In a rush to pump up China’s chip sector, local Chinese governments and private investors took big risks to set up numerous semiconductor projects during the past several years.
Hoping to become the next Chinese chip national champion, local governments were eager to team up with private investors. But sometimes, local governments and contractors fall prey to professional con men who defraud tens of billions under the disguise of semiconductors.
The most high profile and eerie fraud case is Wuhan Hongxin Semiconductor Manufacturing Corporation (HSMC), a project that contracted TSMC veteran Chiang Shang-Yi as its CEO with projected investment of RMB100 billion.
The project came to a sudden halt last fall when Chiang resigned and contractors sued it for up to billions of yuan of payable and loans. Chiang said that his experience at HSMC was a nightmare.
The project was started by someone with only primary school education, and the key members of the founding team have zero semiconductor industry experience.
The most outrageous aspect is that the person behind HSMC fraud is still actively managing around a dozen other semiconductor projects, potentially attempting to defraud more money from other city governments across the country.
What’s more, certain government officials may have facilitated and benefited from the fraud because such high level projects require government approval, which is hard to obtain without "connections" and is often where bribes occur.
Members of the founding team of HSMC often claim "connections" with high ranking officials. Yet so far, there has not been any criminal investigations into the HSMC project. The local government is taking over the project after suffering tens of billions in losses.
How did the HSMC fraud happen? Below is a translated detailed report from Chinese media 36kr.
A Fantasy Drawn By Founder With Only Primary Education And A Team With Zero Semiconductor Experience
Cao Shan is the earliest founding member of HSMC. In 2017, Cao Shan tried to form a semiconductor project. A person familiar with the matter said that in order to find local governments willing to cooperate, Cao Shan wandered through various provincial capital cities, including Guangzhou, Hefei, Chengdu, Nanjing and other places, but in vain.
Cao Shan was full of big ideas. In order to sell himself, Cao Shan often carries a number of business cards. His identities include "Vice President of TSMC", "The first Vice President of Acer in New York, USA" and so on.
However, a simple check would reveal that "the vice president of TSMC" does not have someone named Cao Shan, and Acer has no office in New York.
Many people who have been in contact with Cao Shan said that "Cao Shan" is not even his real name. His real name is Bao Enbao. Cao Shan is the name of the driver he used from his hometown.
But after much hard work, Cao Shan developed persvasive communication skills. He eventually met another key figure, Long Wei, who would be the second critical member of the founding team.
Many HSMC insiders said that Long Wei was "very energetic" and "connected" to high officials. With the maneuvering of Long Wei, HSMC finally was able to knock on the door of the Dongxihu District government in Wuhan city.
Because Long Wei is the key figure with high level connections, he hired a close friend Li Xueyan as the director of HSMC. Li Xueyan previously sold soju, opened a restaurant, and resold Chinese medicine.
Together, Long and Li also installed a number of cronies into key positions at HSMC, such as Li Yueru, a supervisor of the board of directors. Some insiders said that he was a "personal nanny" who took care of Li Xueyan’s daily life.
An absurd initial team was thus formed: Long Wei with "connections" served as chairman, Cao Shan was a director, and Li Xueyan as director and general manager.
None of them had any semiconductor experience. No one had formal university degrees and Cao Shan has only a primary school diploma.
But still, HSMC quickly took off with Long Wei’s "connections".
On November 12, 2017, Cao Shan established a company called "Beijing Light Blueprint". Four days later, with it holding 90% of the shares, HSMC was established jointly with the Wuhan Dongxihu District Government.
It seems that the Wuhan Dongxihu District government was taking a very small risk. As a minority shareholder of 10%, it only injected 200 million yuan in start-up capital at this time.
However, the problem is that although Beijing Light Blueprint held 90% of the shares and promised to invest 1.8 billion yuan, it did not actually paid the money.
However, this did not prevent HSMC from quickly becoming a star project in Wuhan in just one year. Since 2018, HSMC was listed as a major special project of Hubei Province for two consecutive years.
HSMC began introducing itself as a project with an investment of US$20 billion/RMB 130 billion.
According to a document issued by the Wuhan Municipal Development and Reform Commission, in January 2019, HSMC, which was only established for one year, had completed an investment of 6.5 billion yuan.
By March 2019, HSMC had received more than 1.5 billion investment in one month. These investments come from the Wuhan Dongxihu District Government.
What is puzzling is how did HSMC get these funds, even when the technical and operational errors and mistakes made by HSMC team were so egregious?
