In-depth investigation: The 100 billion chip scam

Latest update time：2021-08-31 10:13

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Why was the precious "lithography machine" that they had worked so hard to obtain mortgaged for money just one month later? This made the management of the chip company "Wuhan Hongxin Semiconductor" (hereinafter referred to as "Hongxin"), especially the newly hired CEO and industry leader Jiang Shangyi, feel something was wrong.

Lithography machines are key equipment for chip manufacturing. Only a few companies in the world can produce them, and ASML, a Dutch company, has the most advanced technology. However, due to the Sino-US trade friction, according to Reuters, since 2018, the US has repeatedly lobbied the Dutch government, hoping that the Netherlands would not allow ASML to export high-end lithography machines to China, making it impossible for domestic chip manufacturers to buy them even if they have money.

Tao Yong, an employee of Hongxin, still remembers the scene of the arrival of the lithography machine on December 22, 2019: In a factory building on Wang'an Avenue in Wuhan Linkonggang Economic Development Zone (Dongxihu District), five workers carefully transported a huge machine into the constant temperature workshop. This lithography machine, model NXT:1980Di, was wrapped in layers of sealed bags. To prevent oxidation, workers also injected inert gas into the bag to keep it fresh with liquid nitrogen throughout the process.

When the lithography machine entered the factory, Hongxin was overjoyed. On that day, a ceremony was held for the lithography machine to enter the factory. The red backboard read "Hongxin serves the country and realizes the Chinese dream". Among the people taking photos, stood Chiang Shangyi, the former second-in-command of TSMC.

"Hongxin has a Jiang Shangyi, and Jiang Dad brought a photolithography machine." Each and every one of these events is a major event in the domestic semiconductor industry.

74-year-old Chiang Shangyi is a prominent figure in the semiconductor industry. In the industry, Chiang Shangyi is respected as "Dad Chiang". An industry insider described to 36Kr: "TSMC has many uncles and uncles, but there is only one 'Dad'." In June 2019, Chiang Shangyi joined Hongxin.

In acquiring the lithography machine, "Dad Jiang's" face played a huge role.

Someone from Hongxin once asked Chiang Shangyi why he was able to get the lithography machine. Chiang Shangyi replied: "We signed contracts for hundreds of machines when we were at TSMC. Everyone at (ASML) is familiar with us. They were willing to sell us the first machine just for the sake of face."

Reputation alone is not enough. The above-mentioned person told 36Kr that due to ASML's limited production capacity and extremely strict external supply conditions, even if ASML accepts an order, it will send a team of more than a dozen people to the customer's factory for on-site inspections, using a "scoring system" to judge the buyer's technical blueprint, financial status, etc.

Thanks to Jiang Shangyi, Hongxin soon got the opportunity to be inspected. In December 2019, Hongxin obtained a brand new DUV deep ultraviolet lithography machine.

For a time, Hongxin, which was only two years old at the time, was the most popular chip project in recent years. Its previous ambitious goal - to focus on 14nm process and then 7nm, with a monthly production capacity of 30,000 pieces, which only TSMC and Samsung can achieve in the industry - no longer seemed so illusory.

But what Jiang Shangyi never expected was that the lithography machine he had worked so hard to obtain was mortgaged to the bank for money less than a month after it entered the factory.

Tianyancha shows that on January 20, 2020, Hongxin mortgaged the ASML lithography machine it introduced to Wuhan Rural Commercial Bank in exchange for a loan of 580 million yuan. In the mortgage information column, it was clearly written that the lithography machine was "brand new and unused."

"Dad Jiang started to feel something was wrong," Lin Xiong, an early member of the Hongxin team, recalled to 36Kr.

In June 2020, the disheartened Jiang Shangyi planned to resign from the positions of director and CEO of Hongxin. At that time, Jiang Shangyi and the Hongxin board of directors had already broken up. In order to retain Jiang Shangyi, the Hongxin board of directors showed a ferocious face.

An insider told 36Kr that in order to prevent Jiang Shangyi from leaving, Li Xueyan, then chairman of Hongxin, said she would send a lawyer's letter to sue him, "to write a bad story about Jiang Dad and attribute all of Hongxin's failures to Jiang Dad."

Under all kinds of obstructions, Jiang Shangyi was unable to escape, and even became a puppet for Hongxin to show to the outside world. On July 8, 2020, Hongxin held an "employee recognition meeting" and Jiang Shangyi was asked to attend and award employees. Hongxin officially released a group photo of Jiang Shangyi, Li Xueyan and others, and the picture was prosperous and harmonious.

