A government-backed semiconductor manufacturing project based in the central Chinese city of Wuhan has gone belly-up, with key operator HSMC mired in debt. The local government said the project amounts to nearly RMB 128 billion (around $18.7 billion) in investment. 

Chinese media recently reported that the construction of the Wuhan Hongxin Semiconductor Project, which was planned to house China’s first 7-nanometer (nm) chip fabrication plant in a 650,000 square meter (around 160 acre) structure, had been at a standstill since December. 

Local newspaper National Business Daily said in a report (in Chinese) on Monday that work had stopped on the project’s headquarters in Wuhan as of Thursday, with no buildings completed. The newspaper cited a contractor of the project as saying that construction had been halted because workers had not been paid. 

On Aug. 28, the Commerce Bureau of Wuhan’s Dongxihu District, where the project is located, said in response (in Chinese) to a local resident’s inquiry that the project had been suspended because of “financial difficulties.”

On July 30, the Dongxihu District government said in a semi-annual report about the local economy that “there is a huge funding gap in the Hongxin Semiconductor Project” and that it faces “risks of stagnation at any time.” The report cited the “challenge in the capital market” because of the “global outbreak of Covid-19.”

The district government deleted the report (in Chinese) from its website after wide coverage from local media.

The project’s operator is a company founded in 2017 called Wuhan Hongxin Semiconductor Manufacturing Co. (HSMC). The company said on its website (in Chinese) that it expects to be able to build a 14-nm chip production line that can produce 30,000 wafers per month and a 7-nm chip production line with the same capacity. It did not give a timetable for those goals.

The decline of the ambitious chip manufacturing project highlights risks as local governments in China rush to achieve dreams of semiconductor self-reliance. According to Made in China 2025, a government initiative announced in 2015 aimed at boosting the high-tech sector, China wants to produce 70% of chips it uses by 2025. But making cutting-edge chips is hard, and attempts to charge into the industry haven’t gone well.

Vast investment and big hires

The Hongxin Semiconductor Project had received RMB 15.3 billion in funding as of the end of 2019, according to the Wuhan Municipal Development and Reform Commission, a government body that oversees local macroeconomic planning. The project is expected to receive an additional cash infusion of around RMB 8.7 billion in 2020, it said.

It is a truth universally acknowledged—as Jane Austen would have put it, during a second career as a semiconductor market analyst—that a new chipmaker in possession of a good fortune must be in want of talent. HSMC has been courting engineers at Taiwan Semiconductor Manufacturing Co. (TSMC), the largest contract chipmaker in the world. The company, together with another local government-backed chipmaker, had hired more than 100 engineers and managers from TSMC since last year, according to a Nikkei Asian Review report in August.

In Taiwan, HSMC is known as a generous suitor. One anonymous source told Nikkei that the HSMC offers packages “as high as 2 to 2.5 times TSMC’s total annual salary and bonuses” for engineers and managers from the Taiwanese company, which supplies high-end chips to big tech firms such as Apple, Google, and Huawei.

In July 2019, HSMC hired as its chief executive Jiang Shangyi, formerly a research and development vice president at TSMC. The 75-year-old chip veteran also served as an independent director at Semiconductor Manufacturing International Corp (SMIC), a Shanghai-based state-backed chipmaker, from 2016 to 2019.

Where was the money from?

While the Wuhan municipal government said the project had received billions of RMB in funding, HSMC’s shareholding structure doesn’t reflect that. The company is 10% owned by a government-owned firm and 90% by a Beijing-based private firm, according to Chinese corporate information platform Tianyancha. The Beijing-based firm is majority-owned by company Chairwoman Li Xueyan, who holds a 54% stake. Mo Sen, one of the company directors, holds the balance.

On Monday, Chinese media The Cover reported that the Beijing-based company never put real money in the project.

Public information shows Li has no experience in semiconductors and data from Tianyancha shows she also has stakes in a baijiu retailer, a few catering companies, and several medical firms.

Li cannot be reached for comment. HSMC didn’t respond to an emailed request for comment.

“The strange thing about HSMC is that it’s unclear where its money is from… It seems that the company didn’t actually receive as much money as it claimed to have,” Gu Wenjun, chief analyst at Shanghai-based semiconductor research company ICwise, told TechNode (our translation).

Chen Rang, a semiconductor investor cited by the National Business Daily, hinted that the Wuhan municipal government may have leveraged land resources to attract private capital to back the project. “But the semiconductor industry has a high standard on investment and it is far from enough to just utilize land resources [to raise money],” Chen said.

Phantom mask aligner

HSMC’s goal was to make China’s first 7-nanometer chips. All it has to show for it is a few uncompleted buildings. It did buy a high-end machine needed for bleeding-edge semiconductor production, but it was put up as collateral for a loan.

The semi-annual report by the Dongxihu District government also said that HSMC had bought “China’s only mask aligner that can produce 7-nm chips” from Dutch company ASML, referring to an instrument that enables photolithography in the fabrication process.

If true, it would be quite a coup—the US government has been campaigning since 2018 to prevent ASML from selling the most advanced machine required to make high-end chips to Chinese companies, according to Reuters.

Chinese media Caixin tried to find the unique 7-nm machine, and it does seem to exist. But they found that it was under mortgage; is good only for 14-nm chips, not 7-nm; and, citing an anonymous semiconductor industry insider, that SMIC has around 10 units of the same model.

Court files show that the machine had never been used when it was held as security for the RMB 582 million loan in January.

“You will need at least two mask aligners and nearly 100 pieces of other machinery to make chips,” said Gu of ICwise. He added that no Chinese chipmaker has realized the mass production of 7 nm chips.

READ MORE: SILICON | Can China make chips?

Fool me once

The Hongxin project was widely questioned in the semiconductor industry, said Gu. “No one believed that it would be a success,” he said.

There are similar stories from other parts of China. In July, Dekema, a Nanjing-based chipmaker backed by the local government, announced it was bankrupt because of “financial difficulties” in raising additional funds from investors. 

The Nanjing company previously received $3 billion from investors including the Nanjing municipal government. Founded in 2016, the company said it would “fill the blank in China’s contact image sensor (CIS) chip production.” CIS chips are a key component widely used in portable scanners and bar code readers. After the bankruptcy announcement, local media found that the company’s headquarters consisted of two unfinished buildings and that it had not produced a single wafer.

“Building [semiconductor] production lines needs long-term and consistent investment and it usually takes three to five years to see the initial results,” Gu said. “Production lines backed by local governments face the risk that the support is not consistent because of rotations in officials.”

“We appeal to local governments to make decisions on semiconductors after necessary analyses,” he said. “Whether a semiconductor industry can be built doesn’t depend on how much subsidy the government gives, but on how capable the participants are.”

Writing about semiconductors and telecommunications.