The mystery of SMIC’s equity!

The internal strife of SMIC caused by the differences in shareholder demands is considered by the outside world to be a typical struggle for control. SMIC seems to be facing a corporate governance problem, but it is by no means as simple as a simple corporate governance problem. SMIC's problems are not so much a conflict of interest between shareholders as a reflection of the development difficulties of China's high-tech industry.

In the context of the aftermath of the Cold War between the East and the West and the international community's technological blockade against China, SMIC absorbed funds from various backgrounds in order to break through the blockade and cultivate industries, and finally formed an extremely complex shareholder structure. The central enterprise shareholders, local government shareholders, sovereign fund shareholders, Taiwanese shareholders, and American shareholders formed around SMIC have different interests and demands, mixed with the will of the Chinese government, financial investors, industrial investors, and the personal will of the founder. When the wills of all parties cannot be balanced, internal strife becomes inevitable.

As the leading enterprise in China's semiconductor industry, SMIC has been stumbling along the way since its establishment in 2000. The changes that have occurred during this period are even more dazzling - nine years of losses in the ten years since its opening, patent lawsuits, the founder's exit, CEO changes, factional struggles... Why is this leader that holds the hope of China's semiconductor industry so embarrassed?

12 years ago, Zhang Rujing, a Taiwanese who studied in the United States and was known as the third person in the semiconductor industry in the Chinese world, went to mainland China to establish "SMIC". Only a few years after the establishment of the company, its scale has been growing rapidly and once squeezed into the top three in the world. However, because of the defeat in the seven-year patent lawsuit with the industry leader TSMC, Zhang Rujing was forced to resign and leave the company he founded. Since then, this company with an extremely complex shareholder structure has entered a turbulent period. The death of the old chairman Jiang Shangzhou, who played a key role in balancing the interests of all parties, directly led to the public factional struggle within SMIC.

The internal strife at SMIC is not so much a conflict of interest between shareholders as it is a reflection of the development difficulties of China's high-tech industry under the background of international technology blockade. The complex shareholder structure and the numerous factions within the company are essentially caused by the international community's technology blockade against China in the high-tech field.

SMIC has unfortunately become a platform for the struggle between various parties. It seems that there is no clear answer as to whether this company will become a pioneer or a martyr.

Background: Technology blockade of semiconductor industry Before formally introducing the case of SMIC, it is necessary to explain two terms in the international community regarding the export of high-tech products and technologies - "Battalion" and "Wassenaar Arrangement". During the Cold War, in order to achieve a technological blockade against Eastern Bloc countries, Western countries such as the United States, Western Europe, and Japan established the "Paris Coordinating Committee" (hereinafter referred to as "Battalion") in Paris to implement restrictions on member countries' exports of strategic materials and high-tech products to Eastern Bloc countries, including military weapons and equipment, cutting-edge technology products, and rare materials. The most important targets of its blockade were the Soviet Union and China. After the disintegration of the Soviet Union, Batumi was disbanded in 1994, but in 1996, the United States and 33 other Western countries re-signed an alternative "Wassenaar Arrangement" to implement export controls on military and high-tech products, and China was also among the controlled countries. With the rise of the electronics and IT industries, China has gradually developed a huge demand for semiconductor products since the 1990s. Semiconductors, as a high-tech industry, are precisely in the strict technology blockade imposed on China by the "Wassenaar Arrangement" of Western countries. According to the rules of the "Wassenaar Arrangement", Western countries generally approve the export of semiconductor technology to China in accordance with the "N-2" principle, that is, two generations later than the most advanced technology. If the approval process is appropriately delayed, basically, the technical equipment that China can obtain will be three generations or even longer later than the most advanced technology in developed countries. At that time, in order to break through the bottleneck of semiconductor production, China invested heavily in the "908" and "909" projects led by the government in the mid-to-late 1990s, and established two core state-owned enterprises, Huajing and Huahong. However, state-owned enterprises such as Huajing and Huahong encountered restrictions on the "Wassenaar Arrangement" when purchasing equipment in the international market, and basically ended in failure. The export controls imposed by the United States and other Western countries on China have caused China's semiconductor equipment manufacturing industry to be 2 to 3 generations behind the international advanced level, lagging behind the international advanced level by about 10 years. This has also greatly hindered China's level upgrade in the production of the semiconductor value chain. Prologue: Jiang Shangzhou's "908" and "909" projects were shelved. In 1999, the then Ministry of Information Industry held a national seminar on the "15th Five-Year Plan" strategic planning for integrated circuits. At that time, it was planned to spend 5 years and invest 20 billion yuan to build two 8-inch semiconductor production lines. At that meeting, Jiang Shangzhou, deputy director of the Shanghai Economic Commission, who attended the meeting, said that it was necessary to find overseas partners for investment in order to break through the restrictions of the "Wassenaar Arrangement". Since then, Jiang Shangzhou has begun the process of looking for overseas semiconductor partners. At the same time, another core protagonist of this case, American Taiwanese businessman Zhang Rujing, was considering returning to mainland China to invest in the semiconductor industry. Zhang Rujing, born in 1948, is known as the "third person" in the semiconductor industry in the Chinese world. After obtaining his doctorate, he joined Texas Instruments in the United States in 1977. During his 20 years at Texas Instruments, he worked in research and development for 8 years and in factory operations for 12 years. He also assisted Texas Instruments in the construction and operation of 10 semiconductor factories in the United States, Japan, Singapore, Italy and Taiwan, China. In 1997, after Zhang Rujing retired from Texas Instruments, he returned to Taiwan at the invitation of investors to establish "World Semiconductor Manufacturing Co., Ltd." to engage in semiconductor foundry. Unexpectedly, in January 2000, the major shareholder of World Semiconductor Manufacturing Co., Ltd. sold the company to the industry leader "TSMC" for US$5 billion without Zhang Rujing's knowledge, and Zhang Rujing was forced to leave the company. So Zhang Rujing came to mainland China to look for entrepreneurial opportunities. He found that the semiconductor industry in mainland China was far behind the world average in terms of technology and industrial scale. It was during the inspection in mainland China that Zhang Rujing met Jiang Shangzhou, deputy director of the Shanghai Economic Commission. For Jiang Shangzhou, Zhang Rujing was a long-sought-after pillar of talent, and he was simply the best person to assist in the development of the semiconductor industry. Jiang Shangzhou strongly invited Zhang Rujing to settle in Shanghai and establish a semiconductor company. The media recorded some information about Zhang Rujing's investment site selection: "When Zhang Rujing visited Beijing, the mayor of Beijing and the deputy mayor in charge of science and technology were not there. He was accompanied by a person who could not make a decision, so the matter ended in vain. When he visited Shanghai, the mayor of Shanghai and the deputy mayor in charge of science and technology were all there. They immediately made a decision and took him to Zhangjiang to choose a site. He could choose any site he wanted." In April 2000, Zhang Rujing established "SMIC" in the Cayman Islands and used it as a platform to raise funds, and then set up a factory in Shanghai as a foreign investor. Among the first investors of SMIC were Goldman Sachs and Walden International from the United States, Hanting Asia Pacific from Taiwan, Xiangfeng Investment from Singapore, and Shanghai Industrial and Beida Jade Bird with Chinese government background. SMIC raised about US$1 billion in the first phase of funds. After the fundraising was completed, there were a total of 16 shareholders, and the equity was very dispersed. Even Shanghai Industrial, as the major shareholder, only held about 12% of the shares, and Zhang Rujing himself held less than 1%. One of the important reasons for adopting such a diversified shareholder background is to learn from the lessons of the "908" and "909" projects, which were too state-owned and were blocked by the international community when introducing technology. The Chinese government's role in the project was deliberately downplayed in order to gain the trust of the international community and break the international blockade of technology. At the same time, Zhang Rujing himself did not want the company to be like the one he founded, TSMC, which was absolutely controlled by a single major shareholder and could be sold at any time. Moreover, in terms of corporate governance structure, SMIC's board of directors only arranged Zhang Rujing to serve as an executive director (representing the management), and the members appointed to the board by major shareholders could only serve as non-executive directors and not executive directors. This move is believed to be a deliberate agreement between Zhang Rujing and shareholders in the company's articles of association, with the aim of ensuring that SMIC has sufficient independence in operations to avoid major shareholders from excessively intervening in daily operations and controlling the company. Because of Jiang Shangzhou, in the early days of SMIC, in addition to the founder Zhang Rujing, Shanghai Industrial had the most prominent voice among all shareholders.

