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A Cautionary Tale For China's Ambitious Chipmakers

Wuhan Hongxin Semiconductor Manufacturing Co.'s unfinished chip fabrication plant.
Wuhan Hongxin Semiconductor Manufacturing Co.'s unfinished chip fabrication plant.

WUHAN, China — In 2019, the U.S. sanctioned two major Chinese telecom firms, temporarily cutting them off from a vital supply of semiconductor chips — bits of silicon wafer and microscopic circuitry that help run nearly all our electronic devices.

Wuhan Hongxin Semiconductor Manufacturing Co. promised a way out, toward self-reliance in the face of increasingly tough U.S. curbs on this technology. The private company once boasted on its website that it would raise a total of $20 billion to churn out 60,000 leading-edge chips a year.

None of that would come to pass.

Hongxin's unfinished plant in the port city of Wuhan now stands abandoned. Its founders have vanished, despite owing contractors and investors billions of yuan.

The company is one of six multibillion-dollar chip projects to fail in the last two years. Their rise and fall is a cautionary tale in an industry that is flush with state cash but still scarce on expertise — and a preview of the expensive and winding road China will have to take toward semiconductor self-sufficiency, now a national security priority.

A Chinese microchip is seen through a microscope set up at the booth for the state-controlled Tsinghua Unigroup project during the 21st China Beijing International High-tech Expo in 2018. Tsinghua Unigroup said last December it had defaulted on paying the principal back on nearly $2.5 billion worth in bonds due to a "liquidity issue."
Ng Han Guan / AP
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A Chinese microchip is seen through a microscope set up at the booth for the state-controlled Tsinghua Unigroup project during the 21st China Beijing International High-tech Expo in 2018. Tsinghua Unigroup said last December it had defaulted on paying the principal back on nearly $2.5 billion worth in bonds due to a "liquidity issue."

Big promises

Hongxin Semiconductor began in November 2017 as a joint venture between Wuhan's Dongxihu district government and a company called Beijing Guangliang Lantu Technology.

The venture got off to a good start — on paper — but a closer look shows there were a number of issues. One of the co-founders of Guangliang had only finished elementary school and was allegedly using false credentials and a different identity, Cao Shan, according to 36Kr, a Chinese tech news outlet. Another co-founder, Li Xueyen, dabbled in selling Chinese traditional medicine, alcohol and tobacco before starting Hongxin, according to corporate records reviewed by NPR. The two could not be reached for comment.

To balance out their lack of technical know-how, the Hongxin founders lured in one of Taiwan's most famous semiconductor engineers, Chiang Shangyi, to serve as director. He left the company in 2020 to become the deputy chairman of China's Semiconductor Manufacturing International Corp.,telling Hong Kong paper South China Morning Postthat his time at Hongxin was"a nightmare." Chiang did not respond to NPR requests for comment.

Hongxin made headlines in December 2019 when it managed to buy an older model lithography machine made by Dutch company ASML, despite American lobbying to prevent its sale to the Chinese chipmakers.

ASML sold the multimillion dollar piece of equipment — used to etch semiconductors — because of Jiang's top-notch reputation, according to two people familiar with the sale who were not authorized to speak publicly about it. ASML declined to comment.

Hongxin's timing was opportune. Chinese chip companies still rely heavily on European, American and Japanese technology — much of which, in turn, relies on American intellectual property, which the U.S. appears determined to keep out of Chinese hands. China's semiconductor demand continues to surge beyond what it can supply itself; trade data show that in 2019, Beijing imported around $350 billion worth in chips.

Given that reliance,China's central and local governmentshave been pumping money into the sector to accelerate domestic chip design and manufacturing. The country's latest five-year economic planning document released in March identifies integrated circuits — semiconductors — as a priority sector for research and development funding.

The all-out approach has notched achievements. Successful chip design companies such as Cambricon and Huawei's HiSilicon have allowed Huawei to replace some of its U.S.-designed chips in its mobile phones. Not far from Hongxin is Yangtze Memory Technologies Co. (YMTC), a partially state-owned company that plans to double its output of memory chips to overtake South Korea's Samsung and SK Hynix, which currently dominate production.

The Wuhan Cybersecurity Talent and Innovation Base, an industrial park that is to provide office and residential space for technology companies. Hongxin built its factory next door.
Amy Cheng / NPR
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The Wuhan Cybersecurity Talent and Innovation Base, an industrial park that is to provide office and residential space for technology companies. Hongxin built its factory next door.

Hongxin sought to capitalize on this momentum. It rented a discreet office on the 25th floor of Wuhan's Dongxihu district government headquarters.

"Cao" and his partners promised to pitch in 1.8 billion yuan ($276 million) in investment on top of 200 million yuan ($30.7 million) in starting funds from Dongxihu district.

Wuhan's city government was, around the same time, also beginning construction on a cybersecurity park to provide office and residential space for technology businesses, and it was looking for a flagship company to anchor the complex. In 2018 and 2019, the city named Hongxin its most important "critical construction project" and the company began building its factory next door.

Broken promises

As early as late 2019, even while Hongxin was being lauded by Chinese media for securing an ASML machine, several Wuhan-based construction crews were scrambling to get paid for millions of dollars of work for Hongxin.

"Four months ago, [Hongxin's] payments to us started to be short, and now we are missing 18 million yuan [$2.76 million]," one contractor, Lu Haitao told another, Wang Liyun in December 2019, according to phone recordings NPR obtained. Wang confirmed the authenticity of the recordings when reached by phone. Lu did not respond to several texts and calls from NPR. Wuhan's municipal government did not respond to a request for comment.

Meanwhile, two other semiconductor companies — Tacoma Semiconductor Technology Co. Ltd. and Dehuai Semiconductor Technology Co. Ltd — were also running out of cash.

