The chips are down

Now without Wang: SMIC offices 

In March tycoon Huang Guangyu launched a successful effort – from his prison cell – to unseat the chairman of the company he had founded, Gome. Few thought that there would be similar boardroom drama in the remainder of the year.

Until now, that is. In the last three weeks, SMIC, China’s largest contract chipmaker, has seen its board fire the chief executive, and two of its largest shareholders bash heads in a public feud. That’s hardly good news for a company that has only recently turned a profit for the first time since 2004.

Let’s backtrack a little: SMIC was founded in 2000 as part of a national policy to promote a tech champion. But it lacked the scale and technology of nimbler, more cost-effective competitors like Taiwan Semiconductor Manufacturing (TSMC), United Microelectronics (UMC: also Taiwanese) and Abu Dhabi’s Global Foundries.

SMIC’s recent distractions began when its chairman Jiang Shangzhou died in late June. Jiang had recruited David Wang, a Taiwanese industry veteran, to help him put the company back on track. Wang joined in in November 2009 and was “very, very focused on delivering the numbers and executing,” according to Steven Pelayo, then regional head of technology at HSBC in Hong Kong. The transformation effort had been so complete, “the company should have just changed its name,” Pelayo thought at the time.

As a result Wang had nursed SMIC back to health, returning it to profitability after five straight annual losses. But rather than give him a large bonus, shareholders including government-owned Datang Telecom Technology then voted against his re-election. He was forced to resign last Friday.

Why fire Wang? “The changes are due more to politics than the fundamentals of the company. David Wang was performing quite well and didn’t make any major mistakes,” a Taipei-based chip analyst told the China Daily. “There is a possibility that the central government wants to consolidate the sector. China doesn’t need so many small foundries.”

The speculation is that Datang, the company’s largest shareholder, has been looking to merge with SMIC to create an integrated tech firm that makes both chips and telecoms equipment. This ambition may have been thwarted by Wang’s appointment as company chief. Michael Clendenin, managing director at research company RedTech Advisors, said Wang clashed repeatedly with Datang over strategy.

Datang is under pressure itself from Sasac’s directives that all but the largest SOEs should consolidate into bigger enterprises (see WiC90). And it was hoping that a merger with SMIC would pre-empt moves from outside that it restructure, says CBN.

Whether an SMIC/Datang tie-up is in the best interest of another shareholder, CIC, is more debatable. The sovereign wealth fund invested $250 million for an 11.6% stake in the foundry back in April, rendering it the second largest investor after Datang. But analysts say a link-up with Datang could well undermine SMIC’s expansion abroad. Overseas clients, especially those in the US, are wary of giving big orders to Chinese companies that are clearly state-owned, says CBN (witness Huawei’s problems).

CIC and Datang are now in rival camps. When Jiang died, Datang lobbied aggressively for Simon Yang, the company’s chief operating officer, to replace Wang. The attempt was rebuffed by the board, including a supporting vote from CIC, says the Financial Times.

The fear is that the boardroom squabble will serve as a major distraction, taking SMIC away from its more profitable recent path. “This is a deeply worrying development,” a person close to the board told the FT. “Finally this company was starting to move in the right direction, and now everything is falling apart again.” Concerned by events, investors sent SMIC shares down 11% this week on the Hong Kong stock exchange.

But there were signs that CIC and Datang were trying to reach a truce this week by appointing Zhang Wenyi, a former Chinese government minister, as the acting chief executive while the board looks for Wang’s replacement.

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