The picture shows a group photo of the Hongxin Commendation Conference in July 2020. The 7th and 8th from the left are Li Xueyan and Jiang Shangyi. The picture is from the Hongxin official website

After the event, Jiang Shangyi quickly left Wuhan and returned to his residence in the United States. In an interview with the South China Morning Post, he said: "My experience at Hongxin was a nightmare."

One month after Jiang Shangyi announced his resignation, a document from the local government revealed the tragic situation of Hongxin's collapse. On July 30, 2020, the Dongxihu District Government of Wuhan City, where Hongxin is located, officially issued a report, clearly stating that the Hongxin project "has a large funding gap and is at risk of a funding chain rupture and project stagnation at any time."

Lu Haitao, the head of Wuhan Torch Construction Group (hereinafter referred to as Torch), a general contractor that failed to collect debts from Hongxin, angrily denounced many local officials: "Why do you say (Hongxin) invested 100 billion? Isn't that a liar!"

What is puzzling is that the first few people who organized Hongxin had no background in semiconductor industry and most of them even had only college degree. How did they deceive the Wuhan government, performance leader Jiang Shangyi, and many partner companies into this "100 billion scam" step by step?

More importantly, for the many local governments and funds that are eager to "make chips", how can they avoid falling into the "Hongxin-style scam" again?

The Hongxin construction site was photographed by 36Kr Qiu Xiaofen

A team of laymen set up a 100 billion chip game

To set up a chip project, you need to find people, seek technical authorization, and contact the government. The relationships are nested and extremely difficult. However, since the chip business requires land, factory construction, and machine purchases, each link involves hundreds of millions of dollars of huge funds. Once speculators succeed, the returns are extremely tempting.

Wuhan Hongxin, which has a big story and involves a large amount of money, is such a bold project.

Cao Shan, the earliest architect of Hongxin, tried to set up a semiconductor project in 2017. An insider told 36Kr that in order to find a local government willing to cooperate, Cao Shan usually roamed around various provincial capitals, including Guangzhou, Hefei, Chengdu, Nanjing, etc., but most of the time he ran into a wall.

In Lin Xiong's impression, Cao Shan is full of big talk and has a gangster style. In order to package himself, Cao Shan often carries many business cards with him, including identities such as "Vice President of TSMC" and "First Vice President of Acer in New York, USA". However, his lies are often exposed because "there is no vice president of TSMC named Cao Shan" and "Acer does not have a company in New York at all".

Several people who have had contact with Cao Shan told 36Kr that "Cao Shan" is not even his real name. His real name is Bao Enbao, and Cao Shan is the name he borrowed from his hometown driver. "He has committed too many crimes, so he uses a pseudonym when he is outside," a person familiar with Cao Shan told 36Kr.

But after traveling to many places, Cao Shan developed a good communication skill. On the eve of establishing Hongxin, Cao Shan met another key figure, Long Wei.

Long Wei, the secret operator behind Hongxin. Many Hongxin insiders told 36Kr that Long Wei was "very powerful". With Long Wei's help, Hongxin knocked on the door of Wuhan Dongxihu District Government.

In order to control the real power of the company, Long Wei found Li Xueyan, who was close to him, to serve as a director of Hongxin. Li Xueyan's work experience had nothing to do with chips. She sold liquor, opened a restaurant, and resold Chinese medicine. Long and Li also placed many of their confidants in key positions at Hongxin, such as Li Yueru, a board supervisor. An insider said that she was previously a "personal nanny" responsible for taking care of Li Xueyan's daily life.

An absurd initial team was formed: Long Wei, who had a "background", served as chairman, Cao Shan, a "gangster", served as director, and Li Xueyan, a "chip novice", served as director and general manager. None of the three had any experience in the semiconductor industry. And the founding team of such a 100 billion-level semiconductor project had mostly college education, and Cao Shan himself only had a primary school diploma.

Unexpectedly, under the operation of Long, Cao and Li, Hongxin quickly gained momentum: on November 12, 2017, Cao Shan established a company called "Beijing Guangliang Blueprint". Four days later, Guangliang Blueprint, as the major shareholder holding 90% of the shares, jointly established Hongxin with the Dongxihu District Government of Wuhan.

The hidden danger has been buried since then: it seems that the risk borne by the Wuhan Dongxihu District Government is very small. As a small shareholder with 10%, it only injected 200 million yuan in start-up capital at this time, which is only a small amount in the chip projects that often require investments of tens of billions of yuan; but the problem is that although Long, Cao, and Li Yifang, who hold 90% of the shares, showed an attitude of taking on the heavy responsibility at the time and promised to invest 1.8 billion yuan, they have never actually paid the money.