Starting: Zhang Rujing's performance In August 2000, the chip factory invested by SMIC started construction and set a record for the fastest chip factory construction in the world. It took only 13 months from the first pile was driven in Shanghai on August 1 of that year to the official completion and production of the first 8-inch factory in Shanghai on September 25, 2001. Incredibly, SMIC built three 8-inch chip factories in Shanghai at one go. In September 2002, SMIC broke ground on two 12-inch chip factories in Beijing. In September 2003, SMIC acquired Motorola's 8-inch chip factory in Tianjin. SMIC's investment scale can be said to be a unique large-scale investment in China at that time. You know, an 8-inch chip production line costs hundreds of millions of dollars, and a 12-inch production line costs nearly 1 billion US dollars, not to mention the simultaneous construction of multiple production lines. SMIC's investment scale has enabled its production capacity to quickly enter the top three in the global semiconductor foundry industry, second only to TSMC and UMC in Taiwan, China. Obviously, the $1 billion raised by SMIC in the early stage of its establishment could not cope with such a large investment scale, so in September 2003, SMIC raised about $630 million from existing shareholders and new investors. In March 2004, SMIC was listed in New York and Hong Kong, with a financing amount of nearly $1.8 billion. After listing, SMIC began a new round of expansion: in 2005, the 8-inch factory in Chengdu and the 12-inch factory in Shanghai started construction; in 2006, the 12-inch factory in Wuhan started construction; in 2008, the 8-inch and 12-inch factories in Shenzhen started construction. SMIC eventually formed a diamond layout in East China, South China, North China, and West China. However, behind this seemingly bold and generous expansion, the founder Zhang Rujing's sweat was soaked in the sweat of breaking through the international technology blockade. In 2001, SMIC's Shanghai factory was still under construction. Zhang Rujing hoped to import 0.18-micron production line equipment from the United States, so he applied for relevant export licenses from the US government. At that time, the United States was not the most advanced in 0.18-micron technology (the United States had already achieved mass production of 0.13-micron technology), but even the most advanced technology in China was only at the 0.35-micron level, two generations behind 0.18-micron. Due to the technological blockade of the Wassenaar Arrangement, it became difficult for SMIC to introduce 0.18-micron production equipment. In order to obtain an export license for equipment imported from the United States, Zhang Rujing, a Christian, went to the United States to lobby and found the five major churches in the United States to endorse his character, guaranteeing that what he said was honest and credible, and promised that SMIC's products would only be used for commercial purposes and not for military purposes. Finally, the United States issued them an export license. After that, every one or two years, when SMIC's production line needed a technological upgrade, similar difficulties would appear, which had occurred at 0.13 micron, 90 nanometers, and 65 nanometers. It was not until SMIC applied to purchase 45-nanometer technology equipment that the US government did not deliberately make things difficult because of its good record in the past six or seven years and SMIC had always kept its promise that its products would only be used for commercial purposes. In December 2007, SMIC successfully obtained the production equipment for 45-nanometer products, only about one year later than the Western developed countries. In January 2009, SMIC successfully obtained the export license for 32-nanometer production equipment. Zhang Rujing said in an interview with the media: "45 nanometers is a big breakthrough. In the future, it will basically be synchronized with foreign countries. There should be no problem of export license for the next 28 nanometers and higher-end products." The entire Chinese semiconductor industry recognizes that if it were not for SMIC, the technological upgrading of China's semiconductor industry would be far from reaching this speed. The reason why SMIC can achieve this has a lot to do with its founder Zhang Rujing's identity as a Taiwanese American businessman and its shareholders from all over the world. As a circumstantial evidence, after SMIC built four 12-inch chip processing plants, the first 12-inch plant planned for many years by the state-owned enterprise Huahong NEC was still aborted due to the US technology blockade.

