Corruption is sending shockwaves through China’s chip industry

Corruption is sending shockwaves through China’s chip industry

It remains unclear whether Unigroup’s failure directly triggered the anti-corruption shakeup at the Big Fund. However, the strategy the latter has taken – throwing huge investments against the wall and seeing what sticks – may fail miserably. According to long-time observers, this strategy is also a perfect breeding ground for corruption.

“This is the least surprising corruption investigation I’ve heard about in a while,” said Matt Sheehan, a fellow at the Carnegie Endowment for International Peace, a US think tank. “Not because I know that Ding Wenwu is personally corrupt, but when you have that amount of money splashing around in the industry, it would be much more surprising if there it is not a major corruption scandal.”

A significant part of the problem was the lack of precision, Sheehan says. China knew it needed to invest in semiconductors, but it didn’t know exactly which sub-industry or company to prioritize. The country was forced to learn by trial and error, working its way through problems such as the bankruptcy of Unigroup and increasing technological blockade by the USA. The next step should be more targeted investments in specific companies, Sheehan says.

That could mean a new head for the Big Fund — someone better versed in getting financial returns, said Paul Triolo, senior vice president at business strategy firm Albright Stonebridge, which advises companies doing business in China. Many of the Big Fund managers came from government backgrounds and may have simply lacked the relevant experience. Ding, who is now under investigation, was once a department director at China’s Ministry of Industry and Information Technology.

“You need competent people to run this [Big Fund] who understand the industry, finance and will not finance projects that do not have a sound commercial basis,” says Triolo.

Ultimately, these investigations may be positive for China’s semiconductor industry as they highlight the limitation of politically driven funding and may encourage large fund management on a market basis. Beijing’s appetite for experimentation is waning as its concerns about self-sufficiency intensify. “They can’t afford to waste $5 billion on factories that won’t be sustainable,” says Triolo.



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