July 18, 2011 1:30 pm

SMIC’s future unclear after Wang’s resignation

Investors in Semiconductor Manufacturing International (SMIC) expressed shock on Monday at a boardroom drama that has once again left China’s biggest contract chipmaker by sales with an uncertain future.

Shares fell almost 10 per cent in Hong Kong in reaction to a rare public feud between two state-owned shareholders of SMIC that has broken out over the past 18 days. It began when Jiang Shangzhou, SMIC chairman, died in late June and culminated in the resignation last week of David Wang, SMIC chief executive.

Rivalry between state enterprises or departments is common in China, but rarely does it play out as publicly and with as drastic consequences as in the SMIC case.

“This is a deeply worrying development. Finally, this company was starting to move in the right direction, and now everything is falling apart again,” said a person close to SMIC’s board.

SMIC was part of China’s decades-long ambition to create a domestic semiconductor manufacturing industry, but had been disadvantaged because it lacked scale and technology expertise to compete with its Taiwanese rivals, who dominate the contract chipmaking industry.

SMIC had been unprofitable for five years until Mr Wang, a Taiwanese industry veteran, took over in 2010 and started an extensive restructuring programme to turn the company round.

Mr Wang delivered SMIC’s first profitable year in 2010, but was forced to resign because he failed to gain re-election to the board amid a tussle between Datang Telecom Technology & Industry , a state-owned group, and China Investment Corporation (CIC), the country’s sovereign wealth fund.

Andrew Lu, an analyst at Barclays Capital, said there was no disagreement over strategy. “It is about power,” he said.

In 2008, battered by a long-running patent dispute with Taiwan Semiconductor Manufacturing (TSMC), the world’s largest contract chipmaker by sales, SMIC turned to Datang for a $172m investment. Datang soon increased its stake to 19.4 per cent, making it SMIC’s largest shareholder.

According to people close to Datang, some officials hoped the state firm could fully consolidate SMIC to create a vertically-integrated telecoms technology company. “This would greatly increase the group’s assets,” said one person close to the situation.

Such ambitions received a blow last year, when the well-connected Mr Jiang, a former government official, brought in CIC, with an 11.6 per cent stake.

Datang immediately countered with an additional investment in SMIC to prevent its stake from being diluted, but remained wary about CIC’s role. When Mr Jiang died, Datang campaigned for Simon Yang, SMIC’s chief operating officer, to replace Mr Wang as chief executive, but was rebuffed by the board, which included the vote of CIC’s representative. Yet despite that vote of support from the other board members, Mr Wang was blocked from reappointment to the board at SMIC’s annual general meeting just two days after Mr Jiang’s death, which set the stage for his resignation.

Mr Wang had said SMIC would invest up to $12bn over five years in cutting-edge technology, and limit its manufacturing sites to just a few locations including Beijing.

Mr Wang’s reforms were a step in the right direction, said Bill Lu, analyst at Morgan Stanley, in an note before Mr Jiang’s death, but he noted that SMIC continued to face uncertain prospects as it lagged behind in technology and as industry conditions are likely to get tougher in the second half of the year.

SMIC said on Sunday that it had appointed Zhang Wenyi, a former chairman of SMIC’s smaller rival Shanghai Huahong, and former vice-minister for the electronics industry, as its new chairman, executive director and acting chief executive.

Mr Zhang appeared to reaffirm the restructuring path taken by Mr Wang, showering him with praises and pledging to stick to the course.

“The board agrees that SMIC must maintain its independence and internationalised operations, implement professional and standardised management, and unite the interests of management, employees, and investors,” he said, in a clear rebuff of further ambitions by Datang.

However, analysts say implementation of the restructuring is certain to face hiccups, as a number of other senior Taiwanese executives are likely to follow Mr Wang’s departure.

Gary Tseng, a former TSMC executive who had joined SMIC last year as chief financial officer, and Chris Chi, formerly of Taiwan’s United Microelectronics, the world’s second-largest contract chipmaker, who became SMIC’s chief business officer last year, were likely to leave as well, said Mr Lu.

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