The paralysis of the Hongxin project highlights the risks associated with investment mania under the Chinese Communist government’s policy of fostering technology industries. After Hongxin, more local governments may have to pay for similar scams due to the lack of monitoring and auditing mechanisms. After the U.S. limited and cut off the supply of high-end chips, the whole country of mainland China swarmed into the chip industry, becoming a replica of the “great steel-making” in Xi Jinping‘s new era.
Local governments cheated of billions
According to a report by Caixin.com on May 5, there are still Hongxin employees who are dissatisfied with the compensation package and intend to apply for labor arbitration. The report said that the company’s signboard has been removed after the yellow New Year, and that government staff have recently “intensively entered the factory for inspection”.
The company has been looking for a successor after the shutdown,” said an employee previously quoted by Jiwei.com. “Last December, the top management said that the company would be adjusted in three months, and we thought we had a chance to turn around, but we didn’t expect our perseverance to be replaced by an exit.”
In recent years, as the United States has imposed heavy restrictions on Chinese technology companies, imposing export restrictions on mainland Chinese companies in “neck” areas such as chips, forcing the Chinese authorities to revert to self-reliance, fueling a boom in investment in the semiconductor industry in mainland China. From the central to local level, semiconductor chips have become a hot spot for investment.
The threshold for entry into the semiconductor industry is high, with investment costs for mature companies often ranging from $5 billion to $10 billion. Wuhan Hongxin Semiconductor had claimed to be a 100 billion RMB project. The Wuhan Development and Reform Commission’s January 2019 report in the Hubei Daily, reproduced on the official website, said, “Hongxin Semiconductor invested 130 billion yuan to build a chip R&D and manufacturing base, using the world’s most advanced process technology to produce 10-nanometer chips, and the second phase will develop a 7-nanometer chip production process with lower power consumption and higher performance, ranking among the first square of the global integrated circuit industry. “
This ambitious ambition was questioned by many industry players. SMIC, which represents the most advanced level of integrated circuit research and development in mainland China, is currently able to mass-produce processes only 14nm process.
Since 2017, Chinese private citizens have emerged to target semiconductor government funds for money-grabbing scams. They register shell companies, brag about their funding and technology backgrounds, and pass on investment risks to local governments, financial institutions and engineering contractors.
Wuhan East-West Lake District Government supported the establishment of Hongxin Semiconductor in such a scam. Hongxin’s initial few people with no background in the semiconductor industry have cheated the Wuhan government, former TSMC technology leader Jiang Shangyi, and many partner companies into the “hundred billion dollar scam”.
Cao Shan (whose real name is Bao Enbao), one of the operators of Hongxin, set up a company called “Beijing Light and Blue” in 2017 and established Hongxin together with Wuhan East-West Lake District Government in the same year. Documents from the Wuhan Development and Reform Commission show that by March 2019, Hongxin had received RMB 8 billion in investment from the government.
As planned, the first phase of Hongxin’s factory was scheduled to start operation at the end of 2019, but equipment procurement was delayed.
Brand new lithography machine is mortgaged
According to 36 Krypton, a mainland Chinese technology venture capital media, Cao Shan acted as a broker through a Shanghai-based company and recruited more than 100 senior technical staff for Hongxin from Taiwan and other places.
In June 2019, former TSMC second-in-command Jiang Shangyi joined Wuhan Hongxin. Not only did Chiang’s membership endorse the “strength” of Hongxin and enable it to recruit more technical talent, but through Chiang’s previous relationship with ASML, the Dutch lithography oligarch, Hongxin made a high-profile purchase of an ASML lithography machine in December 2019.
On January 20, 2020, Hongxin mortgaged the “new and unused” lithography machine to Wuhan rural Commercial Bank for a loan of RMB 581.8 million.
In June 2020, Shang-Yi Jiang resigned from Hongxin and left Wuhan immediately. In an interview in Hong Kong‘s South China Morning Post, Jiang said that his experience at Hongxin was “a nightmare.
“According to a report in 36 Krypton, documents previously released by Wuhan’s Development and Reform Commission show that Hongxin had received a total of 15.3 billion yuan in investment as of Dec. 31, 2019.
In July 2020, Wuhan officials acknowledged the fact that Hongxin’s funds were broken; in October, the National Development and Reform Commission of the Communist Party of China (NDRC) said that it would notify the accountability of rotten chip projects that caused major losses or led to major risks, in accordance with the principle of “who supports, who is responsible.
