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


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

Two foundry projects, led in part by a little-known entrepreneur then in his thirties, help show why China has yet to succeed.

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

and Samsung Electronics Co.

, who have decades of experience building chips.

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

Both foundries, Wuhan Hongxin Semiconductor Manufacturing Corp. and Quanxin Integrated Circuit Manufacturing (Jinan) Co., burned some cash, but never manufactured chips for commercial purposes.

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 major new chip-building 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 was invested in these projects, much of which came from governments, according to the documents. Some have never produced a single chip.

The Wall Street Journal spoke with 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 board member of HSMC and a former major shareholder of the companies. The Journal also spoke with 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 salvaging some parts, while writing tougher rules to avoid future waste.

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

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

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

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

When it comes to building the most advanced chips, such as those used in smartphones and computer processors, China – which has been hit by US sanctions preventing some companies from accessing certain chip-making technologies chips – could be delayed even further, experts say.

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 societal frustration with its reliance on foreign chips erupted in late December, after US semiconductor giant Intel Corp.

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

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



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

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

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

Soon, token money spread all over China. According to the Tianyancha database, tens of thousands of Chinese companies have registered their businesses as semiconductor-related, including some whose main businesses were in restaurants and cement manufacturing.

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

The Wuhan and Jinan 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 government documents.

HSMC has lured a former top executive from TSMC as chief executive. QXIC has recruited dozens of experienced engineers from Taiwan, including TSMC, with relatively high salaries, according to former employees.

A Taiwan Semiconductor Manufacturing Co. brochure presented 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 falling far short of the funding needed to manufacture advanced chips, the commercial production of which can cost billions of dollars.

At QXIC, work was progressing slowly, former employees said. Although the engineers recruited by QXIC had knowledge in the technical aspects of chip manufacturing, QXIC lacked the knowledge to integrate those 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, according to state media, and officially closed in 2021.

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

An official at 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 Cao Shan’s name in company documents, his real name was Bao Enbao. He said he played an important role in helping bring together technology and talent for the projects and used the pseudonym Cao Shan to avoid potential problems when recruiting in Taiwan, which was scrutinizing talent poaching. from the continent.

He said he has around 15 years of experience in the industry, having founded a chip design company in 2005, and forming ties with TSMC after ordering chips there. Asked about national media reports suggesting his conduct was not always honest, he replied: “Do you think local governments are so easily fooled?”

He said he left the Wuhan project in October 2018 after disagreeing with executives over how to develop it. He said he left the Jinan project in December 2020 as Beijing increased scrutiny of chip projects, and in May the Jinan government pushed the company he leads as a major shareholder. .

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

As problems surfaced 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 blindly set up semiconductor projects, and officials who supported such projects would be held responsible.

Write to Yoko Kubota at [email protected]

Corrections & Amplifications
A Taiwan Semiconductor Manufacturing Co. wafer is shown in a photo with this item. An earlier caption incorrectly called it a chip from TSMC. (Corrected January 10.)

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