VC Roundup: Chinese tech firms are betting on chips

Chinese tech giants typically focus on the consumer market. But their appetite for semiconductors is growing. 

These deals highlight a trend: Chinese tech giants are trying to secure their future growth by making investments in the semiconductors industry.

Funding China’s semiconductor industry also underscores tech giants’ concerns about being cut off from the global semiconductor supply chain after the US effectively banned Huawei from sourcing American-made components. 

Other active chip investors are Tencent and e-commerce behemoth Alibaba, which have focused on investing in the artificial intelligence chips and computer processors that power their cloud computing businesses. Earlier this month, Tencent participated in artificial intelligence chip maker Enflame Technology’s RMB 1.8 billion (around $278.3 million) Series C.

Tencent and Xiaomi have been targets of Trump’s actions against Chinese tech firms, but they have so far not had trouble getting chips.

Increasing investment in semiconductors is also in line with Beijing’s push for self-sufficiency in strategically important technologies. Unlike Huawei, which is locked in geopolitical disputes with the US and is barred from most high-end semiconductors that use American technology, the other companies making these investments are largely free from US sanctions.

China has vowed to produce 75% of all the chips it uses by 2025—and it is putting a lot of money behind this goal. Total VC investments into China’s semiconductor industry quadrupled (in Chinese) in 2020 to RMB 140 billion from the previous year. The country has also set up a series of government-backed funds to support semiconductors startups, including a $29 billion “Big Fund.”

In this issue of VC Roundup, we look into how Chinese tech giants are making investments in semiconductors.

Huawei: The Shenzhen-based telecoms company, which produces everything from smartphones to base stations for next-generation 5G networks, has felt the pain of a shortage of semiconductors. The company may have to stop manufacturing smartphones in the middle of this year if the US doesn’t lift sanctions.

• In April 2019, Huawei set up its Hubble investment unit, led by Bai Yi, the then president of Huawei’s global financial risks control center. The company had RMB 700 million in registered capital when it was founded. In October, Huawei increased the investment unit’s registered capital to RMB 2.7 billion. Hubble has invested in 27 companies so far, all of them in the semiconductor sector.
• In August 2019, three months after Washington added Huawei to a technology export list, Hubble made its first investment in a Hangzhou-based battery integrated circuit (IC) designer.
• In 2020, Hubble invested in 20 semiconductors companies, according to Chinese corporate information platform Tianyancha (in Chinese).
• They include NineCube, a maker of chip-designing tools; ALLSEMI, a semiconductor manufacturing equipment maker; and Onmicro, an IC designer of processors and radio frequency (RF) front-end modules used in handsets.
• Industry insiders believe that Hubble’s investments are linked to Huawei’s plan to “de-Americanize” its supply chain. “The investments are clearly replacing US companies they can no longer get access to,” a chip industry executive told the Financial Times in December.
• Some of Hubble’s investments, such as RF module designers Onmicro and Evisionics, are aimed at replacing US counterparts, like Qorvo and Skyworks, said Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink. 

But chip design won’t “help too much” if they don’t have access to chip contract manufacturers like Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea’s Samsung, Randall added. TSMC and Samsung are also subject to US export restrictions on Huawei because their production lines contain American technology.

Xiaomi: Xiaomi made its first foray into chips in 2014 when it launched a semiconductor division that focuses on SoC design. In 2017, the unit, called Pinecone, launched its first and only mobile processor, the Surge S1, which was featured in Xiaomi’s Mi 5C smartphone.

• In 2019, Xiaomi began rethinking its chip ambitions by pivoting to investment. In July 2019, it bought a 6% stake in Shanghai-based chip designer VeriSilicon.
• Xiaomi has since become a more active chip investor than Huawei. In 2020, the company funded some 30 early-stage semiconductor firms, most of which are designers of smartphone chips.
• There is some overlap between Xiaomi and Huawei’s portfolios. Both companies have invested in Onmicro and SmartSens Technology, a Shanghai-based digital camera image sensors maker.

Internet companies: E-commerce giant Alibaba is also China’s biggest cloud computing service provider. The company has been pouring money into making silicon for its cloud computing business to reduce reliance on foreign chipmakers such as Intel and Nvidia.

Alibaba’s semiconductor push began in 2017. The company invested in a series of artificial intelligence chip makers such as Cambricon (in Chinese) and DeePhi Technology (in Chinese).

• In April 2018, Alibaba acquired C-sky, a designer of homegrown 32-bit processors for servers. Alibaba then merged C-sky and Damo Academy, an in-house semiconductor research institution founded in 2017 to form T-head, a chip-designing unit.
• T-head’s offerings include the Xuantie processor series and the Wujian SoC Platforms series, which are mainly used to power IoT devices; and the Hanguang neural processing unit (NPU), which is used in servers in Alibaba’s data centers, according to the company’s website.

Artificial intelligence chips have also caught Tencent’s eye. The company participated in three financing rounds for chipmaker Enflame between 2019 and 2021. 

• Tencent is China’s second-largest cloud computing service provider after Alibaba, but the company is not as active in semiconductor investments as Alibaba. 
• Apart from Enflame, the only other semiconductor firm Tencent had a stake in is Shenzhen-based SDMC, a smart television chipmaker. In August, Tencent led a RMB 44 million (in Chinese) financing round in SDMC.
• Internet companies’ investment in semiconductors is a “global phenomenon,” Randall of Intralink told TechNode. “Facebook, Google, Amazon, etc. all have their own chip teams now. Alibaba and Tencent followed this trend,” he said.

A mixed picture: While the US hasn’t targeted the majority of Chinese tech giants with technology export restrictions, some companies have already found themselves in the crosshairs of US-China geopolitical disputes. It’s unclear whether their investment strategies will mitigate this risk. Huawei has demonstrated that investing in chips can be more profitable than strategic.

• “For Chinese companies at least it is also some form of protection,” said Randall. “If we get cut off from Nvidia then we at least have some in-house expertise to maybe create something to keep our services running as they grow.”
• But Huawei’s efforts to invest in the domestic semiconductors supply chain didn’t prevent it from being cut off crucial chips it needs to produce smartphones. The company had to sell its budget handset brand Honor in November. Reuters reported this week that Huawei is in early-stage talks to sell its premium smartphone brands P and Mate.
• Randall says these may just be good investments. “Sometimes you can make more profit that way. Like Qualcomm makes more off a Xiaomi phone than Xiaomi,” he said.

Big deals: semiconductors edition

• Jan. 25: Xiaomi injects RMB 200 million into Cvitek, a Beijing-based chip designer for video surveillance equipment.
• Jan 7: Beijing-based AI chip designer Horizon closes a $400 million Series C2 led by British firm Baillie Gifford and Hong Kong-based Aspex Management.
• Jan 5: Enflame closes a RMB 1.8 billion Series C led by state-owned Citic Private Equity and participated by Tencent.
• Dec 28: Huawei’s Hubble investment unit injected more than RMB 10 million into Ninecube.
• Dec 21: Senscomm, a wireless semiconductors designer based in Jiangsu province, closes a RMB 150 million Series A led by Oriza Holdings and Xiaomi.