Cao Shan has told others that HSMC was to produce chips with a 90-micron to 7-nanometer process. He also set a big goal to "become a fab second only to TSMC and Samsung."
Anyone who understands the semiconductor development knows that no fab can produce chips that span 13 generations at the same time.
According to the laws of the semiconductor industry, chip manufacturing should gradually develop from the entry-level 65nm and 40nm to the more difficult 14nm.
A HSMC employee once asked Cao Shan: "Why do you have to fly if you haven’t learned to walk?" Cao Shan replied: "To build 65nm chips, the project is only worth 8 billion, but if we say it’s a 14nm chip project, it is worth 120 billion."
A senior investor in the semiconductor industry in Shanghai said: "It is difficult for local governments to be rational. You see that everyone is doing (chip projects), why can’t I do it?"
"It Was A Nightmare"
However, to prop up the HSMC team and the project’s credibility, Long, Cao, and Li urgently need a solid technical team.
Surprisingly, they managed to hire the most senior, experienced, and highly regarded TSMC veteran, Chiang Shang-Yi.
In 2019, Cao Shan once again used his contacts to find a company called "Shanghai Jingtai". The company worked closely with major chip manufacturers such as TSMC and was good at buying and reselling second-hand equipment. It was quite "connected" in the chips circle.
Cao Shan asked Shanghai Jingtai to act as a broker, and the two parties signed a contract worth tens of millions.
Jingtai needed to help HSMC hire 100 senior technicians from Taiwan and other places. The higher the talent’s seniority level, the more commission fees that HSMC pays.
"If you can help us hire Chiang Shang-Yi, you will receive RMB 1 million, and if you find a deputy (manager level) talent, you will get RMB 500,000."
Driven by money, Shanghai Jingtai contacted Chiang Shang-Yi, who just ended SMIC’s tenure at the time. Chiang Shang-Yi was deceived by HSMC’s facade of capital and connections.
Inside HSMC, rumors about the background of the founding team have always existed. Long Wei was rumored to be "the grandson of a certain senior leader" and Li Xueyan is "the younger sister of a certain leader."
When Cao Shan and others went to Taiwan to recruit technical teams, they often claim that the HSMC project is "the mainland’s star project" and "government is investing RMB 100 billion."
Long Wei also brought the potential recruit candidates in and out of certain hotels, which he claims are places where only people "with deep background" can go in.
In the summer of 2019, Chiang Shang-Yi decided to join the HSMC team. With Jiang Shangyi on board, a large number of engineers came too, and HSMC did not hesitate to double the salary to retain talents.
With Chiang’s help, HSMC was able to buy a lithography machine from ASML. ASML needed to review purchasers of its machines to ensure the buyers have the capacity to operate it. But HSMC’s building contractors had no experience building a fab factory. The factory floors were not even and ceiling was not high enough.
Some employees remember that Li Xueyan once told others how to buy a machine from ASML. "Invite ASML to come to China for dinner, and give them gifts and Chinese calligraphy and painting."
Hongxin employee Tao Yong still remembers that on December 22, 2019, the ASML machine was in place. A big ceremony was held and HSMC became a semiconductor treasure.
But what Chiang Shang-Yi didn’t expect was that the lithography machine he tried so hard to get was mortgaged into the bank less than a month after entering the factory.
On January 20, 2020, HSMC mortgaged the imported ASML lithography machine to Wuhan Rural Commercial Bank for a loan of 580 million yuan. In the column of mortgage information, it is written that the lithography machine is “new and not yet used".
In June 2020, the frustrated Chiang Shang-Yi planned to resign from the positions of director and CEO of HSMC.
At that time, Chiang Shang-Yi and the board of directors of HSMC had already been on the rocks for a while. In order to keep Chiang Shang-Yi, the board of HSMC used all kinds of tactics.
In order to prevent Chiang from resigning, Li Xueyan, the then chairman of HSMC, stated that he would send a lawyer’s letter to prosecute him. "It is necessary to write that Chiang is terrible, and all the failures of HSMC are attributed to him."
Under various obstructions, Chiang could not resign or get away. On July 8, 2020, HSMC held the "Employee Commendation Conference". Chiang was asked to attend the ceremoney for employees. HSMC officially released photos of Chiang with other management team members to show strength.
After the event, Chiang quickly left Wuhan and then returned to his residence in the United States. He once said in an interview with the South China Morning Post: "My experience at HSMC was a nightmare."
Chiang’s resignation accelerated HSMC’s fall. The Dongxihu District Government of Wuhan City, where HSMC is located, soon officially issued a report clearly stating that HSMC project “has a large funding gap and faces the risk of project stagnation due to capital shortage at any time”.
