China watchers, watch out for Tsinghua Unigroup

Few days back, Reuters did a story on Tsinghua Unigroup and their plan to invest as much as 300 billion Yuan ($47 billion), equivalent to market leader Intel's total yearly revenue to make Chip Empire.

Though we initially though this to be more of a micro story (meaning company or sectorial specific) and beyond the scope of our macro picture (though all are inter connected). However, on a second though and just looking at few numbers we realized our initial impression to be very wrong. You can check out the story at http://www.reuters.com/article/2015/11/16/us-china-tsinghua-m-a-idUSKCN0T50DU20151116.

We don't want to get into whether Intel could lose market share or not, or who will be industry leader in next decade (leave that part for our equity team)...however there are some macro elements to notice here -

• Tsinghua Unigroup is 51% owned by Tsinghua Holdings and 49% owned by Beijing Jiankun Investment Group, which makes it a state owned company, since Tsinghua holdings is state owned. That said, Tsinghua Unigroup's ambition to become a key chip maker globally can be seen as government's.
   
• Next we looked at sectional view of Chinese imports and that revealed in 2014, China imported $421.5 billion worth of electronic equipment, constituting more than 21% of total imports, more than $316 billion worth of oil. Majority of this electronic equipment are semiconductors and chips.
   
• China imports almost all of its chip need, be is to be used in farm machinery or military aircraft. This is where the dream lies. China would feel more secure if it can make its own chips.

Though changes might not come as early as next quarter, nevertheless we feel China watchers should keep an eye on this ambition.