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China gives up on $20bn Wuhan chipmaking fiasco


(ATF) Wuhan Hongxin Semiconductor Manufacturing (HSMC), which had promised to deliver China’s first 7-nanometre (nm) chips with $20 billion of investment, has decided to dismiss all employees as hopes for a resumption of business collapsed.

The news comes after construction of HSMC’s plant was put on hold indefinitely early last year, plus the resignation of former Taiwan Semiconductor Manufacturing Company (TSMC) veteran and chief executive Chiang Shang-yi in July, and the Wuhan government taking over the troubled project in November.

HSMC’s executive team asked all employees to “resign” via a WeChat group message, Chinese semiconductor news portal Laoyaoba.com said on Friday, citing people close to the situation.

“Based on the situation that the company has no plan to resume work or production, the company has decided that all employees should submit their resignation by the end of the day on 28 February, and complete their exit procedures by the end of the day on 5 March,” the message said.

The report suggested that as many as 240 people would lose their jobs at the semiconductor company. It is unknown whether they will receive any compensation.

The job cut notice came a little over a week after people came back to work from  the Lunar New Year holiday. Right after the holiday is when many Chinese companies hand out a pink slip – a courtesy that gives workers a paid holiday.

Han Xiaomin, general manager of Laoyaoba’s consulting arm, expects it will be difficult to find a successor for the HSMC project. “It is less expensive and less time-consuming to build a new plant that meets one’s requirements than converting an existing plant,” she said, adding that HSMC’s looming debts would also make it a ‘hot potato’.

Scientific research institutes may be able to utilize some of HSMC’s facilities so they do not totally go to waste, she said.

Meanwhile, some industry professionals said Beijing’s increased scrutiny over chipmaking investments since last year will likely put fruitless projects like HSMC to an end.

“The government has enforced stricter control of investments in semiconductor manufacturing projects since last year. Companies can only start hiring after they secure the funding and technologies needed for the projects,” Gao Qiquan, former global executive vice-president of chip designer Tsinghua Unigroup, said.

HSMC is part of a recent boom in the Chinese mainland’s semiconductor industry, as Beijing prioritizes self-sufficiency in key tech areas affected by tensions with Washington.

Huge scam hits govt-backed project

Beijing set up a 100-billion yuan national semiconductor fund in 2014, then created a second phase for the fund of 204.2 billion yuan in October of 2019 to nurture its domestic chip industry and close the technology gap with the US. 

Launched in November 2017 with a planned investment of $20 billion, HSMC had aspired to become one of China’s most advanced chipmakers capable of producing chips with 7nm-and-below processing techniques. It was said to be able to create 50,000 jobs, directly or indirectly, and have an annual output of 60 billion yuan ($9.25 billion) once running at full capacity.

The project had been a star on the Wuhan government’s list until reports surfaced last year that described it as a “100-billion yuan chipmaking scam”.

In early July last year, the boss of a HSMC contractor that did not get paid millions of dollars on time complained over social media, and questioned HSMC controlling shareholders’ capability to run such a mega-project in Wuhan when they have “no technical background, no team, and no business competency.”

Wang Liyin, a legal representative for HSMC contractor Wuhan Huanyu Foundation Engineering (Wuhan Huanyu), revealed that HSMC was 90%-owned by a shell company whose founders had no experience in semiconductors and were believed to not have invested a single penny in the project.

HSMC already faced insolvency in the second half of 2018 and the status of the public money sunk into it was left unaddressed, Wang said.

Several weeks later, a local economic operations report published on the website of Wuhan Dongxihu District government revealed that “there is a large funding gap in the HSMC project” and that it faces “risks of stagnation at any time”.

The report said the venture has yet to receive the lion’s share of its planned funding, or 112 billion yuan of the originally planned 128 billion yuan.

Wuhan Dongxihu District government later deleted the report from its website, but Chinese media started to probe into the project.

An investigation by Caixin magazine found that the plant’s technology capacity was largely exaggerated. The local government said HSMC owns an advanced lithography machine produced by the Dutch company ASML Holding NV that is the most cutting-edge piece of equipment ever imported into China. But analysts said that was misleading as HSMC’s gear was just one of several imported machines capable of producing 7nm chips in China.

Ironically, the ASML lithography machine was held in pledge for a loan just one month after HSMC held a grand ceremony to celebrate its entrance into the plant.

And Li Xueyan, co-founder of a Beijing-based company that owned 90% in HSMC, was found to have run businesses in ecological technology, baijiu retail, catering, garden construction and traditional Chinese medicine sales – but had no experience in semiconductors. 

The other co-founder “Cao Shan” (thought to be an alias) reportedly only received a basic school education. Though not confirmed, Security Times suspected that since 2017, Cao and a few others may have used similar “tricks” to set up a slew of shell companies and get money from the national semiconductor fund, while shifting their risks to local governments, financial institutions and construction contractors.

TSMC chip veteran quits, Wuhan govt intervenes

Chiang Shang-yi, former chief operating officer of TSMC who joined HSMC in 2019, resigned in July of last year.

Chiang called his days at HSMC an “unpleasant experience” that is “hard to describe in a few words.” People familiar with Chiang said he was likely to have joined HSMC in hopes of pushing forward R&D on cutting-edge integrated circuit packaging technologies, which the company declared to be a business focus.

The 74-year-old chip veteran later joined Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker, as its executive director and vice chairman.

Meanwhile, information from business data platform Tianyancha shows that HSMC was taken over by the Wuhan government after shareholding changes published in November. The enterprise is now under the full control of the State Assets Supervision and Administration Commission for the Dongxihu District government in Wuhan.

Amid reports on the HSMC fiasco, China’s top economic planner, the National Development and Reform Commission, blasted local authorities’ careless forays into chipmaking.

Some local governments have “blindly taken on projects” with enterprises that have “no experience, no technology, and no talent” in integrated circuit development, Meng Wei, a spokesperson for the Commission, said in October.

As of the end of 2019, China had some 50 large-scale chip manufacturers across the country that took in 1.7 trillion yuan in funding, or an average investment of 30 billion yuan each, according to Caixin calculations.

Besides HSMC, several other government-funded mega-projects in semiconductor manufacturing have also fallen through. 

They include the $10-billion joint venture between American contract chipmaker GlobalFoundries and the Chengdu government, a 40-billion yuan ($6 billion) Kuntech project to set up a manufacturing base for flexible semiconductors in Shaanxi province, plus the $3-billion Dekema project in Nanjing city in Jiangsu province that aimed to “fill the blank in China’s contact image sensor (CIS) chip production”.

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Iris Hong

Iris Hong is a senior reporter for the China desk, and has special interests in fintech, e-commerce, AI, and electric vehicles. She began her career in 2006 and worked for Interfax News Agency and for PayPal before joining Asia Financial in July 2020. You can reach out to Iris on Twitter at @Iris23360981

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