March 5, 2021
This is the web version of Eastworld, Fortune’s newsletter focused on business and technology in...

This is the web version of Eastworld, Fortune’s newsletter focused on business and technology in Asia. Subscribe here to get future editions in your inbox.

China’s push for self-reliance in semiconductors suffered two embarrassing reversals this week as one of the nation’s most high-profile chipmakers was taken over by municipal authorities in its home city of Wuhan, and a second chipmaker, affiliated with prestigious Tsinghua University in Beijing, defaulted on a corporate bond.

On Wednesday, the South China Morning Post, citing Chinese corporate registration records, reported that authorities in Wuhan’s Dongxihu district have seized control of Wuhan Hongxin Semiconductor Manufacturing Company (HSMC) following months of delays in the construction of a $20 billion semiconductor manufacturing plant that was to have been one of the most advanced in China.

Construction at the plant has been stalled since August; the facility appears not to have produced much of anything. The company’s chief executive has resigned and fled the country. The local government’s plans for the plant and sorting out the company’s debt obligations remain unclear.

News of HSMC’s travails came two days after a prominent Chinese credit rating agency declared that Tsinghua Unigroup, 51% owned by Tsinghua University-controlled Tsinghua Holdings, had defaulted on a privately-placed domestic bond worth $197 million. Unigroup owns one of China’s biggest mobile chip designers and controls Yangtze Memory Technologies Co. in Wuhan, which makes flash memories. Unigroup’s financial woes puzzled analysts because the company has enjoyed generous state-backing in years past; in 2015, Unigroup made headlines by attempting a $23 billion takeover of U.S. memory-chip maker Micron Technology.

Stumbles at HSMC and Unigroup highlight how difficult it will be for Beijing to realize its goal of achieve self-sufficiency in semiconductors by 2030.

China is the world’s largest consumer of semiconductors. It is expected to spend more than $300 billion on importing semiconductors this year—about $60 billion more than it spent last year on imports of crude oil. In 2019, China produced only 16% of the semiconductors it consumed domestically.

That dependence on foreign chipmakers has long been source of anxiety for China’s leaders. And it has become a national emergency over the past year as the Trump administration imposed a series of harsh measures designed to ban companies from both the U.S. and its trading parters from selling semiconductors or chip-making technology to China.

Beijing has lavished subsidies on home-grown chipmakers—mostly to no avail. In 2014, China announced a National Integrated Circuit Plan promising to spend $150 billion to expand local semiconductor manufacturing. Eliminating China’s dependence on foreign suppliers for key technologies like semiconductors is a central focus of China’s 14th Five-Year Plan drafted in Beijing last month.

And yet China’s leading chipmakers, by most estimates, remain five to ten years behind the most advanced fabrication facilities in Taiwan, South Korea, and the U.S. “Today, China has no leading-edge semiconductor manufacturing facility,” declare Justin Hodiak and Scott W. Harold of the RAND Corp., who note that China’s most modern foundry, at Semiconductor Manufacturing International Corporation (SMIC) in Shanghai, only began production for creating chips from the 14 nanometer technology node in late 2019—at least two generations, behind the leading edge foundries run by Taiwan Semiconductor Manufacturing Corp. (TSMC), Samsung, and Intel.

S&P Global Market Intelligence estimates Chinese semiconductor companies have raised the equivalent of nearly $38 billion so far this year through public offerings, private placements, and asset sales. The Wall Street Journal reports that more than 50,000 Chinese companies have registered their businesses as related to semiconductors this year, a record that is four times the total from five years ago.

But many of these would-be chipmakers have no experience with the industry and are piling in from unrelated sectors like real-estate, cement, and agriculture to qualify for the latest round of tax breaks and government subsidies. HSMC isn’t the first multi-billion dollar China-based chip-making venture to go belly up—there have been at least two more this year—and almost certainly won’t be the last.

It would be foolish to suggest that China’s drive to become self-sufficient in semiconductors can’t succeed, but the evidence to date suggests this isn’t an industry that plays to China’s economic strengths.

More Eastworld news below.

Clay Chandler
[email protected]

This edition of Eastworld was curated and produced by Naomi Xu Elegant and Grady McGregor. Reach Naomi at [email protected] and Grady at [email protected].

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