Tacoma was over 350 miles from Hongxin along the Yangtze river, in the port city of Nanjing. There, the Taiwanese entrepreneur Joseph Lee had initially found a welcome harbor for his own ambitions, starting Tacoma in the city in 2015. He pledged to raise $3 billion to make wafer chips, with consultation from Israeli company Tower Semiconductor (formerly TowerJazz). Tower declined to comment for this story.

Lee continued pitching other local governments. In 2016, he co-founded a second company in Jiangsu province's Huai'an city, named Dehuai Semiconductor. (Lee sold his stake the same year, citing a clash in vision with the firm's other managers.)

In 2017, Lee invited Chinese media to tour Tacoma's facilities, declaring the company had somehow scored 200 million yuan ($30.7 million) in sales. Tacoma had yet to even finish construction on its manufacturing facilities.

Lee initially agreed to an NPR interview for this story but later retracted it, citing state pressure. "Officials have told me not to talk to the media," he said by text.

By 2018, Tacoma's employees were blasting an online forum run by the Nanjing mayor's office with complaints about unpaid salaries. Chinese corporate records show at least 50 legal complaints have been filed against Tacoma in provincial court, all seeking to recoup construction costs or unpaid wages. Lee disputes owing employees 20 million yuan in unpaid wages.

"Real or fake, the truth is in the hearts of the people," Lee wrote shortly after these allegations, on Wechat,the Chinese messaging app, and cited a verse from the New Testament: "Now faith is the certainty of things hoped for, a proof of things not seen."

Hongxin, Tacoma and Dehuai were able to secure billions of yuan in state funding on the condition they would match that with investment of their own — a commitment that never materialized. Tacoma eventually raised only a fraction — 250 million out of 2.5 billion yuan — of what it promised.

"We never imagined that when our cash flow dried up, we would not be able to find new [cash flow sources], that we would get in so deep," he told Japanese broadcaster NHK this March.

Technology analysts say China's most recent semiconductor flops illustrate how astronomical upfront costs in the industry are, even for local governments.

"What leading companies like South Korea's Samsung and Taiwan's chipmaker TSMC are spending in terms of R&D every year rivals some of the big government funds in China, so even if you use the lever of industrial policy and huge state subsidies, it's just really hard to compete with the established leaders," says Jeffrey Ding, who China's artificial intelligence and technological capabilities.

A bubble deflating

Hongxin's temporary offices. The main entrance to the complex has been freshly sealed with concrete.
Amy Cheng / NPR
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Hongxin's temporary offices. The main entrance to the complex has been freshly sealed with concrete.

The dissolution of Hongxin, Tacoma and Dehuai has led to a cascading chain of bankruptcies in their wake.

Court records show the Wuhan government confiscated about 300 acres of land and even Hongxin's ASML machine to pay down an estimated 128 billion yuan ($19.6 billion) in debt.

Hongxin quietly moved out of its headquarters late last year, according to tenants next door. About 10 minutes' drive away, Hongxin's factory complex is nothing more than a concrete shell. Nearby, the entrance to its temporary offices had been freshly sealed with a concrete wall during an NPR visit in February.

"The executives are nowhere to be found," says Wang Liyin, a director at Huaiyu Construction Co. in Wuhan, which was subcontracted to build Hongxin's factory.

Wang alleges Hongxin contractors still owe him more than 40 million yuan ($6.14 million) for construction materials and is suing them in Wuhan court. Unable to pay his own employees, Wang says he has left China for the time being but refuses to disclose which country he is sheltering in: "As long as things continue to be bad, I will not come back."

Tacoma and Dehuai have officially declared bankruptcy, and local government bodies have taken over the companies' remaining assets for restructuring. "There is nothing much to say about Tacoma. Everything has been liquidated," says Si Wei, a former deputy director at the company.

A court has ordered Tacoma founder Joseph Lee not to leave mainland China until he pays down the company's debts. He currently lives in the port city of Ningbo and is working on his newest venture, the chip designer Chengxing Semiconductor Company, which he started in 2019.

He says he is also working with the Nanjing local government to restructure the company and bring in new investors. "Getting Tacoma going is the only way to not let down the company's employees and contractors," Lee wrote on WeChat.

Given the sheer number of semiconductor companies receiving state investment, some were bound to fail — expensive, but necessary mistakes in China's ambitions toward technological independence, says Zhang Honglei, a director at RunJet, a Wuhan-headquartered company that makes chip components.

"The semiconductor industry is characterized by its requirement of high investment, high risk — and of course, the possibility of high return. During the development process, firms like ours need constant financial inputs and support," Zhang says.

Three other major businesses went bankrupt last year. Even established chip companies are seeing cash flow troubles; YMTC's parent company Tsinghua Unigroup said last December it had defaulted on paying the principal back on nearly $2.5 billion worth in bonds due to a "liquidity issue."

The high risk has not discouraged a wave of new entrants. More than 20,000 new semiconductor-related companies sprang into existence last year alone, according to Qichacha, a Chinese corporate records database.

But Leo Li, founder of a new Shenzhen-based venture capital firm, says he decided to hold off on investing in semiconductors after researching the industry. The chipmaking business requires "a complete ecosystem of supply chains" to survive, he says, and not just a handful of well-funded startups.

Chinese policymakers are trying to slow a boom in semiconductor companies, warning against excessive investment and white elephant projects.

"This risks leading to the construction of low-level or duplicate chip manufacturing plants," Meng Wei, a spokesperson for a top police-planning body, said last October.

Should any plants fail, she added, local governments must take financial responsibility.

"One hopes the [semiconductor] industry will take on a more market-oriented approach," says RunJet's Zhang.

Amy Cheng contributed research from Wuhan.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

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