Posted by: Bruce Einhorn on March 31, 2010
There are some things too challenging even for China. Anybody who thinks China’s economic mandarins are all-powerful need only look at the sorry case of the country’s top chipmaker, Semiconductor Manufacturing International Corp. (SMIC), for proof that there are some things even Chinese leaders can’t manage. The Shanghai-based company, which got its start a decade ago as part of Beijing’s campaign to create a local chipmaking industry to compete with the world’s best, has lost $1.4 billion since 2005. SMIC hasn’t made a profit since 2004 and last year alone had $828 million in red ink.
The company’s founder and longtime boss, Richard Chang, was great for reporters; an evangelical Christian, Chang regularly talked about doing God’s work and he helped fund an impressive new church building near SMIC’s headquarters in Pudong. (See this story I wrote about Chang’s mix of religion and business.) Chang wasn’t so great for investors. The company’s New York-listed ADRs IPOed at 17.50 in 2004 and by January last year they were trading just above 1.50.
In November, Chang left the company. Since then, things have started to look up for SMIC. The new boss, David Wang, is the former president of Asia for Applied Materials and analysts like the change he’s brought to SMIC. “Wang seems to have brought a more Western-style management style to SMIC that demands more accountability from every level and a harder focus on profitability,” BofA Merrill Lynch analyst Daniel Heyler wrote in a March 17 report. Wang is also the CEO of another Shanghai chipmaker, Shanghai Hua Hong International, raising hopes of consolidation. And Wang has helped end the destructive rivalry with the world’s top foundry chipmaker, Taiwan’s TSMC, which reached a settlement with SMIC in November over the Taiwanese company’s charge that SMIC had stolen its trade secrets. As part of the settlement, TSMC agreed to accept shares in SMIC and $200 million in cash. TSMC is now proceeding with that plan: On Monday, it applied to the Taiwanese government for approval to receive as much as 10% of SMIC.
All this is welcome relief for beleaguered investors in SMIC. The price of its ADRs is up 97% so far this year. Don’t get carried away, though. Heyler sees the company losing another $185.5 million this year and not turning profitable till 2012.