Chinese Bureaucracy and Semiconductors: What Could Go Wrong?
An Epic Failure in Wuhan Leaves China's Tech Achilles Heel Still Exposed
It feels like China can do anything these days. Well, maybe not quite.
If you never heard of Wuhan Hongxin Semiconductor Manufacturing Co., or HSMC, you won’t now, except as subject of a multi-billion dollar scandal whose details Beijing will do its best to hide. The company closed its doors over the weekend, firing its few hundred remaining employees via WeChat message, which some of them leaked to pesky media outlets.
Thus ends one of the more ballyhooed, and expensive, projects aimed at fast-forwarding China’s microchip industry, the country’s Achilles heels in any tech cold war with the U.S.. China imported a whopping $380 billion (or so) worth of semiconductors last year. National champions like telecoms equipment manufacturer Huawei would struggle mightily without inputs from Taiwan Semiconductor (ticker: TSM), Advanced Micro Devices (AMD), Intel (INTC), and others. Donald Trump’s (partial) blockade of Huawei drove this point forcefully home.
So China is going all out to close the chip gap. To judge by HSMC, it won’t be easy. The effort, which gathered momentum in 2018, combined one of China’s more powerful regional governments --Wuhan was a burgeoning industrial center before becoming famous for coronavirus — with a superstar foreign CEO: TSM’s own ex-chief operating officer Chiang Shangyi. HSMC didn’t lack for ambition either, promising to invest $20 billion in producing 7-nanometer chips. That’s just two nanos thicker than what TSM put into the latest iPhone.
It all went really wrong really fast. According to a Hollywood-worthy expose by colleagues at chinamoneynetwork.com, the founding genius behind HSMC was a “con man with a primary education” named Cao Shan, who traveled China with a wallet full of bogus business cards from the likes of TSM and Acer (2353:Taiwan). He finally hooked up with a Wuhan influence peddler named Long Wei, who persuaded authorities to buy in, big. No one involved knew the first thing about semiconductors. Taiwanese import Chiang did, of course. But he fled HSMC last year, calling the experience “a nightmare.” Meanwhile $2 billion or so went missing.
The moral of the story is there are two Chinas, which Xi Jinping and his predecessors have been remarkably successful in keeping separate, or symbiotic: a kleptocratic state sector where debacles like HSMC are only to be expected, and a dynamic entrepreneurial sector that is turning the world on its ear. Catching up to Taiwan and the U.S. in semiconductors may take combining capital on a state scale with entrepreneurial management, and that’s going to be tough.
Only a fool would count China out. Chiang Shangyi, after recuperating a bit from HSMC, signed on late last year as deputy chairman of Semiconductor Manufacturing International Corporation, or SMIC (0981. Hong Kong), the biggest Chinese player. But it’s going to be tough.