Hongxin may not be the only one in the scam
The industry is concerned that there are more scams similar to Hongxin. Business information shows that the promoter of the shell company “light amount of blueprint” Cao Shan has also set up Zhuhai “Yi core”, “cloud core”, Hubei “Ltd. and Quanergy Advanced Integrated Circuit Industry Research Institute (Jinan) Co.
Among them, “Quanxin” as a key introduction project in Shandong Province, with a claimed investment of 59 billion yuan. Jinan’s state-owned asset management department has reportedly invested 510 million yuan in the project.
According to statistics from the Chinese Communist Party media in October last year, six tens of billions of dollars or more of semiconductor projects in mainland China have been halted in more than a year. In addition to Wuhan Hongxin, there are Nanjing Dekocode, Chengdu Gexin, Shaanxi Kuntong, Jiangsu Huaian Dehuai Semiconductor and Guizhou Huaxintong.
In addition, a total investment of 1 billion yuan in Hebei Ang Yang Microelectronics also stalled last year. The company’s general manager, Xu Guozhong, was reported for allegedly cheating government subsidies and state-owned land.
However, official support for the chip industry remains strong, with Xiao Yaqing, the mainland’s minister of industry and information technology, saying at a news conference on March 1 that the mainland will reduce corporate income tax for IC companies from the year they make profits during the 14th Five-Year Plan period. He also said that the basic aspects should be further enhanced.
Xiao Yaqing said: “The chip involves more basic issues, there are materials, processes, equipment, involving a relatively long industrial chain. Only when the foundation is solid, the chip industry can continue to innovate and develop.”
Analysis: the government “good cheat” from the mechanism is not transparent
A report in 36 Krypton quoted analysts as saying that the government of Wuhan’s East and West Lake district is eager to build chip manufacturing projects, partly to compete with the Wuhan East Lake New Technology Development Zone across the river. ZiGuang Group established its “Changjiang Storage” chip project there in 2016 and succeeded in achieving mass production of 64-layer 3D NAND flash memory chips. Wuhan East-West Lake District has made corresponding industrial plans, but has unexpectedly become a victim of speculators’ scams.
According to Salvatore Babones, an associate professor of sociology and an expert on mainland China at the University of Sydney, the reason behind this flurry of projects in mainland China’s technology industry, which have been launched and then shut down, is the lack of transparency in government investment and bidding mechanisms.
This closed system in mainland China makes it almost impossible for the government to get a proper return on investment for its technology investments,” Babones told Voice of America. It also makes it impossible for private investors to be sure that they will get the return they deserve. Without the rule of law, waste is inevitable.”
He said, “Any Time government action is done in secret, corruption is inevitable. If you compare this to Western countries or democracies like Taiwan or Japan, in both Western and Asian democracies, if the government wants to subsidize industry, there’s a public bidding process. There would be broadly representative committees to oversee the spending inputs. Independent auditors would conduct regular audits. And none of this is what would happen in mainland China.”
“If local governments compete in an open and transparent process, with independent audits of the results, then in principle it is a good thing for local governments to compete. The problem is not local government competition. The problem is the lack of openness in the whole system.” He said
Mainland China’s semiconductor part of the project level of upgrading the overall lag
According to mainland China’s semiconductor industry estimates, mainland China’s IC sales revenue will reach 884.8 billion yuan in 2020, with an average growth rate of 20%, three times the growth rate of the global industry during the same period.
In terms of technological innovation, SMIC’s 14nm process chip foundry technology represents the most advanced level of mainland China’s local ICs; Changjiang Storage announced in April 2020 the successful development of 128-layer QLC3D NAND flash memory chips; and Changxin Storage’s dynamic random storage chips are also hotly anticipated.
Mainland Chinese media also said that companies such as Cambrian, Huada Jiutian, Shanghai Microelectronics and Jiangfeng Electronics have also made progress in various areas of chip design, design tools, equipment and materials.
Scott Kennedy, senior advisor on China business and economics and chairman of the board at the Center for Strategic and International Studies (CSIS) in Washington, said that while mainland China has made progress in some categories of the semiconductor industry, it still lags behind the world leaders overall.
Despite the hundreds of billions of dollars that mainland China has invested in this industry, it remains on the lower end of the scale compared to the world leaders,” Ganside told Voice of America. Even though it continues to ramp up with double, or even triple, the effort, I think mainland China will still be behind the world leaders for some time.”
Mainland Chinese companies are still flocking to crowd into the chip industry. Business and industry data show that as of February 2021, there were 66,500 chip-related companies in mainland China, with 22,800 new companies registered in the year 2020, up 195% year-on-year. In Guangdong alone, there are 22,900 chip companies. This year’s data growth is even more rapid, the first two months of registration has reached 4,350, an increase of 378% year-on-year.
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