is no longer whether consolidation will happen, but who will emerge as the primary consolidators, positioned to become China's answers to global giants like Taiwan's TSMC, South Korea's Samsung, and U.S. giant Qualcomm (QCOM). Based on last week's deals, SMIC and Hua Hong are making their intentions clear: they want to be among the winners when the dust settles.