In 2017-2018, Cao Shan and Li Xueyan founded Beijing Guangliang Blueprint with a paid-in capital of 0. Data from Tianyancha

However, this did not prevent Hongxin from becoming a star project in Wuhan within just one year. Since 2018, Hongxin has been listed as a major project of Hubei Province for two consecutive years. To the outside world, Hongxin introduced itself as a project with an investment of US$20 billion/RMB 130 billion.

The Dongxihu District government also quickly followed up with funding. According to a document released by the Wuhan Municipal Development and Reform Commission, in January 2019, Hongxin, which had only been established for a year, had completed an investment of 6.5 billion yuan; by March 2019, Hongxin had received more than 1.5 billion yuan in investment within a month. All of this investment came from the Wuhan Dongxihu District government.

What is puzzling is why Hongxin was able to obtain these funds. After all, the various mistakes and omissions in technology and operations made by the Hongxin team in the early stage surprised people in the industry.

For wafer fabs, the initial technology route is almost a life-or-death matter. Cao Shan first set the technical direction for Hongxin to produce chips with a process of 90 microns to 7 nanometers. He also set a goal like the Great Steelmaking Movement: "To become a wafer fab second only to TSMC and Samsung." However, anyone who has a basic understanding of the laws of semiconductor development knows that no wafer fab can produce chips spanning 13 generations at the same time.

According to the rules of the semiconductor industry, chip manufacturing should develop gradually from the entry-level 65nm and 40nm to the more difficult 14nm, but Hongxin claimed from the beginning that it would specialize in 10nm and even 7nm chips.

An employee of Hongxin once asked Cao Shan: "Why do you want to fly before you learn to walk?" Cao Shan replied: "The project of making 65nm chips is only worth 8 billion, but the project of making 14nm chips can be worth 120 billion, which means there will be more money to be made."

Why did Wuhan Dongxihu District invest so frequently and rush to launch chip manufacturing projects? Lin Xiong told 36Kr that one reason was that the Wuhan East Lake New Technology Development Zone across the river was the "Yangtze River Storage" chip project launched by Tsinghua Unigroup in 2016, which was booming. The project later achieved mass production of 64-layer 3D NAND Flash chips. Wuhan Dongxihu District also made an industrial plan: to build an industrial cluster of "chips, screens, intelligence, networks, and new technologies", "wanting to build a wafer factory to connect the upstream and downstream of the industrial chain."

A senior investor in the semiconductor field in Shanghai told 36Kr: "It is difficult for local governments to be rational. You see that everyone is doing (chips), so why can't I do it? You can't say that you can do it, but if I do it, it will be overheating."

However, in order to support the Hongxin empire, the three of them are bound to show their true colors. In order to make the fake play real, Long, Cao, and Li urgently need a solid technical team.

Amazingly, they did it.

Concept map of the office building released by Hongxin’s official account

Money makes the world go round

In 2019, Cao Shan once again used his connections and found a company called "Shanghai Jingtai", which has close cooperation with major chip manufacturers such as TSMC, is good at reselling second-hand equipment, and is quite popular in the circle.

Cao Shan asked Shanghai Jingtai to act as a broker, and the two sides signed a contract worth tens of millions: Jingtai needed to help Hongxin gather 100 senior technical personnel from Taiwan and other places. The higher the level, the more commission Hongxin would pay. Lin Xiong told 36Kr that the commission conditions offered by Hongxin at the time were, "If you can dig up Jiang Shangyi, you will get 1 million, and if you find a deputy (factory director level) you will get 500,000."

Driven by money, Shanghai Jingtai used layers of connections to contact Jiang Shangyi, who had just finished his term at SMIC and was feeling frustrated.

Jiang Shangyi was deceived, which was closely related to the sweet words and flattery of Cao Shan and others.

The Hongxin team is well versed in packaging. Rumors about the background of the founding team have always existed within Hongxin: Long Wei is "the grandson of a senior official" and Li Xueyan is "the sister of a leader". The two often hesitate to speak out. If anyone mentions their mysterious identities, they will deny them in person and say that they are rumors spread by other members of the team.

On the one hand, they were half-hearted, and on the other hand, Long, Cao and others deliberately created an aura of status. Lin Xiong told 36Kr that when Cao Shan and others went to Taiwan and other places to seek technical teams to settle in, they often used the banner of senior government officials to deceive, claiming that the mainland was willing to invest 100 billion in the Hongxin project. In order to make the fake play real and increase persuasiveness, Long Wei would also take the technical team in and out of some hotels that he claimed "only those with connections can go to."

