China's SMIC and Hua Hong Pursue Multibillion-Dollar Deals to Consolidate Chip Production

Two Deals Put China's Biggest Foundries on a New Course

China's two largest contract chipmakers, Semiconductor Manufacturing International Corporation, known as SMIC, and Hua Hong Semiconductor, are pursuing separate acquisitions worth a combined 48.87 billion yuan. The deals would bring key manufacturing subsidiaries more firmly under their control as the industry faces restrictions on advanced equipment and growing pressure to use its resources more efficiently.

SMIC intends to acquire the remaining 49% of Semiconductor Manufacturing North China, its subsidiary in Beijing, for approximately 40.6 billion yuan, or $5.8 billion. Hua Hong plans to buy a 97.5% interest in its sister foundry, Shanghai Huali Microelectronics, for 8.27 billion yuan, or about $1.2 billion.

The announcements came within days of each other. As of January 6, 2026, they point to a broader effort, driven by industrial policy, to move beyond the fragmented factory expansion of the previous decade and concentrate production, profits and investment within leading companies. Their close timing suggests coordination, although the deals remain separate transactions.

A foundry makes chips for customers that design them. Bringing related foundries together can give a company greater control over manufacturing capacity, customer orders and spending. In these cases, consolidation also addresses two different problems: SMIC wants to retain all the earnings of a profitable subsidiary, while Hua Hong wants to reduce competition between related businesses.

The shift reaches beyond corporate ownership. United States export controls have narrowed China's access to the equipment needed for the most advanced chips. At the same time, large investments in older manufacturing technologies have created opportunities to supply essential components, alongside a growing risk that factories will produce more than customers need.

Why SMIC Wants Full Control in Beijing

Semiconductor Manufacturing North China is already part of SMIC's operations. Buying the remaining 49% would turn the Beijing business into a subsidiary wholly owned by SMIC, changing who receives its profits rather than establishing an entirely new manufacturing operation.

The Beijing facility is one of the most profitable among SMIC's ten fabrication plants, commonly called fabs. Under the existing ownership structure, nearly half of its profits go to minority shareholders. Full ownership would allow SMIC to retain 100% of those earnings.

The sellers include the China Integrated Circuit Industry Investment Fund, commonly called the Big Fund, and several investment entities backed by Beijing's municipal government. The proposed transaction would move their ownership interests into the listed foundry business and give SMIC more direct command over a valuable asset.

The 40.6 billion yuan purchase is therefore principally a move to consolidate ownership and profits. Its value to SMIC lies in keeping a larger share of the returns from an established operation while bringing decisions about that operation under one corporate owner.

Hua Hong Seeks to End Competition Within Its Group

Hua Hong's proposed purchase of 97.5% of Shanghai Huali Microelectronics addresses a different kind of inefficiency. Hua Hong has historically concentrated on specialty manufacturing processes, while Huali has focused on advanced logic chips, which carry out computing tasks.

Huali's expansion into manufacturing at 28 nanometers and 14 nanometers brought the businesses into closer competition. Their product lines began to overlap, leaving sister companies bidding for some of the same customers and competing for resources within the same wider industrial group.

The acquisition would combine capacity and resources under a more unified strategy. It is intended to reduce duplicated research and development, simplify administrative work and give customers a more coherent choice of manufacturing services.

Hua Hong also expects the transaction to add roughly 38,000 wafers per month of capacity at the 40 nanometer and 65 nanometer levels. A wafer is the base on which many chips are manufactured before they are separated into individual components. That capacity would expand Hua Hong's access to processes used for a broad range of everyday electronics.

Export Controls Change the Manufacturing Choices

Restrictions led by the United States are a major force behind China's restructuring. They have severely limited access to advanced chipmaking equipment, particularly extreme ultraviolet lithography tools. Lithography is the process of transferring tiny patterns onto a wafer to form a chip's circuits.