Disagreement: Profit first or industrial upgrading first Although SMIC has made irreplaceable contributions to the rapid upgrading of the domestic semiconductor industry, the differences among the parties within the company are becoming increasingly larger. From the perspective of stakeholders, there are three major forces surrounding SMIC: the government, shareholders, and founders. The core demand of the government is to cultivate the domestic semiconductor industry as soon as possible through SMIC; the core demand of founder Zhang Rujing is to build SMIC into a company with a voice in the global semiconductor foundry field; the core demand of shareholders is to obtain considerable financial returns through investment in SMIC (especially considering that most shareholders were financial investors when SMIC was founded). In theory, the demands of the three parties seem to be perfectly unified: SMIC has successfully grown into a company with international voice, the domestic semiconductor industry has also achieved rapid upgrading, and shareholders have also obtained financial returns. But the fact is that SMIC cannot achieve the unity of the three in actual operations. In the eyes of some shareholders, Zhang Rujing, as the only executive director and CEO of SMIC, has at least two "failures": one is long-term losses, and the other is blind expansion. Failure 1: Long-term losses. From its establishment in 2000 to 2009, SMIC has never achieved a full year of profitability, which is obviously unacceptable to some shareholders who seek a return on investment. Long-term losses are also helpless for Zhang Rujing. There are some bottlenecks that he cannot overcome, and in order to ensure the long-term development of SMIC, he cannot focus on the goal of short-term profitability. First of all, the international technological blockade has hindered SMIC's production autonomy, and it is impossible to produce high-gross-profit products according to market demand. For example, the 12-inch semiconductor production line imported by SMIC can theoretically produce both memory products and logic products, but the gross profit margin of the latter is much higher than that of the former. However, due to the technological blockade, SMIC cannot produce logic products with high gross profit margins (the US is worried about military use), but can only produce memory products with low gross profit margins. The price of memory products fluctuates greatly, which makes its profits in a certain uncontrollable state. From the perspective of the training of technical workers, the process flow of memory chip production is not as difficult as that of logic chips, which is conducive to the training of production technical workers. With the technical foundation of memory products, the process difficulty of developing logic products will be much smaller. If we start with the production of logic products, the lack of experience of the technicians will not ensure the production of qualified products. The strategy of starting with memory products objectively helped SMIC complete the initial accumulation of intellectual property rights and technology. Zhang Rujing said: "At that time, many people blamed me and thought that we should not make memory because the price of this product fluctuates greatly. But in the absence of any foundation at the beginning, this was no choice, and we had to do it." Secondly, in order to keep up with the industrial upgrading of the entire international semiconductor market as quickly as possible, Zhang Rujing had to break the normal rhythm and start the large-scale layout of 12-inch production lines before the huge investment cost of the 8-inch production line was digested. This made the investment amount snowball, and the income created could not cover the investment cost. Zhang Rujing has always insisted that if he did not invest in the 12-inch production line, SMIC would be one of the most profitable companies among all semiconductor companies in mainland China, "but does SMIC have a future without the 12-inch production line? Does China's semiconductor industry have a future?" He is very clear that investing in a 12-inch production line means huge pressure for SMIC. Other semiconductor manufacturers invest in 12-inch production lines only after their 8-inch production lines have been depreciated. However, SMIC built its first 8-inch production line in 2001. If it waits until the 8-inch production line is depreciated before investing in the 12-inch production line, SMIC will never be able to keep up with the pace of upgrading of the global semiconductor industry. Therefore, Zhang Rujing always believes that analysts only see SMIC's poor performance, but do not understand that other peers started nearly 20 years earlier than SMIC, and all depreciation has ended, so the profits are naturally good. In this sense, SMIC is using its own huge losses for many years to drive the rapid upgrading of the entire Chinese semiconductor industry. Mo Dakang, a semiconductor expert who once worked at the Institute of Microelectronics of the Chinese Academy of Sciences, said that thanks to Zhang Rujing's position in the industry and his strong willpower, he was able to have the final say in SMIC and lobby the board of directors to make this investment, otherwise China's semiconductor industry would not be what it is today. Failure 2: Blind expansion. In the few years after its establishment, SMIC quickly jumped out of Shanghai and expanded across the country. In particular, it could not withstand the invitation and lobbying of some local governments and set up many production lines in Beijing, Tianjin, Chengdu, Wuhan and Shenzhen. The content not only involved chip foundry itself, but also included downstream packaging and testing and other fields such as on-chip color filter lenses. The scale was extremely large, and some projects later became a heavy burden for SMIC. Zhang Rujing has always believed that the cooperation with local governments is a good deal. For example, the initial investment of the 12-inch factory in Wuhan was paid by the government, and SMIC was entrusted to operate it, and then repurchased when the time was right. In this way, SMIC alleviated a lot of financial pressure and gained production capacity at the same time. However, this also put Zhang Rujing in a dilemma later. For example, the 12-inch production line was invested in Beijing. Shanghai is the base camp. If it is not invested, the Shanghai leaders will be unhappy, and if it is invested, the pressure will be too great. As a company, it is very difficult to balance between different local governments. If you are not careful, it is very likely to make a local government unhappy. It was Zhang Rujing who catered too much to the local governments and spread his business too widely, which put the company in a passive position and worsened the company's situation, which was criticized by shareholders. However, although the demands of the three parties at this time could not be fully met in terms of goals, at least the strategic demands of the founder Zhang Rujing and the Chinese government were still consistent, because both the scale effect of the enterprise and the upgrading of the entire industry driven by it were booming. Therefore, shareholders had no choice but to compromise with temporary losses and look forward to medium- and long-term investment returns.

