The chips are down for China’s chip industry

“The mighty Chiang Shang-yi (蔣尚義) duped by a crook with a primary school education?” screamed a headline last week, after it emerged that the scantily-educated swindler – Cao Shan is his name – who had lured the Princeton and Stanford-schooled computer chip titan to be the figurehead of his sham company HSMC (Hongxin Semiconductor Manufacturing) has dismissed the last of his employees.

Among the many indiginities the 73 year-old Chiang had to endure at HSMC (a stint he later described as “a nightmare”) was calling on the goodwill he had with the chip equipment manufacturer ASML to get one of its machine imported to China – no easy feat when the Trump administration was pressuring western countries not to import technology to China  – only to discover (1) Cao Shan’s sole concern upon receiving the precious cargo was to use it as collateral to obtain RMB600 million in loans for himself, and (2) HSMC’s plant was so unprofessionally built that its ceiling wasn’t high enough for the machine to pass through. Even the freedom to throw in the towel was denied to Chiang: when he submitted his resignation letter after one year at the firm, he was threatened with a lawsuit by, of all people, the “intimate friend” (mainland media’s euphemism for mistress) of a company higher-up with deep CCP ties.

There is still a photo on the internet showing Chiang and that lady attending a forum:  a smooth-faced, fair-skinned former beauty, she stands erect and confident, while Chiang, his shoulders hunched and his arms falling stiffly by his side, tries to force a smile that ends up as a grimace. Prior to working for HSMC, that woman operated a racketeer for Chinese medicine.

Those who query how a stellar talent like Chiang would find himself under the thumb of a woman with a dubious past and a con artist with a primary school education don’t understand China. In contrast to capitalist societies, where people are free to sell goods and services to end consumers, in communist China, the right to do business, to varying degrees, has to be earned from the party and its adherents. So, all too often, the most spectacular gains are made not so much when goods and services are sold, as when they are in the process of being produced: those in positions of power assign the right to develop a business in exchange for personal gains, and those who win such rights receive kickbacks from parties contracted to producing the goods and services.

This is exactly what happened at HSMC: a well-connected guy – the “intimate friend” of that lady’s – connected Cao with a district government in Wuhan who was eager to get a piece of the chip craze action. The government quickly invested RMB200 million in seed money. With its stamp of approval,  Cao was then able to persuade a construction company to build a chip plant; it is industry practice for construction firms in this kind of deal to pay Cao up to RMB100 million to secure the bid. Armed with government funding and the plant, Cao sweet-talked Chiang into joining HSMC. WIth Chiang on board, the district government ponied up more funds, eventually investing a total of RMB15.3 billion over a 2.5-year period. By the time Cao gave his remaining employees their walking papers, there was only RMB1500 million left in HSMC’s accounts. Among those saddled with unpaid bills was the construction firm that had paid Cao that estimated $100 million upfront.

No one knows where the rest of the money has gone, but once, when the man who was responsible for introducing Cao to the district government got drunk, he was heard saying “I can surely retire after the HSMC project.”

There was a final twist to the HSMC saga. It was later discovered that even Cao’s name was fake – he had borrowed it from his driver in his hometown, as his own name had long been sullied by a string of shady deals.

About HSMC’s collapse, an online commentator quipped “A deal gone bad. The involvement of a mistress and a driver. All the motifs of the typical mainland business story are at play!”  Indeed, if there’s anything Beijing should learn from its 20-year failure to grow a domestic chip sector, it is that socialism with Chinese characteristics is inimical to the building of viable semiconductor firms,

Last year, China said by 2025, it’ll invest RMB9.5 trillion to raise its chip self-sufficiency rate to 70% from the current 30%. Despite the implosion of giant chip projects like HSMC, the frenzy to build semiconductors has only accelerated. In the first two months this year, a whopping 4350 new semiconductor companies were registered, representing an on-year growth of 378%. There are now a total of 66,500 chip enterprises in China. If these new firms adopt the typical mainland way of doing business, they are doomed to fail. But every Chinese who cares about liberty should gloat over this, for China’s firewall and its country-wide surveillance system are powered by chips. The irony of ironies, of course, is it’s in the virtual impossibility of building a semiconductor national champion that Beijing is getting its comeuppance for being so hostile to intellectual freedom.

I'm Michelle Ng (吳若琦), an Oxford-educated bilingual political writer and English writing coach based in Hong Kong. I'm currently an English columnist for Apple Daily and Ming Pao, and a Chinese columnist for 眾新聞. I have written for Hong Kong Free Press, The Wall Street Journal and The Vancouver Sun. 

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