In 2018, a senior government official visited Wuhan for inspection. Lin Xiong remembered that Li Xueyan told employees in a mysterious way that the official would secretly visit Hongxin's factory to encourage everyone to "make good Chinese logic chips." However, a careful employee later verified that the official had not actually visited Hongxin, and that what Li Xueyan said was all lies.

By the time Jiang Shangyi received the invitation, the news that Hongxin had taken the initiative to release and obtained a 100 billion yuan investment had already been overwhelming. In addition, the first phase of the project was nearing completion. In the summer of 2019, "Dad Jiang" decided to join the game.

"If it was Jiang Shangyi who wanted to do it, his technical ability would be very attractive to the market," a Chinese chip investor once told the media. However, based on the rumors about Hongxin circulating in the capital market, "I'm afraid Jiang Shangyi was deceived."

With Jiang Shangyi's endorsement, a large number of engineers came to join the company, and Hongxin even doubled their salaries to retain talent. Lin Xiong told 36Kr that among the engineering team, "there are a lot of people with annual salaries of 3 million or 5 million yuan." At its peak, the number of Hongxin employees once swelled to more than 400.

It was because of Jiang Shangyi and the technical team that Wuhan Hongxin was able to buy the lithography machine. This could not have been achieved by the previous amateur team. An employee remembered that Chairman Li Xueyan once gave advice to the team that was struggling to solve the problem of lithography machines: "Invite ASML to China for dinner, give them gifts, and send them Chinese calligraphy and paintings."

Tao Yong remembers that when ASML, a Dutch lithography machine manufacturer, came to investigate, it gave a high evaluation to Hongxin's engineering team. Tao Yong told 36Kr that ASML praised Hongxin as "the best team they have seen in mainland China."

Although the plan looks bright and seems to have hope of success at the moment, for the planners with ulterior motives, "assembling a plan" to make chips is ultimately just a cover to make money.

Wuhan Hongxin Timeline was compiled by 36Kr based on public information and interview information.

The liar's golden pocket

The engineers who were poached with high salaries entered Hongxin's factory and soon discovered that something was wrong with Hongxin's factory.

Someone familiar with chip manufacturing has conducted an on-site survey of Hongxin's factory and found that the factory had problems such as misalignment of the central axis and insufficient emergency power reserves. "The ground is uneven, and the chip factory built will be scrapped within two years."

There were even more low-level mistakes. Because the ceiling of the Hongxin factory was too low, the lithography machines could not be moved in later, so they had to raise the ceiling again and strengthen the load-bearing capacity of the floor.

Hongxin engineers came to the conclusion that it was a group of ignorant people who designed a completely unusable factory.

Several Hongxin employees told 36Kr that in order to build the factory quickly, Cao Shan, the organizer of the project, obtained the blueprints of SMIC's old factory from a design institute and directly imitated and built the Hongxin factory. However, the general contractor hired by Hongxin, Torch Group, had no experience in building chip factories and was even involved in numerous lawsuits, with a record of being a defendant in court for owing hundreds of millions of yuan.

Cao Shan once said to people around him: "Chips are too complicated. I don't really want to make chips. I just want to build the factory. We are familiar with civil engineering and can do both."

Lin Xiong told 36Kr that using the name of "building a factory" to "raise money" is a common method for semiconductor companies to transfer funds. "First, building a factory can get financial subsidies from the central or local governments; second, building a factory requires finding a contractor, and the contractor will pay a deposit of hundreds of millions of yuan to ensure that the construction tasks are carried out," said Lin Xiong.

In other words, building a factory can cheat both sides and gain benefits from both.

Not only the government that invested was defrauded, but contractors and subcontractors also became the targets of Hongxin's bloodsucking.

On December 20, 2019, Wang Liyin, head of Wuhan Huanyu Infrastructure Engineering Company (hereinafter referred to as Huanyu), called Lu Haitao, head of Torch, the general contractor, to urge for a 2 million yuan engineering payment, but was told by the latter: "The arrears have accumulated by 70 million yuan, and it has not been approved even after reporting to Hongxin."

Hongxin gave all kinds of excuses for delaying the repayment. For example, it asked the contractor to redraft the signed contract, saying it was "untidy and messy"; if you called Hongxin's finance department to collect the payment, the other party would prevaricate by saying that "the leader forgot his phone in the car"; Torch's CEO also complained to Huanyu that Hongxin simply refused to pay, saying, "The cost of the high-speed mold (a formwork process) is more than 20 million, and Hongxin refused to acknowledge it."