Turning point: Datang Telecom’s investment It is precisely because of the government’s support that Zhang Rujing can still run the company according to his own will and make shareholders compromise when the will of shareholders is inconsistent with his will. At this time, SMIC’s business strategy is still developing in the direction set by Zhang Rujing and expected by the government. SMIC is still expanding and investing heavily. In particular, the price of memory chips collapsed in 2008, and SMIC was in a dilemma of losses and urgently needed to replenish capital. The question is, where does the money come from? As SMIC has been losing money, the original shareholders are obviously no longer interested in making additional investments in this company that has been losing money. They just want to wait until the company makes a profit, and then they can gradually cash out and exit while the stock price is strong. Some international private equity funds (PE) are interested in investing, including Blackstone, TPG and other internationally renowned private equity funds. They found Zhang Rujing and expressed their willingness to acquire SMIC’s equity at a generous price. The plans proposed by these funds are different, ranging from acquiring 20%, 35%, 50% to all equity. Zhang Rujing recalled: "Private equity funds have been competing to acquire semiconductor companies that are waiting to be sold since 2006. A typical transaction is the Freescale acquisition. Private equity has a very flexible way of operation and offers very favorable prices. Once they control the dominant position, they will mostly split and sell." But this is obviously not the result Zhang Rujing wants to see. Based on this situation, Zhang Rujing had to seek help from relevant government departments. The government said that it was willing to invest if there was an opportunity, and recommended three central enterprises, Datang Telecom, China Resources and China Electronics Information Industry Group, as alternatives. There was a great debate within the board of directors of SMIC on whether to sell the equity to international PE or to domestic central enterprises. Under Zhang Rujing's proposal, it was finally decided to target domestic central enterprises. After several rounds of negotiations, China Electronics Information Industry Group was eliminated because its production of some military products was strongly questioned by overseas shareholders, and China Resources was rejected by the board of directors because it demanded that SMIC be renamed. In the end, only Datang Telecom was shortlisted. In November 2008, the central enterprise Datang Telecom acquired a stake in SMIC and replaced Shanghai Industrial as the largest shareholder. Due to the well-known complex approval process of central enterprises, it took 10 months from negotiation to completion of investment. During these 10 months, the international financial tsunami in 2008 was at its most raging. The global stock market plummeted, and SMIC's share price fell from HK$1.4 to HK$0.4. In the end, Datang Holdings acquired 16.6% of SMIC's shares for US$176 million and became the largest shareholder. Because of the huge reduction in the amount of financing and the excessive dilution of the equity of the original shareholders, Zhang Rujing caused strong dissatisfaction among the original shareholders. Datang Telecom's investment has become an important turning point in the development of SMIC, because it is the first shareholder to enter as an industrial investor since the establishment of SMIC. Previously, among the many shareholders of SMIC, although there are both domestic and overseas shareholders, both industrial enterprise shareholders and private equity funds, they are basically financial investors (even industrial enterprise shareholders such as Shanghai Industrial and Beida Jade Bird, because they are not in the same industry as SMIC, their investment is more for financial returns, or they provide financial support under the order of the government), so they have no motivation to control SMIC at the operational level. However, Datang Telecom and SMIC are in the same upstream and downstream of the industrial chain. Its investment in SMIC is obviously the role of industrial capital, and it is not ruled out that it wants to control SMIC. What is more noteworthy is that Datang Telecom requires two seats on the board of directors of SMIC, while the other major shareholders have only one seat on the board of directors. Generally speaking, if it is a financial investor, one seat on the board of directors is enough, and Datang Telecom seeks two seats, which shows its desire to seek control. Why does Datang Telecom want to invest in SMIC? Why does it intend to control SMIC? There are two analyses in the industry that can be used as references: First, Datang Telecom is actively developing 4G, which requires a strong industrial chain support, including chips, so it has always hoped to make SMIC its subsidiary. This is also the most important purpose of Datang Telecom's investment in SMIC. Second, Datang Telecom's strengthening of its control over SMIC may improve its position in central enterprises. Central enterprises have been continuously integrating, and plans to reduce them to less than 100 in the future. Since Datang Telecom's position in central enterprises is not strong, it may want to avoid being integrated by controlling China's largest semiconductor foundry. At this point, the chess game has become more complicated around SMIC's stakeholders. Originally, the government hoped to cultivate and develop the industry, the founder hoped to build a company with industry discourse power, and the shareholders hoped to obtain financial returns. Now, among the interests of shareholders, in addition to the original shareholders who want to obtain financial returns, the new largest shareholder is not completely concerned about financial returns, but hopes to turn it into its own vassal and serve its own strategic goals. The demands of multiple parties have become different, and it has become increasingly difficult to reconcile. For this reason, Jiang Shangzhou had to serve as the chairman of SMIC as an independent non-executive director in June 2009. Jiang Shangzhou does not represent the interests of any shareholder on the board of directors. He is more of a government official who coordinates the relationship between various parties with the founder Zhang Rujing to maintain the basic balance of the company. Datang Telecom acquired a stake in SMIC with the intention of seeking control, while Jiang Shangzhou and Zhang Rujing strongly emphasized that the company should be independent and not controlled by a single shareholder, especially not become a vassal of the state-owned shareholder. This laid the groundwork for future disputes over control.

