How China’s would-be silicon savior became a debt-ridden disappointment

The Chinese semiconductor startup HSMC (Wuhan Hongxin Semiconductor Manufacturing) managed to hire the engineers and even a senior executive of Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s biggest chipmaker, and attract billions of yuan in government investment and subsidies. It could have been a highlight of China’s efforts in building domestic semiconductor manufacturing capability amid upgrading U.S. export controls, but instead, the company is now in deep debt, sued by multiple contractors, and barely has its factory constructed.

The chip industry has become a key battlefield of the escalating U.S.-China tech war, as Beijing realizes that semiconductors underpin the country’s technological and economic progress. The chipmaking industry heavily relies on U.S.-made chip design tools, patents, and critical manufacturing technologies, which Washington has used to leverage semiconductor makers around the world to restrict chip supplies to Chinese companies.

The U.S. earlier this month imposed export restrictions on China’s biggest chipmaker, Semiconductor Manufacturing International Corporation (SMIC), after Huawei lost nearly all of its major semiconductor suppliers when a similar ban took effect in mid-September.

China imports hundreds of billions of dollars worth of semiconductors each year, and is expected to buy over $300 billion in foreign chips in 2020, a similar amount as the previous two years. Chinese officials have repeatedly stated (in Chinese) that the nation’s heavy dependence on semiconductor imports has become a “stranglehold” (卡脖子 qiǎ bózi) on China’s economic prospects. Beijing is also drafting measures to bolster the semiconductor industry’s development for the country’s top-level economic policy: the 14th Five-Year-Plan, according to Bloomberg.

The arrival and departure of HSMC?

Under the pressure of U.S.-China decoupling and deteriorating bilateral relations, Beijing is pushing to boost the domestic semiconductor industry. HSMC is one of the most prominent semiconductor startups under this national effort.

Founded in 2017, HSMC received high expectations mainly thanks to its big-name CEO, Chiang Shang-yi (蔣尚義 Jiǎng Shàngyì), who formerly oversaw research and development as the joint COO of the world’s biggest semiconductor manufacturer, TSMC (Taiwan Semiconductor Manufacturing Company). HSMC earned additional prominence in the field when it purchased an advanced lithography machine from the Netherlands’ ASML and announced it aims to produce 7nm chips, a goal that even SMIC has yet to achieve.

HSMC attracted 128 billion yuan ($19 billion) of investment and subsidies. However, recent government and news reports suggest that the company is facing financial fallout and risks bankruptcy.

Construction of HSMC’s headquarters and factory in Wuhan has come to a full stop as the company failed to pay off its contractors, according to multiple Chinese media reports (in Chinese). HSMC appears to be still operating, with hundreds of employees continuing to work in the temporary office buildings, but there is no indication of any ongoing production activities in the factory, an HSMC equipment supplier told The China Project.

HSMC is currently facing a significant cash shortage and is at risk of being shut down anytime, according to the mid-year economic report issued (in Chinese) this July by the local government of Wuhan’s East-West Lake District, where the semiconductor startup is located.

The government report revealed that HSMC was not able to receive funding from the national semiconductor industry support programs and other private equity funds, due to the company’s failure to provide key supporting documents on land and environmental impact assessment. A local court in Wuhan seized (in Chinese) more than half of HSMC’s land last November after a major construction contractor, Wuhan Huanyu Infrastructure LLC, sued the semiconductor company for underpaying 51 million yuan ($7.6 million).

The Wuhan government claimed that HSMC has concluded its phase one construction, including major production facilities and an R&D building, which is now equipped with a high-end ASML lithography machine. However, business registration records on Tianyancha show that HSMC has mortgaged the brand-new ASML semiconductor manufacturing machine to Wuhan Rural Commercial Bank for a 581 million yuan ($87 million) loan.

Is it all a scam?

HSMC has also been delaying onboarding dates for its new employees, and many of them have taken to social media (in Chinese) to expose the company’s unreliable recruiting process. A Chinese mechanical engineer hired by HSMC confirmed to The China Project that the company has repeatedly postponed the start date and has not offered any updates since July.

In May 2020, the Wuhan government took HSMC off the provincial key investment projects list (in Chinese), after the chip company was presented at the top of the list for the two continuous years ever since its founding. HSMC earlier this year took down its Chinese website, leaving its English site still available.

HSMC’s background led to skepticism in Chinese media even before its recent fall. The chip company’s biggest shareholder, Beijing Guangliang Blueprint Technology LLC (Blueprint), was only a two-week-old technology company when it established HSMC. Neither Blueprint nor its two founders had any known previous experience in the semiconductor industry. HSMC’s questionable origin did not stop the Wuhan government from promising hundreds of billions in investment and subsidies to the semiconductor startup, as Beijing continues to push for self-sufficiency in key technology areas impacted by its trade war with Washington.

A co-founder of Blueprint in 2019 established another semiconductor company in Shandong Province, Quanxin Integrated Circuit Manufacturing (Jinan), known as QXIC, which attracted 59.8 billion yuan ($8.9 billion) worth of government investment and subsidies.

As thousands of new semiconductor companies are registered each year in China, the competition for top talent is fierce. HSMC not only hired the former TSMC executive and industry legend Chiang Shang-yi as its CEO, but also lured about 50 veteran TSMC engineers with two to two-and-a-half times higher salaries, according to reports by Nikkei Asian Review. QXIC also reportedly hired roughly dozens of former TSMC engineers.

Chinese news media started to report on HSMC’s downfall in early August, and many focused on the company’s illicit conduct and suspicious background. Some reports called the HSMC case a fraud, and used it as a wake-up call for local governments to conduct sufficient due diligence before rushing into the semiconductor industry. A Chinese social media account, Xin Bang, in September wrote (in Chinese) in a now-deleted article that HSMC was transferring its Taiwanese engineers to Guangdong for another semiconductor startup “scam.”

HSMC’s earlier speculation on its advanced lithography machine also faced public disputes. The company has long claimed that its ASML chipmaking machine is the only semiconductor manufacturing equipment in China that can produce 7nm chips, yet Caixin reported (in Chinese) that many other Chinese chip companies own the same model, with SMIC having 10 of them in-house.

Beijing’s call on self-sufficiency of chip supplies and the following “Great Leap Forward”–style national fervor on semiconductors have driven many local governments to rush into the high-technology field, leaving room for opportunists. China’s News Weekly (in Chinese) reported that at least six semiconductor startups across the country have come to a halt. The public has started to question these companies and local governments that have wasted state resources while the country is still recovering from the COVID-19 pandemic.

Last week, China’s top economic planner cautioned (in Chinese) local governments about their investments in the semiconductor industry. The message was loud and clear: Don’t waste money.

“Companies that don’t have relevant experience, technology, or human resources are joining the semiconductor industry. Certain local governments do not have enough understanding of the semiconductor industry’s law of development, and blindly install these projects. They are exposed to the risk of redundant and low-quality capacity building,” a spokesperson of the National Development and Reform Commission (NDRC) said in a press conference on October 20.  

NDRC warned that local governments that support semiconductor projects will be held accountable should major losses and risks occur.

“I hope the local governments can be more vigilant,” a Weibo user commented (in Chinese) on the fallout of HSMC. “That’s taxpayer’s money, not your political stepping-stone.”