28-05-2025
Sugon, its suppliers hit by US sanctions, to merge with Hygon
Sugon, also known as Dawning Information, a state-owned computing server maker in China, will be acquired by its subsidiary Hygon Information Technology to deal with the inability of its suppliers to source US chips due to sanctions.
Hygon, a Shanghai-listed fabless chipmaker, has a market cap of 316 billion yuan (US$44 billion) while Sugon has a market cap of 90.6 billion yuan.
'At present, the development of China's information technology industry represented by artificial intelligence (AI) is in a complex situation where opportunities and challenges coexist,' Hygon's executives told the media in the company's first quarter result announcement briefing on Monday. 'Considering the current capital market policies and development needs, the two parties (Hygon and Sugon) decided to merge through a share swap.'
The executives said the reorganization is conducive to the coordinated development of both parties, reducing costs and increasing efficiency, consolidating and expanding the two companies' market share in the domestic computing power industry.
The decision came after the US Commerce Department's Bureau of Industry and Security (BIS) added 80 entities, mainly in China, to its Entity List on March 25.
Twelve companies were accused of developing advanced AI, supercomputers, and high-performance AI chips for China-based end-users with close ties to the country's military-industrial complex.
Sugon's key suppliers or business partners, including Henan Dingxin Information Industry Co Ltd, Nettrix Information Industry Co Ltd, Suma Technology Co Ltd, and Suma-USI Electronics Co Ltd, are among those sanctioned.
'These entities have provided significant manufacturing capabilities to Sugon, a Chinese high-performance computing server manufacturer added to the Entity List in 2019 for building supercomputers used by military end users and supporting China's destabilizing military modernization efforts,' said the BIS.
The BIS also sanctioned six subsidiaries of Inspur Group, another major computing server maker in China, which was added to the Entity List in March 2023. The BIS accused them of contributing to Inspur's development of supercomputers for military end use, particularly by acquiring or attempting to acquire US-origin items supporting supercomputer projects for the Chinese government or military.
In June 2019, the BIS sanctioned Sugon and Hygon and their senior executives due to their connection with the People's Liberation Army. In December of the same year, Sugon spun off a 200-strong team to set up Nettrix, which then took up Sugon's role of supplying sanctioned Chinese companies and institutions with computers that used Intel and Nvidia chips and Microsoft software.
In August 2024, the New York Times exposed this loophole. A follow-up report by Asia Times showed how Sugon's Vice President Qin Xiaoning founded Nettrix and received her rewards in Hygon's 2022 public listing.
Sugon said on May 15 this year that it adjusted its business structure in the third quarter of 2024 by selling more high-end components and fewer low-profit servers. It said its revenue fell 22.6% year-on-year in the fourth quarter, and gross profits of its core business decreased 4.7%.
The company said it would focus on high-end computing parts and solutions businesses and form an ecosystem with Hygon and other associate companies to sell chips, servers, cloud services, and AI computing power.
In the first quarter of this year, the company's revenue surged 4.3% year-on-year to 2.59 billion, and its net profit rose 30.8% to 186 million yuan.
However, the BIS sanctioned Nettrix in March this year. In April, the Trump administration told Nvidia that it would need a license to export its H20 chips or similar products to China.
Although Sugon can no longer source Nvidia's graphics processing units (GPUs), it can use Hygon's deep computing units (DCUs) or general-purpose GPUs (GPGPUs). The most potent Hygon DCU model is the Z100, which was developed with open-source software called ROCm.
A Chinese technology columnist said the performance of Z100 is about 25-55% of that of Nvidia's A800.
A Tianjin-based columnist using the pseudonym 'Little Fish' says in an article that the vertical integration of Hygon (chips) and Sugon (servers) is a good idea as they can rely on each other's strengths. However, he also points out that Sugon would lose competitiveness over the long run if Hygon's chips could not catch up with other players.
On May 13, the US released a guideline warning worldwide companies not to use Huawei Technologies' Ascend chips. Some analysts expect the supply of Ascend AI chips in the Chinese markets to surge, leaving less room for Sugon and Hygon to grow.
Read: Sugon spin-off helps China evade US chip bans
