Well-connected chip maker fails to shine

POLITICAL CONNECTIONS don't seem to count for much in the semiconductor business. Just take a look at China's Grace Semiconductor Manufacturing Corporation (GSMC). Founded in 2000, Grace is notable for its impressive connections. Both US presidential sibling, Neil Bush, and Jiang Mianheng, son of China's former president, are involved - Bush as a consultant and Jiang as co-founder. And the company seems to have great business connections, too, in the shape of CEO Winston Wong (aka Wang Wenyang), who is the son of one of Taiwan's wealthiest tycoons and brother of the chairwoman of major fab customer, Via Technologies.

However, despite heavyweight connections, ambitious plans, and billions in investment Grace is "still small potatoes," in the chip making business, according to a semiconductor industry analyst. One speculative assessment, based on information from an investor, puts the market value of the unlisted company well below its $1.6 billion start up costs.

Much of the space at its large facility in Shanghai is still unused, five years after Grace was founded. Of the three fabs (semiconductor fabrication facilities) that Grace planned for the Shanghai site, only one, Fab 1a is known to be producing chips, while industry sources say the other two, Fab 1b and Fab 2 are not yet in operation. The company originally planned to start 12-inch wafer production, which is generally more profitable, but judging from recent public statements, has not yet achieved this goal, which has restricted its output to eight inch wafers only.

Meanwhile, Chinese rival SMIC, which was established at around the same time as Grace, is forging ahead, churning out hundreds of thousands of silicon wafers - including the more profitable 12-inch variety - which are made into millions of chips. "GSMC is running just over 30,000 wafers per month, which is only 20 percent of SMIC's production," said a semiconductor analyst with a foreign banking group.

Grace did not respond to requests for an interview or to questions about the status of Fab 1b and Fab 2, which industry sources claim are not in operation. In an email statement, a spokesperson said: "GSMC currently continues to focus on enhancing our core competencies and roadmap to meet the growing demand of 0.18um, 0.15um, 0.13um and beyond. We are in the midst of a rapid expansion of our technology portfolio, to meet this demand. We hope this organic growth to continue to be the impetus driving our expansion needs for increased capacity of Fab 1b and Fab 2."

The company spokesperson denied rumours that Grace planned to merge with Japanese electronics giant NEC's joint venture partner, chip maker Hua Hong NEC (HHNEC), but did not rule out some other form of cooperation, saying: "GSMC always would like to cooperate with any potential partner. So far we don't have any plan for merger activity."

GSMC is not publicly listed, so financial data is hard to come by. But flash memory chip developer, Silicon Storage Technology reports in SEC filings that it has investments in GSMC with a book value of $83.2 million, which it says represents a 10 per cent interest in the Chinese manufacturer.

If we assume that Silicon Storage's assessment of its investment's worth is close to the true market value of the shares, then that would suggest a total value for GSMC of only about $830 million. That's well below the $1.6 billion GSMC said it needed to set up its first fab. By way of comparison, the market capitalisation of competitor SMIC is around $3.5 billion, according to Walden International, a venture capital firm. Silicon Storage said the investments in GSMC were primarily intended to secure chip manufacturing capacity.

Grace does not appear to have been helped by its most prominent adviser, Neil Bush, who counts among his immediate family the current US president, a former president, CIA director, and US ambassador to China, not to mention the Florida state governor.

Bush was hired in 2002 by Winston Wong with a remarkably brief contract, which concerns itself solely with awarding him $2 million in GSMC stock over five years for vaguely-defined 'consultancy services'. This is despite the fact that Bush admitted at the time to having no knowledge of the semiconductor business. Details of the contract and Bush's lack of experience were made public during his divorce in 2003.

Perhaps uniquely amongst employment contracts, this one contains no clauses relating to termination of the agreement if the expensive consultant should fall from Grace. Neil Bush told the Washington Post in 2003 that he hadn't yet received any of the money. Grace did not respond to questions about Neil Bush's role in the company. µ

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