Extreme ultraviolet equipment is especially valuable for producing the smallest features. Without it, making chips at the most advanced process levels, such as 3 nanometers or 2 nanometers, becomes extremely difficult and expensive. Those limits affect how Chinese manufacturers decide where to spend money and which technologies to pursue.

SMIC and Hua Hong are consequently putting greater weight on areas where they can remain competitive and exercise more control over their production. Instead of committing resources solely to the race for the smallest processes, consolidation helps them strengthen manufacturing businesses that can operate within the equipment restrictions.

Larger organizations can spread the high cost of equipment that remains available across more production. They can also coordinate complex techniques that use deep ultraviolet lithography to make relatively advanced logic chips. These techniques require multiple patterning steps, meaning manufacturers repeat parts of the patterning process to create finer features.

The financial and technical demands of those repeated steps make scale useful. A unified business has more room to allocate equipment, engineering work and capital across its factories. The restructuring is therefore about managing political and supply risks as well as improving manufacturing margins.

Older Processes Still Make Essential Chips

Processes of 28 nanometers and larger are commonly described as mature nodes. The group includes technologies such as 40 nanometers, 55 nanometers and 65 nanometers. Although public attention often centers on the smallest transistors, much of the global semiconductor market relies on these established processes.

Automotive microcontrollers, power management integrated circuits, display drivers and connectivity chips predominantly use older manufacturing technologies. These components control functions, manage electrical power, operate screens and support connections in cars, industrial equipment and consumer electronics.

The pandemic exposed the vulnerability of their supply chains. Shortages of chips made with mature processes disrupted the production of cars and consumer electronics around the world. China identified that weakness and directed substantial investment toward increasing capacity in this part of the industry.

Industry estimates put more than half of new global capacity additions for mature nodes through the middle of the 2020s in China. Hua Hong's expected addition of roughly 38,000 wafers per month at 40 nanometers and 65 nanometers belongs to that wider expansion.

China's investment serves two purposes. More domestic production can reduce dependence on foreign suppliers for components needed by its own economy. It can also position Chinese foundries as suppliers able to make large volumes at low cost for customers elsewhere that still need these chips.

The commercial opportunity comes from serving real, continuing demand for established technologies. The danger comes from the amount of capacity being built to meet it. Even essential chips can become difficult to sell profitably when manufacturing output grows faster than orders.

State Funds Move From Investors to Sellers

Government investment plays a central role in the financial structure of both transactions. The sellers are primarily funds backed by the state, reflecting how public capital helped establish and expand China's semiconductor manufacturing base.

The Big Fund raised hundreds of billions of yuan across its first three phases to support the industry. Its involvement in the SMIC transaction illustrates a later stage of that financing cycle: an investment fund can sell its stake once a business has developed, while the operating company takes greater ownership of the asset.

Both SMIC and Hua Hong plan to finance their acquisitions largely by issuing new shares. Their share prices are trading near highs reached over several years, making stock a practical way to pay for large ownership transfers while preserving cash.

The exiting investors stand to secure substantial profits. For the foundries, paying mainly in shares leaves more liquidity available for operating costs and research. Liquidity means money that a business can readily use to pay its bills and finance its work.

The arrangements also give state investors a route to recycle capital into other technological priorities, including equipment manufacturing and advanced packaging. Advanced packaging concerns how chips are assembled and connected. The financial aim is to strengthen the leading foundries while allowing public investment to support the next stage of industrial development.

Consolidation Replaces Fragmented Expansion

China's earlier manufacturing push produced a wide spread of projects, subsidiaries and investment partnerships. That structure helped finance expansion, but it also left companies with divided profit streams, overlapping product plans and repeated spending on similar work.

SMIC's Beijing purchase and Hua Hong's Huali acquisition tackle those weaknesses from different directions. SMIC would bring all the earnings of an already profitable facility into the parent company. Hua Hong would join businesses whose manufacturing services have become increasingly similar.