Litigation: The straw that broke the camel's back for Richard Chang Unexpectedly, the failure of a lawsuit forced the founder Richard Chang to resign, and the balance within the company was broken. On November 3, 2009, the U.S. Federal District Court in California reported that TSMC, the leader of the semiconductor foundry industry, sued SMIC for infringing its intellectual property rights, and SMIC lost the case. In fact, SMIC's defeat can be seen as a specific blocking action by Taiwan against Richard Chang's founding of SMIC in mainland China under the background of the international blockade of Chinese semiconductor technology. Richard Chang and TSMC founder Morris Chang originally worked at Texas Instruments in the United States, and the latter was the former's indirect boss. In the 1980s, Morris Chang returned to Taiwan, China to establish TSMC, creating a pattern of separation of design and manufacturing in the semiconductor industry. TSMC also became the leader of the global semiconductor foundry industry, and Morris Chang was also known as the "Taiwanese semiconductor godfather." Due to the lack of high-end semiconductor talents in mainland China, when Zhang Rujing founded SMIC, he basically poached a group of former subordinates from the former World Semiconductor Manufacturing Company (which was now part of TSMC). For a long time afterwards, the core of SMIC's management team was Taiwanese. Since the Taiwanese team had long been accustomed to TSMC's factory operation model, SMIC's factory operation model was basically copied from TSMC's model. One is poaching, and the other is imitating the process flow, which laid the groundwork for the lawsuit between the two parties in the future. TSMC certainly does not want to raise a tiger to cause trouble and sit back and watch SMIC grow into its strong competitor. So in December 2003, TSMC and its North American subsidiary filed a lawsuit with the United States District Court for the Federal District of California, suing SMIC for patent infringement and theft of trade secrets, and applying for an injunction against SMIC and compensation for financial losses. The targets of the lawsuit included SMIC's subsidiaries in Shanghai and the United States. TSMC said that it formally filed the lawsuit only after analyzing the company's recent products sold to the United States and indeed found evidence of infringement of several TSMC patents. TSMC also said that SMIC hired more than 100 former TSMC employees and asked some of them to provide TSMC's trade secrets. SMIC did not take any substantial countermeasures except for filing a statement with the United States District Court of California on March 7, 2004 to withdraw TSMC's infringement charges. On March 23, 2004, TSMC submitted new evidence to the United States District Court of California, claiming that about 90% of the process flow used in SMIC's 180-nanometer chip production line came from TSMC, and that SMIC used stock options as an inducement to poach TSMC's senior executives who had technical secrets and steal production technology. The intellectual property dispute between the two parties lasted for nearly two years and was finally settled out of court in January 2005. According to the settlement agreement, SMIC compensated TSMC about US$175 million. Zhang Rujing had to admit: "We did make a mistake." The engineers recruited from TSMC were used to the operation of TSMC's production line. Therefore, after coming to SMIC, they copied the menu of their competitors and infringed on the rights of their opponents. Since reaching a settlement in 2005, SMIC has been working hard to build its own operating system, "the process is much more difficult than imagined." In addition to TSMC's commercial blockade, the Taiwan authorities also suppressed Zhang Rujing at the political level. On March 31, 2005, the "Ministry of Economic Affairs" of Taiwan, China, fined Zhang Rujing NT$5 million on the grounds of illegal investment and ordered him to withdraw his investment within 6 months, otherwise he would be fined continuously until he withdraws his investment. The core reason of the Taiwan authorities is that the semiconductor industry has always been a field prohibited from investing in mainland China, but Zhang Rujing privately invested in the establishment of SMIC Integrated Circuit Manufacturing (Shanghai) Co., Ltd. in mainland China through SMIC Integrated Circuit Manufacturing Co., Ltd. registered in the British Cayman Islands on December 21, 2000, which constituted the fact of "illegal" investment in the mainland. According to media reports, when Zhang Rujing was running around to raise funds to establish SMIC, the Taiwan authorities had already interfered. At that time, many funds and consortiums invested in SMIC, but later the names of two Taiwanese fund shareholders were accidentally leaked, and the Taiwan authorities immediately forced the two funds to withdraw their shares. Zhang Rujing was furious at the Taiwan authorities' punishment of him, and he immediately issued a statement emphasizing: I am an American citizen, but I grew up, received education, and served in the military in Taiwan, China, and I have deep feelings for Taiwan. From 1990 when I returned to Taiwan from the United States to 2000, I participated in and built a total of four wafer fabs in Taiwan. In 2000, I built a wafer fab in mainland China and tried my best to make some contributions to the semiconductor industry on both sides of the Taiwan Strait. Some people in the Taiwan authorities have repeatedly suppressed and persecuted our development in mainland China. I am deeply puzzled and regretful, and have entrusted a lawyer to properly handle this matter. I will argue with reason through legal and reasonable channels. I hope that the Taiwan authorities can handle this matter objectively and fairly in accordance with the law. During this process, it is said that the Shanghai Municipal Government and the Taiwan Affairs Office have done a lot of mediation. However, the Taiwan authorities at that time were controlled by Chen Shui-bian, who had a pro-independence tendency, and these mediation efforts had little effect. In March 2007, the Taipei "High Administrative Court" made a ruling on Zhang Rujing's investment in SMIC and revoked the penalty decision of the Taiwan "Ministry of Economic Affairs". The judgment stated that when SMIC's Cayman company invested in the Shanghai company, Zhang Rujing was the only executive director, president and CEO, but his shareholding in the Cayman company was less than 0.5%, and he was not the main investor. In addition, the Cayman company's investment in mainland China was decided by the board of directors and was the company's behavior, not Zhang Rujing's personal behavior, so this investment behavior cannot be regarded as an investment that Zhang Rujing can control personally. The original punishment and litigation ruling were wrong and should be revoked. The dispute between Zhang Rujing and Taiwan can be described as "one wave has not settled, another wave has risen". In August 2006, TSMC took SMIC to court again on the grounds that SMIC did not comply with the settlement agreement. The lawsuit lasted for 3 years. TSMC's attorney accused SMIC of violating the settlement agreement signed by the two parties in January 2005. According to the agreement, SMIC must entrust 0.13 micron or more advanced technology data to a third party for custody and not use it. However, in actual operation, SMIC continued to infringe TSMC's related intellectual property rights. After Ma Ying-jeou came to power in 2008, cross-strait relations eased. Zhang Rujing found TSMC's senior management through various channels to express his desire for reconciliation. On the other hand, the Taiwan Affairs Office of the State Council is also actively coordinating this matter. "I have always believed that if the two sides do not reconcile, we will not reconcile with TSMC. If the two sides reconcile, we will of course reconcile." Zhang Rujing said. It is said that under Zhang Rujing's leadership, the two sides once reached a preliminary framework for reconciliation, but because the lawyers of both sides could not reach an agreement on the detailed terms, and SMIC's attorney believed that their evidence was sufficient and the chances of winning were very high, so they insisted on fighting to the end. It was this persistence that caused SMIC to suffer a heavy blow. On November 3, 2009, the U.S. District Court in California ruled against SMIC. The court jury found that SMIC had illegally used 61 of the 65 disputed patents. TSMC demanded $1 billion in damages. After losing the lawsuit, SMIC had to negotiate a settlement with TSMC again, but the settlement price at this time was far from as low as before the judgment.























































On November 7, 2009, three days after the first-instance judgment, Jiang Shangzhou, chairman of SMIC, Zhang Rujing, CEO, and key members of the legal team flew to Hong Kong urgently to negotiate again with Zeng Fancheng, vice chairman of TSMC who was in charge of the matter. After a heated debate, TSMC and SMIC formally reached a settlement agreement on the same day: SMIC paid TSMC $200 million in cash in four years, and paid TSMC 8% of its equity, plus a 2% stock option.