Defrauding Multiple Parties At The Same Time
HSMC engineers hired from other companies soon concluded that HSMC team did not understand semiconductors and had built a completely useless factory.
Several HSMC employees said that in order to quickly build the factory, Cao Shan asked for SMIC’s old factory drawings from a design institute, and directly copied it.
The general contractor, Torch Group, does not have any experience in chip factory construction. Torch Group itself has loads of legal troubles with hundreds of millions of disputed amount in court with other firms.
But it does not matter to HSMC because it is not interested in building a good fab factory any ways. It found Torch Group to defraud it. In China, to ensure the performance of the construction tasks, the contractor often pay a deposit of hundreds of millions of yuan.
In other words, HSMC can deceive both the local government in Wuhan and its contractors such as Torch Group.
During 2019, HSMC and the general contractor Torch Group had many large-scale capital exchanges. What is strange is that on May 30, 2019, Torch paid RMB435 million yuan to HSMC.
Why did Torch pay HSMC? A person familiar with the matter said that because HSMC promised to pay the excess loan interest to Torch, Torch voluntarily borrowed from the bank as a guarantor and then transferred the loan amount to HSMC.
But of course, when the time comes for HSMC to pay, it couldn’t. On January 21, 2020, only three days before Chinese New Year’s Eve, Torch’s manager Lu Haitao made seven calls to Li Xueyan, but none of them were answered.
Torch needed to pay wages of rmb 50 million yuan to contracted migrant workers, who were waiting for their money to go home to celebrate the holidays.
The hundreds of workers gathered on the construction site and saw their hard work for a year not being compensated. During the day on January 22, the workers rushed into the Dongxihu District Government in Wuhan, "the police couldn’t stop it," said one witness.
This scandal soon spread to staff members at HSMC. But Li Xueyan has repeatedly reiterated that HSMC is absolutely safe and money is not a problem for the company.
But money was a problem because money evaporated mysteriously inside HSMC.
The Wuhan Municipal Development and Reform Commission show that the total investment received by HSMC as of December 31, 2019 was 15.3 billion yuan.
But HSMC received way more money than that. HSMC mortgaged its physical assets such as land and lithography machines, of which 580 million was taken from the lithography machine.
In addition, a person familiar with the matter presented evidence proving that HSMC once asked Torch Group, the general contractor of the project, to successively withdrew a loan of about 700 million yuan from the local bank.
It is estimated that if all 15.3 billion investment funds are in place and all arrears have been settled, HSMC should have about 12.4 billion yuan left on its account. But at the time when Wuhan government reported capital shortage, the account had only a bit over 10 million yuan.
An investigation showed that most of the money were channeled to related entities set up by the core members of the team.
Take one of the companies named "Foshan Hanqi" as an example. Hanqi is a Hongxin consulting company, but it actually transfers money from HSMC to itself in the name of training and consulting.
The person in charge of the Hanqi team is Li Xueyan’s younger brother, Li Xuesong.
The training and consulting fees, as well as staff salaries of Hanqi team, go as high as 150,000 to 300,000 yuan per month. This expenditure is allocated by HSMC as "technical authorization expenses."
Most of the money HSMC received were channeled to related companies set up by its core fraud team members, and then into their personal pockets.
Surprise – The Government Ended Up Holding The Hot Potato
After investing as much as 15.3 billion yuan in HSMC, the Wuhan Dongxihu District government has to deal with the mess.
In November 2020, Wuhan Dongxihu District acquired Beijing Light Blueprint, which holds 90% of HSMC shares and completely took over Hongxin.
After the government took over HSMC, it cleared Li Xueyan and other management team members left.
The government sent a lobby group to Shanghai and other places to seek acquisitions, but this project is deemed too rotten to be salvaged.
HSMC’s contractors are still trying to collect their payable and loans that HSMC took with their guarantee.
"A friend went to the Dongxihu government to verify, and the government replied that HSMC had collected their money and left," a person told Chinese media.
According to Tianyancha, in May 2019, Hongxin Chairman Long Wei and Director Cao Shan withdrew from the company’s management team.
After leaving HSMC, Cao Shan said to his friends "Taiwanese (referring to Chiang Shang-Yi) are really easy to cheat." "
Cao Shan continued to travel around, attempting to "defraud" other local governments eager to make itself home of the future SMIC.
Cao Shan holds multiple chip projects in his hands and is seeking his next prey. So far, there are no criminal investigations into the HSMC scandal.