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China’s semiconductor drive stalls in Wuhan, exposing gap in hi-tech production capabilities

Written by South China Morning Post Published on   4 mins read

Construction on a USD 20 billion state-of-the-art semiconductor manufacturing plant in Wuhan has stalled due to a lack of funding.

At an idle construction site in western Wuhan, China’s steep climb to semiconductor independence is clear for all to see. The partially-built factory, owned by Wuhan Hongxin Semiconductor Manufacturing Company (HSMC), was meant to be a key part of a USD 20 billion investment that turned the province into a chip manufacturing hub.

But two years after it was started, construction has ground to a halt, with little evidence of progress beyond a few cranes, workers’ dormitories and steel frames jutting into the air.

The project, which the local Dongxihu district government said in July had stalled due to underfunding, is the latest example of a Chinese chip factory hitting the rocks because of poor planning or funding shortfalls.

Earlier this year, a USD 100 million manufacturing plant set up by US chip giant GlobalFoundries and the Chengdu city government ceased operations after remaining idle for almost two years. In the country’s east, a USD 3 billion government-backed chip plant owned by Tacoma Nanjing Semiconductor Technology went bankrupt in July after failing to attract investors.

Increasingly cut off from American semiconductors due to an intensifying tech war, China is redoubling efforts to develop its indigenous chip manufacturing industry and shake off dependence on Western technology.

Supply issues

In late July, Beijing introduced a 10-year corporate tax break to established companies that could produce chips of 28 nanometers or smaller. It also expanded tax incentives for the entire semiconductor supply chain, from design to packaging. Yet, China’s efforts to reduce gaps in its supply of key technologies and components have largely failed to take off.

HSMC’s phase one factory, which includes its main production facility and a research and development building spread over more than 390,000 square meters, had been partially completed but needs more capital to move forward, the Dongxihu district government said in its July report, which has since been removed from online.

Chinese officials bemoan ‘significant catch-up’ needed with US on chip-making, as industrial decoupling looms. Construction of its phase two facility has barely started and because of insufficient preparations, the company cannot apply for central government funding.

The project was viewed by local authorities as a way to lure much-needed investment to Wuhan, which was the initial site of the coronavirus outbreak early this year. But its stuttering progress has put pressure on local authorities already struggling to recover from the impact of the pandemic.

Funding problems

The funding stress emerged last year when a Wuhan court put a three-year hold on HSMC’s use of 220,000 square meters of land that had been designated for its phase two project. It followed a complaint by a construction contractor which said the firm and its main contractor owed it millions of yuan for the first phase of construction.

Another major contractor, L&K Engineering, a listed company that helped build dust-free rooms and mechanical systems for the production facility, halted work because of delayed payments from HSMC that it said hurt its bottom line, the contractor said in its half-year earnings report.

The Dongxihu district government has fronted up with a RMB 200 million (USD 29 million) investment in HSMC, but the company’s owner, a Beijing based tech firm, has still not fulfilled its commitment to inject capital of RMB 1.8 billion (USD 261 million) into the project, according to corporate records.

HSMC held a high-profile event in December to celebrate the purchase of its first piece of high-end, chip-making equipment from Dutch firm ASML. But it quickly pledged the brand-new machine as collateral to borrow more than RMB 500 million from a local bank.

Construction stalled

On a visit to the phase one site on Tuesday, dozens of vehicles with licenses from different provinces were parked outside and a few people milled about. But a gatekeeper said there had been no new construction this year. The owner of a nearby convenience store said contractors had not yet been paid for some of the engineering work completed last year.

When approached for comment, HSMC’s chief executive Chiang Shang-yi said he was not aware of the company’s financial problems.

“The responsibility for finance belongs to the chairman, chairwoman in this case,” he said via LinkedIn message. “I have read the [government] report. Actually, many details in the report were new to me, as well.”

Read this: Global smartphone sales drop 20% in Q2: Report

Chiang has been the public face of HSMC’s campaign to attract investment and is part of a trend among Chinese semiconductor firms that have looked to employ veteran overseas engineers to boost research and development at home.

After retiring from Taiwan Semiconductor Manufacturing Company (TSMC), the leading chip manufacturer in Taiwan, Chiang was an independent director at Semiconductor Manufacturing International Corporation, China’s largest semiconductor manufacturer. He assumed his management role at HSMC in 2019.

In an interview with Chinese publication DeepTech last year, he said HSMC would not compete with TSMC because they had different business models, but did not elaborate.

A cached version of the company’s now inactive website says it planned to build both 14 and 7 nanometer chip production lines that would be able to produce 30,000 chips per month.

This article was first published on by the South China Morning Post.


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