From TSMC's perspective, although the amount of compensation was much lower than the $1 billion he requested, TSMC became the second largest shareholder of SMIC. Of course, in order to prevent TSMC from intervening too much in the operation of SMIC as a shareholder, Jiang Shangzhou and Zhang Rujing agreed that TSMC had no right to send directors to the board of directors of SMIC, but could only be a "passive investor" of SMIC. The

litigation settlement was achieved, but the price of this settlement was the founder Zhang Rujing's "dismissal". On November 10, SMIC announced a settlement with TSMC, and soon after announced that Zhang Rujing resigned from his positions as executive director, president, and CEO for "personal reasons."

There is speculation that Zhang Rujing's resignation was a prerequisite for TSMC to agree to a settlement, but this has not been confirmed by TSMC. After his resignation, Zhang Rujing said in an interview with the media that he took the initiative to make the decision to resign, "I tried my best, the lawsuit exhausted me, and I am very disappointed with the result (of resignation)." This shows that even if Zhang Rujing took the initiative to submit his resignation, he probably did not do it willingly, and there may be some kind of pressure behind it.

On the one hand, the loss of the lawsuit caused SMIC to suffer huge losses, and Zhang Rujing was the only executive director of the company, so he felt that he should take responsibility for it; on the other hand, shareholders had lost patience with Zhang Rujing and were increasingly dissatisfied with him - continued losses, blind expansion, and excessive dilution of old shareholders by introducing Datang Telecom at a low valuation - Zhang Rujing had made enough mistakes; and Datang Telecom, the largest shareholder, was even more motivated to get Zhang Rujing out in order to strengthen its control over the company.

Therefore, losing the lawsuit became the best opportunity, and all shareholders unanimously agreed to Zhang Rujing's resignation. Regardless of Zhang Rujing's merits and demerits, he was eventually dismissed.

The departure of founder Zhang Rujing caused SMIC to lose an important balancing force, and SMIC has since entered a turbulent period.

Balance: Jiang Shangzhou’s Operation In the post-Zhang Rujing era, Jiang Shangzhou became the only key figure in balancing the relationships between all parties within SMIC. As a substitute for Zhang Rujing, Chairman Jiang Shangzhou successively found Wang Ningguo to take over the positions of executive director and CEO of SMIC, and found Yang Shining to serve as COO of SMIC. Wang Ningguo, who is two years older than Zhang Rujing, was born in mainland China and grew up in Taiwan, China, like Zhang Rujing. After obtaining a Ph.D. in materials science from the University of California, he joined Bell Labs to engage in semiconductor research. In the 1980s, he joined Applied Materials as president of Asia. From 2005 to 2007, the relevant Chinese government invited him to serve as CEO of Huahong Group. Yang Shining was born in mainland China and graduated from Shanghai University. He then obtained a Ph.D. in materials engineering in the United States and became a U.S. citizen. After graduating with a Ph.D., Yang Shining worked at chip giant Intel and has more than ten years of work experience. In the early days of SMIC, Zhang Rujing recruited Yang Shining to serve as the chief technology officer. In 2005, Yang Shining joined Chartered Semiconductor, the world's fourth largest chip foundry, as the chief technology officer. Today, Yang Shining has returned to SMIC as the COO. Wang Ningguo and Yang Shining represent the highest positions of Taiwanese and mainland Chinese backgrounds in SMIC's management, respectively. In addition to solving the personnel vacancies left by Zhang Rujing's departure, there is another thing that worries Jiang Shangzhou: how to prevent SMIC from being controlled by the major shareholder Datang Telecom? In order to balance the voice of Datang Telecom and to further enrich the capital of the enterprise, Jiang Shangzhou used the political resources he had accumulated over many years of political career to persuade China Investment Corporation, a sovereign fund of China, to invest in SMIC. On April 19, 2011, China Investment Corporation, a central government-backed company, invested US$250 million in SMIC, acquired 11.6% of the shares, and became the second largest shareholder of SMIC. It is said that China Investment Corporation originally planned to invest US$350 million in SMIC and obtain the position of the largest shareholder. Although CIC is also a state-owned capital with the characteristics of a central enterprise, since CIC itself has no real industry, its positioning is to engage in financial investment to seek financial returns, so it will not attempt to control SMIC at the specific operating level. If CIC is the largest shareholder, SMIC's independence can be ensured, and at the same time, Datang Telecom's voice in the board of directors can be greatly diluted. However, Jiang Shangzhou's proposal was strongly opposed by Datang Telecom, and CIC finally invested only US$250 million, accounting for 11.6% of the shares. In order to ensure that its equity was not diluted, Datang injected US$102 million during the same period, increasing its shareholding to 19.14%, still firmly occupying the position of the largest shareholder. This series of changes, whether active or passive, has made SMIC's nationalization color more and more intense. State-owned shareholders, from the earliest Shanghai Industrial and Beida Jade Bird, to Datang Telecom, and then CIC Group, have also increased their shareholding ratio from about 10% when they were just established to more than 35%. Whether from the perspective of founder Zhang Rujing or chairman Jiang Shangzhou, they do not want SMIC to be too nationalized, because this will affect the international community's judgment of SMIC's nature, and then have an adverse impact on SMIC's technological upgrade. But SMIC has no choice but to accept the reality that the proportion of state-owned shares continues to expand. Because SMIC must continue to make huge investments in order to drive industrial upgrading, it has always faced a huge funding gap. SMIC's best financing target is overseas investors, but because of years of losses, overseas investors are unwilling to invest, and if they do, the valuation is very low and unacceptable, so they are forced to seek support from state-owned shareholders. At this time, a complex shareholder structure has been formed around SMIC, including central enterprise shareholders, local government shareholders, national sovereign fund shareholders, Taiwanese shareholders, and American shareholders, and the interests of all parties are different. Confrontation: Two major factions compete for control After Wang Ningguo took over Zhang Rujing as CEO of SMIC at the invitation of Jiang Shangzhou, his biggest task was to reverse the situation of years of losses in the Zhang Rujing era. During the Wang Ningguo era, the core management structure of SMIC was: Chief Executive Officer (CEO) Wang Ningguo was responsible for the overall work of the enterprise, Chief Business Officer (CBO) Ji Kefei was responsible for taking business orders and arranging production plans, and Chief Operating Officer (COO) Yang Shining was responsible for specific production and technology development, known as the "Iron Triangle". In order to achieve SMIC's turnaround, Wang Ningguo implemented organizational streamlining, staff layoffs, asset compression, and handled the solar energy business invested in the Zhang Rujing era. Coupled with the improvement of COO Yang Shining's technical level and CBO Ji Kefei's acquisition of a large number of orders against the backdrop of the global recovery of the semiconductor industry, SMIC achieved a historic full-year profit in 2010, and sales revenue reached an all-time high of US$1.5 billion. However, due to historical reasons, two major factions have formed within SMIC: the Taiwan faction and the mainland faction. When Zhang Rujing founded SMIC, the core team of the management was basically Taiwanese. Even after Zhang Rujing resigned, Taiwanese employees still occupied a major position. Against this backdrop, a gap gradually developed between Wang Ningguo, the CEO with the highest position in the Taiwan faction, and Yang Shining, the COO with the highest position in the mainland faction. The inconsistency in their public statements can serve as some evidence of the gap between the two. In an interview with the media, Yang Shining said: "I can responsibly say that SMIC was able to turn losses into profits in 2010, and the efficient operation of the technical operation team during the peak season played a decisive role." When Wang Ningguo summarized the performance in 2010 in public, he attributed the main reasons for the profit to the adjustment of corporate structure and the global industry recovery. Objectively speaking, the disagreement between Yang Shining and Wang Ningguo cannot be called a real contradiction, but at best an act of taking credit for each other. The intervention of the major shareholder Datang Telecom has led to an increasingly complicated relationship between the two parties. Since Datang Telecom became the largest shareholder of SMIC in 2008, it has gradually shown its desire to control SMIC. In 2009, China Investment Corporation wanted to invest US$350 million in SMIC to become the largest shareholder, but was opposed by Datang Telecom, which is a proof of this. However, it is not so easy for shareholders to control SMIC. According to SMIC's articles of association, all shareholders can only serve as non-executive directors, not executive directors, in order to avoid excessive interference of shareholders in the company and ensure the independence of the company. From the Zhang Rujing era to the Wang Ningguo era, only the CEO represented the management as an executive director, and the executive director did not represent the interests of any single shareholder, but only the interests of the company as a whole. Datang Telecom, as a major shareholder, sent two representatives, Chen Shanzhi and Gao Yonggang, but they were only non-executive directors, which means they were not allowed to interfere in the daily operations of the company. Datang Telecom needs to support a spokesperson in the management to implement its will as a major shareholder. Among the existing management, Yang Shining, who has a mainland background, has become Datang Telecom's "dear man". Due to the prestige of Chairman Jiang Shangzhou (he also does not want SMIC to be controlled by any shareholder), Datang Telecom has not shown a strong desire to control SMIC. With Jiang Shangzhou's unexpected death from cancer on June 27, 2011, SMIC lost the most critical force in balancing various shareholders and factions within the company, and a battle for corporate control was imminent.



















































