Chip testing and packaging service provider King Yuan Electronics Co two weeks ago announced an abrupt exit from China’s semiconductor manufacturing market, citing overcapacity and a drastic shuffle of the global semiconductor supply chain landscape amid escalating geopolitical conflicts.
King Yuan said that it plans to divest its Chinese subsidiary King Long Technology (Suzhou) Ltd in a 4.885 billion yuan (US$675 million) deal to companies including King Legacy Investments Ltd, Dense Forest Ltd and other Chinese firms.
The Hsinchu-based company would reduce its holdings to zero following the transaction, which is expected to close by the end of next quarter, yielding a handsome gain of NT$3.83 billion (US$118.16 million), which would add NT$3.13 per share to this year’s earnings, the company said.
With Beijing aiming for 70 percent self-sufficiency in the semiconductor sector by next year, Chinese chip companies are racing to build capacity for less-advanced foundry and chip testing and packaging services, relying on heavy government subsidies, King Yuan president Gauss Chang (張高薰) told reporters.
This has made overcapacity a thorny issue, Chang said. With capacity expansion still at full speed, the issue would only worsen in the next two to three years, Chang said in response to a reporter’s question about the rationale behind the company’s exit.
The move would affect King Yuan’s top and bottom lines, as King Long contributed about 30 percent to overall revenue and net profit last year. King Yuan hopes to fully absorb the financial impact this year by shifting its investment in advanced technology and new capacity to home.
The company increased its capital expenditure budget by 75 percent for this year to NT$12.28 billion from NT$7 billion mainly on advanced chip packaging technology, or chip-on-wafer-on-substrate, to satisfy demand high-performance-computing devices and artificial intelligence.
King Yuan is not the first local chip testing and packing service provider to exit China. Since the US tightened its semiconductor technology export controls to China amid an escalating tech dispute, most chip testers and packagers are downsizing production in China or deploying new production sites beyond China under the strategy of “Taiwan plus one” to boost supply chain resilience. For most semiconductor firms, Malaysia has emerged as a substitute.
Before King Yuan, ASE Technology Holding Co, the world’s largest chip testing and packaging services provider, in 2021 sold four Chinese chip testing and packaging factories to Chinese private equity fund Wise Road Capital for US$1.46 billion.
The decline of business opportunities in China is also a major factor behind the recent retreat of Taiwanese chip companies and their foreign counterparts. As China’s overcapacity has resulted in a price war and substantially eroded profits, Taiwanese and most foreign companies were unwilling to be involved.
Moreover, they are losing technology and cost advantages to Chinese rivals, while there is added pressure from Chinese chipmakers shifting to Chinese testers and packagers to support Beijing’s semiconductor self-sufficiency plans.
As external changes are putting non-Chinese chip companies at such a disadvantage, there is no doubt that more firms would follow King Yuan’s example.
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