Both transactions would give the acquiring companies more control over where to place capital and how to organize production. A larger operation can make decisions across multiple facilities instead of having related businesses compete independently for customers, equipment and development funding.

The wider policy aim is to build stronger national champions capable of directing resources toward strategic priorities. In a business with expensive factories and demanding manufacturing processes, scale increasingly affects whether companies can keep costs manageable and remain competitive.

Consolidation still requires practical changes after ownership transfers. Combining research programs, reducing administrative duplication and coordinating factories are management tasks, rather than automatic benefits of a purchase. The commercial gains depend on how effectively the businesses bring those operations together.

More Chinese Capacity Could Push Prices Lower

Chinese foundries are adding tens of thousands of wafers of monthly production capacity. If that output grows faster than demand for chips made with mature processes, the market could face a surplus, putting downward pressure on prices.

Competitors in Taiwan, Japan and Southeast Asia that depend heavily on these manufacturing segments could face tighter margins. Chinese companies backed by state capital may be able to accept thinner margins while competing for market share, making it harder for other suppliers to match their prices.

Customers could respond in different ways. Businesses focused on price may buy from China to obtain lower costs and dependable supply. Some Western companies may avoid Chinese manufacturing because of geopolitical concerns or regulatory requirements, even when suppliers elsewhere charge more.

Some Western companies have already begun diversifying their supply chains away from China to reduce risks associated with export controls and intellectual property protection. That movement may preserve demand for established foundries outside China despite the growth of Chinese capacity.

The result could be a market divided partly by price and partly by political and regulatory choices. Chinese foundries may capture a substantial share of production using mature processes without entirely displacing competitors in regions closely aligned with United States trade policies.

Failed Projects Show the Cost of Expansion

Wuhan Hongxin Semiconductor remains a warning about the risks of large industrial ambitions. The project sought to become a leading foundry but collapsed into bankruptcy in 2020 after consuming more than 15 billion yuan without producing a single commercial chip.

More recent failures, including the Wusheng Electronics project in Shanghai, show that substantial investment alone cannot ensure success. Consolidating established operations may address some of the weaknesses of fragmented expansion, but the sector still faces difficult financial and operating choices.

Excess capacity is one of the clearest risks. If customer demand fails to keep pace with new factories and production lines, price wars could lead to financial losses. Bringing more output under a single owner does not remove the need to find enough buyers at prices that cover costs.

Large acquisitions also require managers to combine corporate cultures, bring manufacturing processes into alignment and handle increased debt burdens. Those tasks can strain even experienced teams, especially while they are also working around equipment restrictions.

Regulators have begun investigations into alleged dumping of foreign analog chips, signaling a more protective trade stance. Dumping concerns goods sold at unfairly low prices. Such investigations could invite retaliation and add another layer of uncertainty to a sector already shaped by trade restrictions.

Concentrating production in fewer leading companies also concentrates exposure. A severe sanction or technological obstacle affecting a major consolidated producer could disrupt a wider part of China's domestic supply chain than a problem confined to a smaller, isolated business.

Key Points

• SMIC plans to buy the remaining 49% of its Beijing subsidiary for approximately 40.6 billion yuan, or $5.8 billion, retaining all its profits.
• Hua Hong plans to acquire 97.5% of Shanghai Huali Microelectronics for 8.27 billion yuan, or about $1.2 billion.
• The Huali transaction would add roughly 38,000 wafers per month of capacity at 40 nanometers and 65 nanometers.
• The deals seek to concentrate resources, reduce overlapping operations and strengthen leading Chinese foundries.
• United States export controls restrict advanced equipment access, increasing the value of manufacturing technologies China can continue to use.
• Mature processes remain essential for chips used in cars, industrial equipment and consumer electronics.
• Both companies plan to pay largely with new shares, preserving cash while state investors gain a route to recycle capital.
• Growing capacity could lower chip prices, while weak demand, integration difficulties and trade disputes remain risks.