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Two Chinese startups tried to catch up with advanced computer chipmakers and failed

By on January 9, 2022 0

China has spent billions of dollars in recent years trying to catch up with the world’s most advanced semiconductor manufacturers.

Two foundry projects, led in part by a little-known entrepreneur then in his 30s, help show why China has not yet succeeded.

The projects, in the Chinese cities of Wuhan and Jinan, were supposed to produce semiconductors almost as complex as the more sophisticated chips made by industry leaders Taiwan Semiconductor Manufacturing. Co.

and Samsung Electronics Co.

, who have decades of experience in building chips.

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

The two foundries, Wuhan Hongxin Semiconductor Manufacturing Corp. and Quanxin Integrated Circuit Manufacturing (Jinan) Co., spent money, but never commercially manufactured chips.

HSMC officially closed in June 2021. QXIC still exists but has suspended operations and did not respond to requests for comment.

In the past three years, at least six new major chip construction projects, including HSMC and QXIC, have failed in China, according to company statements, state media, local government documents and Tianyancha, a business registration database. At least $ 2.3 billion has been spent on these projects, much of it from governments, the documents show. Some have never produced a single chip.

The Wall Street Journal spoke to a man who identified himself as one of the organizers of the HSMC and QXIC projects. Named Cao Shan in the Tianyancha database, he is listed as the former general manager of QXIC, a former member of the board of directors of HSMC, and a former major shareholder of the companies. The Journal also spoke to former QXIC employees and others familiar with the subject for this article.

Beijing executives and investors are digging through the wreckage of struggling semiconductor companies in hopes of recovering parts, while writing tougher rules to avoid future waste.

While the government has unofficially asked some chipmakers for years to seek approval for new projects, approval is now required for projects involving more than $ 150 million in capital investment, people close to them have said. folder.

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

A global chip shortage is affecting how quickly we can drive a car or buy a new laptop. WSJ visits a manufacturing facility in Singapore to see the complex chip-making process and how a manufacturer is trying to overcome the shortage. Photo: Edwin Cheng for The Wall Street Journal

Manufacturing more semiconductors is a vital priority for China. Chinese chipmakers produce about 17 percent of the chips the country needs, according to International Business Strategies Inc., an industry consulting and analysis company, leaving China dependent on foreign producers.

When it comes to building the most advanced chips, like those used for smartphones and computer processors, China, which has been hit by US sanctions banning certain companies from accessing certain chip-making technologies, could fall further behind, experts say.

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

Evidence of the Chinese company’s frustration with its reliance on foreign chips erupted in late December, after US semiconductor giant Intel Corp.

sent a letter urging suppliers to avoid sourcing supplies from the Xinjiang region, where the Chinese government has waged a forced assimilation campaign against religious minorities.

Intel has been criticized in China after asking suppliers to avoid sourcing from the Xinjiang region; he participated in ChinaJoy, the digital entertainment fair in Shanghai last summer.


Aly Song / REUTERS

Angry at the perceived lightness, Chinese social media users criticized Intel, with some lamenting the lack of domestic chips advanced enough to replace Intel’s.

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

Around 2014, Beijing began unveiling plans to support the industry that included a central government $ 22 billion kitty for chip investments, known as the Big Fund. Local governments have set up similar funds. In 2019, the state created a second national semiconductor fund of about $ 30 billion.

Soon, flea money spread across China. According to the Tianyancha database, tens of thousands of Chinese companies have registered their businesses as semiconductor-related, some of which primarily focus on cement restoration and manufacturing.

China has improved in some aspects of chip manufacturing, including chip design. But some companies have gone bankrupt because they didn’t have enough expertise or capital, according to industry experts.

Wuhan and Jinan’s projects were to start by making chips with circuitry measured at 14 nanometers or less – an area dominated by TSMC and Samsung – before moving to 7 nanometers in a few years, according to company documents and documents. government.

HSMC has attracted a former senior manager of TSMC as its general manager. QXIC has recruited dozens of experienced engineers from Taiwan, including TSMC, with relatively large salaries, according to former employees.

A chip from Taiwan Semiconductor Manufacturing Co. on display at the World Semiconductor Conference in Nanjing, China in 2020.


Agence France Presse / Getty Images

Soon, according to state media, it became clear that HSMC was well below the funding needed to manufacture advanced chips, the commercial production of which can cost billions of dollars.

At QXIC, work was moving slowly, former employees said. Although the engineers hired by QXIC had knowledge in the technical aspects of chip manufacturing, QXIC lacked the knowledge to incorporate these skills, one of the people said.

In August 2020, the Wuhan local government said the HSMC project had been put on hold due to financial difficulties, state media reported, and was officially closed in 2021.

After several other government-sponsored chip projects also failed, the Jinan government took over QXIC and began laying off its employees, people familiar with the matter said.

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

The Wall Street Journal located the man who identified himself as one of the organizers of the two projects through a phone number associated with one of QXIC’s major shareholders in the Tianyancha database.


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The man said that although he used the name Cao Shan in company documents, his real name was Bao Enbao. He said he had played an important role in helping bring together technology and talent for projects and used the pseudonym Cao Shan to avoid potential problems when recruiting in Taiwan, which has scrutinized talent poaching on the continent.

He said he had around 15 years of industry experience, having founded a chip design company in 2005, and made connections at TSMC after ordering chips to be manufactured there. Asked about national media reports suggesting his conduct was not always honest, he replied, “Do you think local governments are so easy to fool? “

He said he left the Wuhan project in October 2018 after disagreeing with leaders on how to develop it. He said he quit the Jinan project in December 2020 as Beijing increased oversight of chip projects, and that in May, Jinan’s government pushed the company he ran as a shareholder. main.

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

As problems emerged in projects like HSMC, Beijing recalibrated its approach. In October 2020, the National Development and Reform Commission, China’s economic planner, said companies without talent, experience, and sufficient technology had blindly set up semiconductor projects, and that officials who supported such projects would be held accountable.

Write to Yoko Kubota at [email protected]

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