According to multiple receipts obtained by 36Kr, Hongxin had many large-scale financial transactions with the general contractor Torch in 2019. What is strange is that on May 30, 2019, Torch paid 435 million yuan to Hongxin.

There are many strange transactions between Hongxin and Torch. The picture shows that on May 30, 2019, Torch, as the second party, remitted 450 million yuan to Hongxin. The picture was provided to 36Kr by Huanyu

As the second party, why did Huoju have to pay Hongxin? An insider told 36Kr that because Hongxin promised to pay the excess loan interest to Huoju, Huoju voluntarily borrowed money from the bank as a guarantor and then transfused it to Hongxin.

This practice also put Huoju in a quagmire. Since Hongxin was unable to repay the loan in time, Huoju, as a guarantor, also paid a total of 11 million yuan in loan interest for Hongxin. On the phone, Huoju's head Lu Haitao cursed Hongxin many times when talking about it: "There is something wrong with these people. The subcontractors hate them to death."

On January 21, 2020, just three days before New Year's Eve, Torch Director Lu Haitao called Li Xueyan seven times, but none of the calls went through.

He was extremely anxious. Because the 50 million yuan in wages for migrant workers had not been paid, hundreds of workers who had not yet returned home were anxious. They gathered at the construction site and watched their hard-earned wages for a year go up in smoke. The worst happened. During the day on January 22, the workers rushed into the Wuhan Dongxihu District Government, and "even the police couldn't stop them."

The conflict had intensified, but Hongxin was still reluctant to release the loan. It was not until 10 pm on January 22 that Hongxin Finance reluctantly promised to pay 12 million yuan. At 4 am, the plan was overturned again by Hongxin, who said that it could only pay 8 million yuan, and the remaining 4 million yuan would not be received until the seventh day of the Lunar New Year.

The two sides were deadlocked over the payment plan, and Lu Haitao was completely enraged. He said to the government staff present at the time, "I invite you to detain me for 15 days and give an explanation to the workers," and "I will report it. I will call the mayor's hotline and report the situation to the municipal party committee."

The farce also spread to Hongxin, and employees were talking about it. In order to appease employees, Li Xueyan repeatedly reiterated that Hongxin was absolutely safe. She emphasized to employees from time to time: Anything could happen at Hongxin, but money was definitely not a problem.

"None of the Hongxin people tell the truth," Lu Haitao said indignantly.

In fact, money is definitely an issue.

Accounts that don't match

When Hongxin was founded, there were overwhelming news reports that Hongxin was the chosen one with a planned investment of 130 billion yuan, but in the end it couldn't even come up with 2 million yuan.

So, does Hongxin have money? Where did the money go?

Based on interviews and public information, 36Kr roughly compiled a record of Hongxin's large income and expenditure from its establishment in November 2017 to Jiang Shangyi's resignation in June 2020, a period of 2 years and 7 months:

Wuhan Hongxin's large-scale income, expenditure, and debt statistics are compiled based on interviews and public information.

In terms of revenue, a document previously released by the Wuhan Municipal Development and Reform Commission showed that the total investment amount obtained by Hongxin as of December 31, 2019 reached 15.3 billion yuan.

There is more. In order to get more money, Hongxin also continued to mortgage physical assets such as land and lithography machines, of which 580 million yuan was taken out of lithography machines. In addition, an insider showed evidence to 36Kr, proving that Wuhan Hongxin had asked the general contractor Torch Group to act as a guarantor and successively withdrew about 700 million yuan in loans from local banks.

The money earned was quite a lot, and Hongxin's expenditure was extremely limited. Here is a rough calculation for Hongxin:

- The civil engineering cost of the first phase of Hongxin project is 1.7 billion yuan (an experienced engineering contractor told 36Kr that the civil engineering cost of the first phase of Hongxin factory is at most 2 billion yuan);

- The purchase of the lithography machine cost nearly 800 million;

- Hongxin did not spend money to purchase production machines other than lithography machines, the factory has not yet started operation, and no R&D and sales expenses have been incurred;

-The remaining large fixed expenses are mainly staff salaries. Considering that Hongxin had less than 500 employees at its peak, and the average monthly salary in the semiconductor manufacturing industry is 10,000 yuan, even taking into account the higher salaries of senior technical personnel, if roughly calculated based on a two-year operation period, the staff expenses should not exceed 400 million yuan.

At the same time, Hongxin also owes a lot of foreign debts. According to 36Kr, Hongxin has not settled its accounts with Jingtai, Torch and other professional contractors.