On June 29, 2011, at the SMIC shareholders' meeting, shareholders voted on the appointment and removal of directors. Wang Ningguo, the only executive director, unexpectedly lost the election for a board seat, and he only received 41.79% of the support rate. The reason why Wang Ningguo lost the election was that the major shareholder Datang Telecom cast a crucial vote against it. Even Wang Ningguo himself felt that the matter was too sudden.

At that time, the total number of shares held by the shareholders attending the shareholders' meeting accounted for only more than 30% of the total share capital, and Datang Telecom alone held nearly 20% of the shares. Therefore, Datang Telecom alone could get more than 50% of the opposition ratio by casting a vote against it.

Datang Telecom's move can be described as an unprepared and unexpected defection action. Otherwise, if other shareholders knew about it, the proportion of participating in the vote would not be so low.

In this way, within a short period of 3 days, the chairman died and the only executive director was also out. After Wang Ningguo was kicked out of the board of directors, the major shareholder Datang Telecom intended to replace Wang Ningguo with Yang Shining as CEO, and continued to ask Wang Ningguo to resign from the CEO position in disguise, with the condition of giving him compensation of three times his annual salary, but Wang Ningguo did not accept it.

According to corporate governance rules, the CEO is appointed by the board of directors. If a shareholder is dissatisfied with the CEO, the board of directors should vote on whether to dismiss him, without the need for a shareholders' meeting to decide. In other words, if Datang Telecom wants to dismiss Wang Ningguo from the CEO position, it must be voted by the board of directors. On

July 2, three days after the shareholders' meeting, the SMIC board of directors held an emergency meeting to discuss matters such as Wang Ningguo's stay or departure. Datang Telecom only has two seats on the board of directors and cannot influence the board's resolution. In the end, the majority of directors did not agree to dismiss Wang Ningguo from the CEO position, and the board of directors decided that Zhang Wenyi would temporarily serve as the executive director after Wang Ningguo was kicked out of the board of directors.

Zhang Wenyi's entry into the board of directors was arranged by the former chairman Jiang Shangzhou before his death. Jiang Shangzhou, who was lying on his sickbed, invited his classmate, former vice minister of the Ministry of Electronics Industry and former chairman of Huahong Group, Zhang Wenyi, to join the board of directors, and suggested that he could serve as chairman in the future to balance the relationship between all parties on behalf of the government (despite this, Datang Telecom, the largest shareholder of SMIC, still voted against Zhang Wenyi's

entry into the board of directors. In the end, Zhang Wenyi entered the board of directors with 4 votes in favor, 2 votes against, and 1 abstention). Just as the board of directors was arguing over whether Wang Ningguo should stay or go, internal employees who supported Yang Shining and those who supported Wang Ningguo also split into two factions and opened fire on each other, and SMIC's internal BBS became a battlefield for the war of words between the two sides. In order to quell the dispute, SMIC had to close its internal BBS, and the two sides moved the battlefield to public Internet platforms such as "Baidu Tieba".

