Two Chinese Startups Tried to Catch Up to Makers of Advanced Computer Chips—and Failed

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A founding belonging to a little-known Chinese entrepreneur turned out to match TSMC and Samsung, but never produced a commercially advanced semiconductor

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Projects in the Chinese cities of Wuhan and Jinan were supposed to churn out nearly as complex semiconductors as more sophisticated chips made by industry leaders Taiwan Semiconductor Manufacturing. Co.

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and Samsung Electronics Co.

, who have decades of chip-manufacturing experience.

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Chinese officials kicked in hundreds of millions of dollars to support the upstarts. But it quickly became clear that the plans were too ambitious, and local officials had underestimated how difficult and expensive it was to make complex high-end chips.

Two foundries, Wuhan Hongxin Semiconductor Manufacturing Corp. and Quanxin Integrated Circuit Manufacturing (Jinan) Co., burned through cash, yet never made any chips commercially.

HSMC formally closed in June 2021. QXIC still exists, but has suspended operations, and has not responded to requests for comment.

Over the past three years, at least six new major chip-building projects, including HSMC and QXIC, have failed in China, according to company statements, state media, local government documents and Tianyacha, a corporate registration database. At least $2.3 billion went into these projects, most of it coming from governments, the documents show. Some never produced a chip.

Businesshala spoke to a man who identified himself as one of the organizers of the HSMC and QXIC projects. Named Cao Shan in the Tianyacha database, he is listed as a past chief executive of QXIC, a former board member of HSMC, and a former major shareholder in the firms. The Journal also spoke to former QXIC employees and others familiar with the matter for this article.

Beijing’s leaders and investors are looking through the rubble of struggling semiconductor businesses in hopes of salvaging some parts, as well as writing tough rules to prevent future waste.

While the government has informally requested for years that some chipmakers seek approval for new projects, approval is now needed for projects with more than about $150 million in real estate investment, people familiar with the matter said. .

In December, Tsinghua Unigroup Co., a Chinese chip conglomerate that defaulted on billions of dollars in bonds over the past year, said a consortium led by two state-backed semiconductor venture-capital firms would become its strategic investor.

Making more semiconductors is a key priority for China. Chinese chip makers make up about 17% of the country’s chips, according to International Business Strategies Inc., an industry consulting and analysis firm, leaving China dependent on foreign producers.

When it comes to making the most advanced chips, such as those used for smartphones and computer processors, China – which is vulnerable to US sanctions restricting some companies from accessing certain chip-making technologies – has fallen behind. Maybe, say experts.

Two entities involved in China’s semiconductor policies, the China National Development and Reform Commission and the Ministry of Industry and Information Technology, did not respond to requests for comment.

Evidence of China’s social despair over reliance on foreign chips flared up in late December after US semiconductor giant Intel Corporation

Sent a letter to suppliers to avoid sourcing from the Xinjiang region, where China’s government has launched a campaign of forced assimilation against religious minorities.

Angered by the alleged slight, Chinese social-media users criticized Intel, with some lamenting China’s lack of sufficiently advanced domestic chips to substitute for Intel.

Intel apologized and said its letter was written only to comply with US law.

Around 2014 Beijing began unveiling industry-support plans that included a $22 billion central government kitty for chip investments, known as the Big Fund. Local governments set up similar funds. In 2019, the state set up a second National Semiconductor Fund worth about $30 billion.

Soon, chip money was dwindling across China. According to the Tianyacha database, thousands of Chinese companies registered their businesses related to semiconductors, with some of their main activities including restaurants and cement making.

China improved some aspects of chip making, including designing the chips. But industry experts say that some companies do not have enough expertise or capital to swell.

According to company materials and government documents, the Wuhan and Jinan projects were intended to start making chips with circuitry of 14 nanometers or smaller — a field dominated by TSMC and Samsung — before moving up to 7 nanometers within a few years.

HSMC attracted a former top TSMC executive as chief executive. QXIC recruited dozens of experienced engineers from Taiwan, including TSMC, with a relatively large salary package according to former employees.

Soon, according to state media, it became clear that HSMC lacked the funds needed to manufacture advanced chips, which could cost billions of dollars to produce commercially.

At QXIC, work progressed slowly, former employees said. Although the engineers recruited at QXIC had knowledge of the technical aspects of chip making, QXIC lacked the knowledge to integrate those skills, one of the people said.

In August 2020, the local government of Wuhan said that the HSMC project had been suspended due to financial difficulties, according to state media, and was formally closed in 2021.

According to people familiar with the matter, after several other government-sponsored chip projects were also underway, Jinan’s government took over QXIC and began letting its employees go.

An official from the Jinan Innovation Zone, the Jinan government-run business district where QXIC is located, said the company’s operations have been suspended.

Businesshala traced the man who identified himself as one of the organizers of the two projects through a phone number associated with one of QXIC’s main shareholders in the Tianyancha database.

The man said that when he used the name Cao Shan in corporate documents, his real name was Bao Anbao. He said he was instrumental in helping to gather technology and talent for the projects and used the pseudonym Cao Shan to avoid potential trouble when recruiting in Taiwan, investigating talent hunts from the mainland. Has been doing.

He said that after founding a chip-design firm in 2005, he had nearly 15 years of experience in the industry, and made connections at TSMC after ordering the chips to be made. When asked about domestic media reports that suggested his demeanor was not always up, he said: “Do you think local governments are so easily fooled?”

He said he abandoned the Wuhan project in October 2018 after disagreeing with officials on how to develop it. He said he abandoned the Jinan project in December 2020 as Beijing increased scrutiny on chip projects, and in May, Jinan’s government ousted the company as a main shareholder.

The Wuhan and Jinan governments did not respond to requests for comment.

As projects like HSMC faced difficulties, Beijing redefined its approach. In October 2020, China’s economic planner, the National Development and Reform Commission, stated that companies without talent, experience and sufficient technology set up semiconductor projects indiscriminately, and that authorities supporting such projects would be held accountable.

Write [email protected] . on yoko kubota


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