According to estimates, if the 15.3 billion yuan investment funds were fully received and all outstanding debts were settled, Hongxin should have about 12.4 billion yuan left in its account. But where did the money go?

Tianyancha shows that in September 2020, in a lawsuit between a company called Shengpin Precision Gas (Shanghai) Co., Ltd. and Hongxin, the balance in Hongxin's account was seized. The verdict showed that there was only about 15 million yuan left in Hongxin's account at that time.

Even Hongxin insiders seem to have no answer to this question. 36Kr interviewed many Wuhan Hongxin executives, and no one could explain how Hongxin ran out of funds.

During the investigation, 36Kr found that Hongxin had complex interest ties with a number of external companies.

Take one of the companies named "Foshan Hanqi" as an example. Hanqi is nominally a consulting company of Hongxin, but in fact it is using the name of employee training/consulting to transfer benefits. Tao Yong told 36Kr that the operator of the Hanqi team is Li Xueyan's younger brother Li Xuesong.

Lin Xiong also told 36Kr that Hanqi has recruited a number of chip engineers from companies such as Yangtze Memory Technologies, TSMC, and UMC through intermediary companies.

The daily work of these engineers is to write the technical information of their former employer into PPTs, and eventually Hanqi will package and sell these PPTs to Hongxin.

In order to cover up this transaction, engineers participating in the training used aliases within Hanqi, such as "Xiao Mao, Xiao Feng, Xiao Zhu". In order to confuse the public, Hanqi also mixed other content into the training, such as asking engineers to learn Nike's success theory and read Romance of the Three Kingdoms collectively.

Although they are not doing their jobs properly, these engineers earn a monthly salary of 150,000 to 300,000 yuan. This expenditure is funded by Hongxin under the name of "technology licensing."

The end result was that the company, which had supposedly received a large amount of investment, soon ran out of money.

According to Hongxin's original plan, the first phase of the factory was supposed to start operation at the end of 2019, but at that time, Hongxin had not even started purchasing the most important production equipment, "all stuck in the last link of finance." The finance department responded that "the money will come in by January 2020", but this deadline was repeatedly postponed to March, April, or even later.

Chip manufacturing has been suspended for a long time. In April 2020, Tao Yong received a puzzling task: the board of directors of Hongxin asked 11 management members, including CEO Jiang Shangyi, to write development plans for each department. "They gave a very broad proposition. Everyone had to write a plan as thick as a phone book and report to the board of directors," Tao Yong told 36Kr.

This work was obviously a sleight of hand. After the management team finished reporting their plans, no one in the Hongxin board of directors raised any questions, but after the meeting, they told all members: "The plan is not written correctly, everyone should rewrite a second draft."

It is worth noting that in April 2020, the Wuhan Municipal Development and Reform Commission issued the "Wuhan City 2020 Municipal Major Project Plan", which stated that Hongxin's planned investment in 2020 was 8.7 billion yuan.

After another executive meeting that was like the emperor's new clothes, Jiang Shangyi could no longer bear it and scolded Li Xueyan. He was a little excited: "We are paid by Hongxin, and we should do things that are worthy of Hongxin. Writing these things (plans) is a waste of time." "I order you as CEO not to write any of them."

This was the first time Tao Yong saw Jiang Shangyi angry. After the conflict with the Hongxin board of directors was completely intensified, in June 2020, Jiang Shangyi quickly resigned from the Hongxin board of directors and then left Wuhan.

Jiang Shangyi's departure became the last straw that broke the camel's back.

In July 2020, Wuhan City revealed that Hongxin’s funds were cut. In October, the National Development and Reform Commission said that in response to the phenomenon of chip projects being left unfinished, it would guide local governments to strengthen their awareness of the risks of major project construction, and in accordance with the principle of “whoever supports, whoever is responsible”, those who cause major losses or trigger major risks will be notified and held accountable.

Who is ultimately harmed?

After investing up to 15.3 billion yuan in this project, the Wuhan Dongxihu District government still has to deal with the mess. In November 2020, Wuhan Dongxihu District acquired Guangliang Blueprint, which held 90% of Hongxin's shares, and completely took over Hongxin. Tao Yong told 36Kr that after the government took over Hongxin's mess, Li Xueyan was dismissed and a lobbying group was sent to Shanghai and other places to seek acquisitions, but the project may be difficult to revive because most of Hongxin's employees have already found a way out and are just waiting to withdraw after receiving their year-end bonuses.