To this day, there are still many posts on the Internet from the "Yang supporters" that seem to be fair but are actually slandering Wang Ningguo and his "direct line". From Wang Ningguo down, CEO Wang Ningguo, CBO Ji Kefei, CAO Guan Yuesheng, CFO Zeng Zonglin, all Taiwan-based executives are included.

As a counterattack against Yang Shining's faction, the "Wang supporters" exposed an internal audit document that Yang Shining was suspected of tax evasion. The document shows that Yang Shining's annual salary is more than 1.8 million yuan, but by providing invoices to offset personal income tax, the tax paid is only more than 50,000 yuan.

This exposure not only hurt Yang Shining, but also exposed the unspoken rules of SMIC for many foreign executives to avoid taxes. Illegal tax avoidance for employee salary income exists in some companies to a greater or lesser extent, but SMIC's practice is considered to be the most daring, largest-scale and longest-lasting in the industry. At that time, founder Zhang Rujing relied on SMIC's special status in the domestic semiconductor industry and the support of government officials to always dare to compete with the tax department in terms of company tax payment and tax avoidance for employees.

In order to take responsibility for the exposure of the company's hidden tax avoidance rules, Wang Ningguo, as CEO, had to submit his resignation to the board of directors.

The development of the situation seems to be in line with the wishes of major shareholders Datang Telecom and Yang Shining, and Yang Shining seems to be able to take over Wang Ningguo's CEO position. However, the board of directors still failed to agree to Yang Shining's appointment as CEO, and instead parachuted Qiu Ciyun from Huahong Group to serve as executive director and CEO.

Qiu Ciyun followed Zhang Rujing to establish SMIC in 2001 and served as the company's senior vice president of operations. He was once regarded as Zhang Rujing's most important deputy. However, due to differences with Zhang Rujing on issues such as company operations and management, Qiu left SMIC in 2005 and went to Huahong NEC to serve as CEO.

Yang Shining saw that he had no hope of becoming CEO, and he also had the intention to leave. On August 16, 2011, SMIC issued an announcement that the company's chief operating officer (COO) Yang Shining would resign, and it would officially take effect on September 5.

Wang Guoning and Yang Shining left SMIC one after another. The internal strife provoked by Datang Telecom ended in a loss for both sides, and its attempt to control SMIC also failed. There is no winner in this internal strife, and the company is dragged into the abyss of serious damage.

Behind the scenes: unbearable burden Qiu Ciyun served as the executive director and CEO of SMIC, which was described by industry insiders as "a blessing in disguise". Born in 1956, Qiu Ciyun has more than 27 years of experience in the semiconductor industry. He has worked for Bell Labs, TSMC and other institutions for a long time. As an executive who participated in the start-up in the early stage, he has a better understanding of the internal situation of SMIC, so he will play a certain role in stabilizing the company. The internal strife of SMIC has gradually calmed down. Will the control dispute of SMIC end? I am afraid that the prospects are not optimistic. Since the founding of SMIC, from Zhang Rujing to Jiang Shangzhou, Wang Ningguo, Zhang Wenyi, and Qiu Ciyun, they all knew that SMIC must develop independently to have a way out. Due to the management system and technology blockade, there is no precedent for state-owned enterprises to succeed in semiconductors. The central enterprise Datang Telecom has strong control over SMIC, and SMIC's future is bleak, which will definitely harm the interests of other shareholders. Jiang Shangzhou has always emphasized that SMIC must adhere to the two "I" development, that is, Independent (independent) and International (internationalization), and does not want to be transformed into a state-owned enterprise, because the characteristics of the industry determine that it cannot be operated in the mode of state-owned enterprises, which is also the good gene of SMIC when it was born. And Datang Telecom originally invested in SMIC with the purpose of control. As an industrial investor, Datang Telecom is not simply pursuing financial returns, but has certain strategic purposes. This means that Datang Telecom is likely to have follow-up actions in order to take control of SMIC. The internal strife caused by the differences in shareholder demands in SMIC is considered by the outside world to be a typical struggle for control. SMIC seems to be facing a corporate governance problem, but it is by no means as simple as a simple corporate governance problem. SMIC's problem is not so much a conflict of interest between shareholders as it is a reflection of the development difficulties of China's high-tech industry. In the context of the aftermath of the Cold War between the East and the West and the international community's technological blockade against China, SMIC absorbed funds from various backgrounds in order to break through the blockade and cultivate the industry, and finally formed an extremely complex shareholder structure. The central enterprise shareholders, local government shareholders, sovereign fund shareholders, Taiwanese shareholders, and American shareholders formed around SMIC have different interests. From the perspective of the government, it hopes to accelerate the cultivation of the semiconductor industry and exchange the loss of one company for the rise of the entire industry, which is completely cost-effective; from the perspective of financial investors, corporate profitability is the only goal, and other things can be ignored; from the perspective of industrial investors, the invested companies must match their own strategic intentions. This inevitably leads to SMIC being mixed with the will of the Chinese government, the will of overseas shareholders, and the personal will of the founder. When the wills of all parties cannot be balanced, infighting becomes inevitable.



















After all, it is difficult for a company to handle multiple demands from different directions, which will eventually tear the company apart.

Can SMIC walk the balancing act?

Content Statement: This article is excerpted from Mr. Su Longfei's "Equity War", which tells a series of past events such as the internal strife over equity disputes in SMIC . The copyright belongs to the author. Any views in this article are for discussion purposes only and do not constitute any investment advice or represent the position of this public account. Users who invest based on this article and any other views of this public account must bear their own risks and responsibilities. This public account does not assume any responsibility for any consequences caused by this.