China imports over $300 billion worth of semiconductors each year. The country is
reliant on chip technology imports for its high technology products.
China correctly recognizes this as a potential weakness to their future economy. So in 2014,
they rolled out a $20 billion national fund to help develop a domestic chip industry.
The government has made it clear that they want to be able to make cutting
edge chips within a few years. And it appears that they are willing to spend
almost whatever it takes in order to create this homegrown industry.
Such demands will always give rise to charlatans. In this video we look
at one really big charlatan - Wuhan Hongxin Semiconductor Manufacturing,
HSMC or just Hongxin. I will use the two terms interchangeably.
The company was founded in November 2017. Right from the start, they wanted to go big.
Their website said that they will start off making up to 30,000 wafers a month.
First with 14nm process node generation and then with the 7nm process node generation.
30,000 wafers, depending on the wafer size, would mean that a startup foundry would
spin up a fab with capacity matching one of TSMC's megafabs in Hsinchu.
In about two years. I guess, not all that impossible since TSMC has done it. They spun
up their Fab 18 Gigafab - which makes some 100,000 wafers a month - in 2.5 years. But they're TSMC.
In order to prove their bonafides, HSMC did two flashy things.
In July 2019 they hired Chiang Shang-Yi as their CEO. Chiang had been the R&D
vice president at TSMC. The 75 year old had also been an independent director for SMIC
from 2016 until his hiring at Hongxin.
Chiang is a legit expert in chip-making. His contributions to TSMC are pretty impressive.
Second in December 2019, they managed to purchase a TWINSCAN NXT: 1980Di DUV lithography scanner
from ASML, the Dutch company that is the world's only supplier of these things.
Having one of those multi-million dollar devices theoretically gives you the ability
to etch chips up to the 10nm level. It costs about 581 million RMB or $87 million USD.
Hongxin made a big deal out of this purchase. They did a big public ceremony announcing it.
They would claim that they had the only device in
China capable of creating 7nm node chips. This is not true.
And then literally a month later, they took out a bank loan using the TWINSCAN device
as collateral. The bank statement says that the device is new and was never used. Not a good sign.
On the surface, the project began to attract a lot of government funding.
First, it came from the city of Wuhan. In September 2018, the city featured 33 projects
in the high-tech and manufacturing worlds. Wuhan claimed to have invested a total of $16 billion
into these projects. Hongxin and another company had received 80% of that $16 billion.
The public relations article announcing this investment said that Hongxin had
received the most money from Wuhan. They had received 636 acres of land with a
636,000 square meter building currently under construction.
The total planned cost of the project would be 128 billion RMB
or roughly $20 billion USD. It would provide 3,000 high value jobs for Wuhan.
At the end of 2019, Hongxin had received $2 billion USD from the Wuhan city government.
In 2020 it anticipated another $1 billion USD.
I never saw any indication that it received the full $20 billion as planned.
At the same time, the company began to join in the crazy race for Taiwanese semiconductor talent.
They offered salaries 2-2.5x the market rate for employees from TSMC's R&D department. They would
poach some 100 such people from the company - a few news articles were written about it.
The first indication that things weren't going well happened in July 2020.
An article by the construction company subcontractor building out HSMC's
facilities - Wuhan Huanyu Foundation Engineering (Wuhan Huanyu) - accused the company of not
paying its bills - about $5 million. They would take the company to court in order to get paid.
Hongxin the public entity is 90% owned by a shell company set up by two people Li Xueyan
and Cao Shan. Li Xueyan has no prior experience in semiconductors. Her corporate ownership stakes
consist of a Chinese liquor retailer, a few catering companies and a few medical companies.
The shell company did not invest any money into Hongxin.
The majority of the money seems to have come from either the
local Wuhan government or through loans from the construction subcontractors themselves.
Not only that, you got indications of wages not being paid.
Job offers being rescinded or pushed back. And bank accounts being frozen. The Hubei provincial
court took back land usage rights for 300 acres due to these bills not being paid.
Here is what is confusing to me. If the company really received those billions of
dollars from the Wuhan government as claimed in that press release,
where did it go? Why can't it pay a measly $5 million to its construction subcontractor?
My guess is that Hongxin had a sort of Silicon Valley, bootstrap vibe.
They wanted to put as little money as they possibly could from the start.
The classic strategy of “Other People’s Money”.
They strung themselves along based on their own hype and cash from local government officials.
Such local city officials are easy to bamboozle with fancy words. The Wuhan local government
bureaucrat, you dangle them the possibility of having a TSMC in their own city, they will
believe it because they want to. It’s like the Wisconsin/Foxconn situation but just in China.
But the local governments themselves did not have enough money to get HSMC up and running.
They could just grant them small things.
Land usage rights that might be worth a lot on paper - but that isn’t cash.
So management realized that they needed to go bigger.
They bet on being able to con successively higher governments:
Local to district to provincial. With the final goal of getting access to the
Central Government’s National Semiconductor cash spigot. That’s the big time. That’s the big win!
But the construction subcontractor dispute in December 2019 stopped them.
The court case prevented them from making a successful application for funds from the national
semiconductor fund. And then the pandemic finally ended things for good and the plans fell through.
For the most part, I think one HSMC co-founder is on to greener pastures. Cao Shan,
the other co-founder, the one who does not own a liquor store, exited the HSMC parent company
and started another semiconductor company in Zhuhai - Yixin Integrated Technology.
He hired another ex-TSMC person, Xia Jingqiu, as the CEO and set up two more companies like HSMC:
Quanxin Integrated Circuit Manufacturing and Yunxin
International Integrated Circuit Manufacturing. It’s just the same model all over again,
except with different local governments. What a grifter.
HSMC is a sad story. It’s not the only one. In 2019, Dehuai
Semiconductor in Jiangsu province collapsed under the weight of unpaid wages and lawsuits.
They got $700 million USD in investment but still ended up over $14 million in debt.
July 2020, Dekema in Nanjing went bankrupt. They had raised $3 billion from investors including
the municipal government to build indigenous image sensor chips. All they had for that
were 2 unfinished buildings. Not a single wafer was ever made.
China’s financial and tech markets seem to have these sort of fevers where they
just go all out in some industry. Think about the ride-sharing wars between Uber and Didi.
And then the bike sharing wars in China - which were really crazy.
The same fever is starting to roll over semiconductor manufacturing in China.
SMIC went public on the Shanghai and Hong Kong stock exchange. The stock
exploded over 100% in the first day of trading.
They are building mini-campuses with Korean and Taiwanese themed accommodations so to house
the dozens and dozens of chip engineers they’re poaching from Samsung and TSMC.
It is kind of nuts. It is kind of a waste. And I am one of the more optimistic ones here. I do
think that if China is determined enough, they can succeed in this industry. They can. I really
believe that. But they need to concentrate and work at it with a focused, concentrated approach.
Because semiconductor manufacturing is way different from an internet startup.
Any schlub can start a website and then offer a service.
You don’t start a foundry without access to some serious, national-level amount of resources.
Not just a Kilimanjaro of cash but also a base of expertise, infinite patience, and so much talent.
None of that comes along in 2 years, 5 years, and even ten. Ask Singapore. They once tried to do
this too, until the government lost interest and moved on to other things. Their foundry industry
is eh. It hangs around. But it's just there. China should study hard Singapore's lesson.
I have looked at a few failures here. I think the common theme in all of them
is that the company founders wanted to get in and out as fast as possible. Doing anything really,
really fast tends to cause mistakes. That’s fine for a lot of things, but not semiconductor
manufacturing. Doing so is a formula for fast failure. And you don't even need to be a grifter.