Wang Liyin of Huanyu is still running around for the 40 million yuan balance of the project. In the past year and a half, he has been running around, writing to Li Xueyan, contacting the court and the district government, but he has not received a satisfactory response. Because of this money, his Huanyu company is on the verge of bankruptcy.

In order to recover the debts owed, Torch has been pretending to "resume work in full" since September 2020, but in fact it has gathered a small group of workers to help Hongxin do the "facade work" of painting the exterior walls and dismantling the scaffolding every day.

In December 2020, workers were "working" on the Hongxin construction site. Photographed by Qiu Xiaofen of 36Kr

Who benefits?

In the recording of the call obtained by 36Kr, Wang Liyin and Lu Haitao both talked about hearing rumors that Hongxin had absconded with the money, and the government was also alert. "A friend went to the Dongxihu government to verify it, and the government replied that Hongxin had taken some of the money and left," said Wang Liyin.

According to Tianyancha, in May 2019, Long Wei, chairman of Hongxin, and Cao Shan, director, withdrew from the company's management. After leaving Hongxin, Cao Shan confessed to the people around him: "Haha, Taiwanese (referring to Jiang Shangyi) are so easy to deceive. This is a trap, let him be the scapegoat."

An insider of Hongxin told 36Kr that the former chairman of Hongxin, Long Wei, once confessed after a heavy drink: "My monthly salary is only 10,000 or 20,000 yuan now. When can I get 100 million yuan with my salary? But after finishing this project (Hongxin), I can retire."

Cao Shan continues to roam around, using similar methods to replicate the "chip bureau". 36Kr learned that Cao Shan has multiple chip projects in his hands. Since November 2018, Cao Shan has successively established Zhuhai Yixin, Yunxin International, Hubei Tianxin, Jinan Quanxin... Even after Hongxin's explosion, Cao Shan still made the "Quanxin" project flourish in Jinan, using the same routine as Hongxin to leverage hundreds of millions of funds from the local government in Jinan to build a factory.

There are many chip companies behind Caoshan. 36Kr compiled based on public information

Before the release of this article, 36Kr made 11 calls to Cao Shan, but all of them were rejected or hung up. Cao Shan only sent a short message saying “please send me a message.” After 36Kr sent a message to verify the purpose of the message, Cao Shan lost contact.

The frustration and plot of the local chip manufacturing boom

What kind of soil did the Hongxin-style scam breed in?

An industrial investor who has been stationed in the Yangtze River Delta for a long time told 36Kr that it is often difficult to prove "fraud" in local chip manufacturing projects. Chip manufacturing is complicated, and it is difficult to say whether a project fails because the investor's funds are not in place, the local government intervenes too much, or there are problems with the technology and equipment. Moreover, the failure of chip projects is a "family scandal" of local governments, and most of them are unwilling to continue to investigate and can only suffer in silence.

This directly leads to the fact that the cost of fraud in the semiconductor industry is lower than everyone thinks, and aborted projects frequently occur:

In May 2020, Chengdu GlobalFoundries, a chip manufacturing giant that planned to invest $10 billion, officially announced its complete closure. This project only lasted for 2 years;

In July 2020, Nanjing Decom, a chip project that claimed to have invested 3 billion US dollars, became a "three-debt company" that owed wages, debts, and taxes, and has now entered bankruptcy liquidation procedures;

In 2017, the Huai'an District Government of Huai'an City spent 2.6 billion yuan in one go to purchase 60% of the shares of Dehuai Semiconductor - this money was equivalent to the local general public budget revenue for one year, but now it is left with only a company with debts of over 100 million yuan.

Major unfinished chip projects in China since 2015. 36Kr compiled based on public information

Of course, not every chip project is like Hongxin where the "schemer" deliberately commits fraud, but there are still many projects that run out of funds and fail halfway.

In 2020, the chip manufacturing industry presented a strange phenomenon: local chip manufacturing projects were collapsing while rapidly entering the market. According to statistics from market research firm CB Insights, in the first half of 2020 alone, semiconductor projects were implemented in 15 provinces and more than 29 cities, an increase of 84% year-on-year. According to the contract value ranking, Jiangsu Province, Anhui Province, Zhejiang Province, and Shandong Province ranked in the top four, leaving Shanghai, which has always attached great importance to semiconductor project investment, in fifth place.

Behind this, on the one hand, companies such as ZTE and Huawei have frequently called for attention to chip manufacturing because of the "bottleneck" in high-end chips; on the other hand, local governments and social capital have over-pursued semiconductors, and even many outsiders such as real estate and cement companies have started semiconductor businesses, giving speculators an opportunity to take advantage.

