March 5, for many employees of Wuhan Hongxin Semiconductor is the day to say goodbye to this once called “100 billion chip project”. After the Hongxin project was put on hold for more than a year, on February 26, Hongxin senior management issued a notice of staff severance, saying that “the company has no plans to resume work and production,” requiring all staff to apply for separation and complete the separation procedures before the end of business on March 5.
The paralysis of the Hongxin project highlights the risks associated with investment mania under the Chinese government’s policy of fostering the technology industry. After Hongxin, more local governments may have to pay for similar scams due to the lack of monitoring and review mechanisms. After the U.S. limited and cut off the supply of high-end chips, China’s national flurry of investment in the chip industry has become 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 after the Chinese New Year, the company’s signboard has been completely removed, and recently some government staff “intensively entered the factory to visit”.
Tibco previously quoted an employee as saying that the company has been looking for a successor after the shutdown, “Last December, the top management said that the company would be adjusted after three months, and I thought it would be a turnaround, but I didn’t expect our perseverance to be replaced by an exit.”
In recent years, as the United States on Chinese technology companies set heavy restrictions on chips and other “neck” areas on Chinese companies to impose export restrictions, forcing the Chinese government to reintroduce self-reliance, fueling the boom in investment in China’s semiconductor industry. From the central to local, semiconductor chips have become a hot spot for investment.
Semiconductor industry entry threshold is high, the investment cost of mature enterprises often between 5 billion U.S. dollars to 10 billion U.S. dollars. 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 Chinese technology venture media “36 Krypton”, Cao Shan acted as a broker through a Shanghai-based company to recruit more than 100 senior technicians 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 had broken down; in October, China’s National Development and Reform Commission said that it would notify the accountability of rotten chip projects that had caused significant losses or triggered significant 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 Chinese media last October, six $10 billion-plus semiconductor projects in China have been halted in a little more than a year. In addition to Wuhan Hongxin, there are Nanjing Dekocode, Chengdu Gecore, 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 subsidy funds and state-owned land.
However, China’s official support for the chip industry continues to be strong, as Chinese Minister of Industry and Information Technology Xiao Yaqing said at a press conference on March 1 that China 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 it is necessary to further strengthen the basic aspects of upgrading.
Xiao Yaqing said: “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 as a result, but it has unexpectedly become a victim of speculators who set up a scam.
According to Salvatore Babones, an associate professor of sociology and China expert at the University of Sydney, the reason behind this flurry of projects in China’s technology industry, which have been launched and then shut down, is the lack of transparency in government investment and bidding mechanisms.
China’s closed system makes it almost impossible for the government to get a proper return on investment for its tech 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 that is going to happen in 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
China’s semiconductor part of the project level to improve the overall lag
According to China’s semiconductor industry estimates, 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 in the same period.
In terms of technological innovation, SMIC’s 14nm process chip foundry technology represents the most advanced level of China’s local ICs; Changjiang Storage announced in April 2020 that it had successfully developed 128-layer QLC3D NAND flash memory chips; and Changxin Storage’s dynamic random storage chips are also hotly anticipated.
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, devices 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 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 China has invested in the 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 China will still be behind the world leaders for some time.”
Chinese companies are still swarming into the chip industry. Business and industry data show that as of February 2021, there were 66,500 chip-related companies in China, with 22,800 new companies registered for 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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