In a significant downturn for China’s semiconductor sector, over 22,000 chip-related firms have ceased operations since 2019, with 2023 marking a record year for company closures. This is a challenging period for the industry, exacerbated by U.S. sanctions and a global decrease in chip demand.

The year 2023 has been particularly harsh, witnessing the closure of approximately 10,900 chip-related companies, averaging about 30 companies shutting down daily. This spike surpasses the 5,746 companies that folded in 2022 and is part of a five-year trend affecting chip design, semiconductor manufacturing, and wafer fab equipment sectors.

In 2023, over half of the 3,243 chip design companies in China generated annual revenues below 10 million CNY (approximately $1.4 million). Wei Shaojun, a leading figure at the China Semiconductor Industry Association and a professor at Tsinghua University, expressed concerns over the development trajectory of the Chinese industry.

These companies are struggling with more than just declining sales. They are dealing with financial losses from unsold inventory, resulting from an oversaturated market and wider economic downturns impacting the semiconductor industry. A significant miscalculation occurred in 2021 and 2022 when companies produced large quantities of chips anticipating continued high demand from the Covid-induced work-from-home trend. However, as the pandemic subsided, demand plummeted, leaving companies with excess inventory that’s rapidly depreciating.

Investment woes and survival strategies for China’s chip industry

The situation is particularly dire for smaller companies, which struggle to attract investments. U.S. restrictions on investments in the Chinese semiconductor industry, coupled with European investors’ reluctance due to U.S. sanctions, have compounded the problem. While larger firms like YMTC and Huawei have invested heavily in finding alternative suppliers and building secret fab networks, smaller companies lack the resources to adapt similarly. Although the Chinese government is investing in the sector — with a recent $1 billion infusion into HLMC — it cannot support every chip startup.

2023’s record number of company closures reflects the severe challenges faced by China’s chip industry: low demand, overstock, and funding difficulties. This has led to a significant shift in the semiconductor landscape, with the industry now dominated by larger companies, as smaller players are increasingly forced out of the market.

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