In October last year, Meng Wei, spokesperson for the National Development and Reform Commission, pointed out China's "chip" problem: domestic enthusiasm for investment in the integrated circuit industry is high, and "three-no enterprises" with no experience, no technology, and no talent are entering the industry. Some places have unclear understanding of the laws of integrated circuits and blindly launch projects, resulting in the risk of low-level duplicate construction.

After all, chips are technology-intensive and capital-intensive projects. If you really want to make them, all the conditions are indispensable: the government or other investors need to have deep pockets and strong determination - the first phase of the "Yangtze River Storage" chip project of Tsinghua Unigroup, which is in the same district as Hongxin, invested tens of billions of yuan, and the cost of a chip project often takes 5 to 8 years to determine; it also requires accurate positioning and the right talent.

Song Chunyu, vice president of Lenovo Group and partner of Lenovo Capital, believes that the first step to avoid pitfalls is to see whether the founder is an industry veteran and whether the goals proposed respect the objective laws of the industry. In his opinion, it takes 20-30 years to make integrated circuits from materials to equipment to manufacturing processes. It requires key leaders, repeated verification with customers, and long-term running-in of processes with equipment.

"There are no shortcuts or short time in semiconductors," said Song Chunyu.

But it should be made clear that the bubble in chip projects does not mean that the general direction of chip making is wrong. The development history of photovoltaics and new energy vehicles may be worth learning from for the current chip industry: in the era of policy subsidies for these two industries, while stimulating the rapid expansion of the industry, it also became a disaster area for fraudulent subsidies. However, with the intensive introduction of regulations, the bubble has gradually been cleared. At present, domestic companies have firmly occupied the leading position in the global photovoltaic industry from materials to equipment, and the shipment volume of new energy vehicles has also ranked first in the world.

In addition to the scammers, there are also many people who want to make a career in the chip field.

The 74-year-old Chiang Shangyi has extensive connections in the industry and is extremely careful about his reputation. The TSMC stocks he held in his early years have made him no longer worried about making a living - it stands to reason that "Dad Chiang" should not fall into Hongxin's trap so easily.

A person who has had close contact with Jiang Shangyi told 36Kr: "Dad Jiang really needs a stage."

When talking about why Chiang Shangyi joined Hongxin in a hurry, the above-mentioned person mentioned three reasons: First, Chiang Shangyi has worked in TSMC for half his life, and people who work in technology are more like "scholars". They have deep industry experience but insufficient social experience. Second, in 2016, when Chiang Shangyi went from TSMC to SMIC to take up his post, he angered TSMC's head Morris Chang. In order to calm his anger, Chiang Shangyi agreed to work in SMIC only as a consultant, but he actually had no power. This situation made Chiang's father "a hero without a place to use his talents."

More importantly, after the domestic semiconductor supply was cut off, whoever could break through the technological blockade first would be remembered in history. "He (Jiang Shangyi) really wants to leave a name in this life," the person said. As of press time, 36Kr was unable to contact Jiang Shangyi.

After leaving Hongxin, Chiang Shangyi regained his confidence and joined SMIC. Although his salary was only one-fifth of that at TSMC, he was more attracted by the career of completing advanced processes.

Looking back, China has experienced three chip manufacturing booms: the first was during the reform and opening-up period, when 33 domestic units invested 1.3 billion yuan to introduce various integrated circuit production lines. However, due to lack of experience, only a few production lines were actually put into use; the second was after the "909 Project" in the 1990s, and the third was from the establishment of the National Integrated Circuit Industry Fund in 2014 to the present.

The three waves of chip manufacturing were not without results. After the first wave of chip manufacturing, in 1988, China's integrated circuit output reached 100 million for the first time - this represented the country's entry into the stage of industrialized mass production; the second wave of chip manufacturing saw the emergence of representative companies such as SMIC and Loongson; the third wave, in 2020, the number of integrated circuit output soared to 261.3 billion.

Xie Zhifeng, one of the founders of SMIC, once mentioned that the semiconductor development in the United States, Japan and South Korea has reached its peak, the market is in China, and talents are returning. Domestic semiconductors have reached a stage where the right time, place and people are right.

"If we don't seize the opportunity at this stage, we will fall behind in the next cycle."

Interview | Qiu Xiaofen Su Jianxun

Text | Su Jianxun and Qiu Xiaofen

Editor | Yang Xuan

(At the request of the interviewees, Tao Yong and Lin Xiong are pseudonyms. 36Kr author Li Qin and intern Geng Wujing also contributed to this article. Header image source: Visual China.)

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