Winston Wong recalls dining with Jiang Mianheng, son of China’s then President Jiang Zemin, at a Shanghai restaurant in 1999. During the meal, Wong, son of Tai- wanese billionaire Wang Yung-ching, says he discovered he had two things in com- mon with Jiang besides a powerful father.
One was the proximity of their birth dates—four days apart in April 1951. More important, Wong says, the sci- ons of influential families from opposite sides of the Tai- wan Strait shared an idea for a company. “Jiang told me it was his dream to build a first-class, state-of-the-art semiconductor manufacturing facility in China,” Wong says. “I said it was my dream also.” Jiang’s reply: “Why don’t we do it?” Wong recalls.
Five years and $1.6 billion later, Grace Semiconductor Manufacturing Corp. is producing made-to-order flash memory chips used in MP3 and DVD players, making it one of the hundreds of Taiwanese-backed companies setting up shop in China. In the 55 years since the Nationalist government of Chiang Kai-shek fled to Taiwan after losing control to Mao Zedong’s Communists, Taiwanese businesses have invested $100 billion in the mainland, according to Tai- wan’s Ministry of Economic Affairs.
Grace’s 240,000-square-meter (2.58-million-square-foot) factory sits on what were once rice paddies in Shanghai’s Pudong district, the semiconductor and financial hub of China. Across the street is Semiconductor Manufacturing International Corp., a computer chip maker started by Richard Chang, 56, a veteran of Taiwan’s semiconductor industry. Wong says Grace plans to sell shares on the New York Stock Exchange this year in one of five initial public offerings by Chinese chipmakers scheduled for 2004.
Among Grace’s backers is Hong Kong–based General Enterprise Management Services Ltd., a buyout fund man- agement company headed by Simon Murray, 64, who was Asia-Pacific chairman of Deutsche Bank AG from 1993 through ’97. Grace raised $45 million from GEMS and $83 million from Sunnyvale, California– based memory chip maker Silicon Storage Technology Inc. There are also Chinese investors Wong declines to name. Hong Kong billionaire Li Kas hing, 76, is an investor in GEMS; former U.S. Secretary of State Henry Kissinger, 81, is an adviser. Wong met Neil Bush, 49, when the brother of U.S. President George W. Bush was seeking funding for his educational software venture, Ignite! Inc., and lined him up as a Grace adviser and director with a $2 million, five-year contract.
High-level connections, known in Chinese as guanxi (pronounced gwan-shee) have traditionally been considered a prerequisite for doing business in China, says Enzio von Pfeil, chief executive officer of Commercial Economics Asia Ltd., a Hong Kong–based investment adviser. “Because there’s no rule of law, you have to have this guanxi,” he says.
Wong and Jiang face hurdles to their China foray—from declining sales growth for semiconductors to rising tensions between Taiwan and the mainland. Since independence- minded Chen Shui-bian was elected Taiwan’s president in 2000, cross-strait discord has worsened. In March, Chen won re-election, beating Nationalist Party Chairman Lien Chan, 67, who had campaigned on a platform of boosting trade and improving relations. On the eve of the election, a bullet grazed Chen in the abdomen. Opponents accused him of staging an assassination attempt, an allegation he denied. The state-owned China Daily newspaper quoted Xiamen University professor Fan Xizhou, who called Chen’s inaugu- ral speech a “separatist road map.”
Such political tensions raise questions about whether the ties the men enjoy will help or hurt Grace. “It’s inherently un- predictable to have a business based on the connections these kids have,” says Gordon Chang, 53, a New Jersey–born for- mer corporate attorney for U.S. law firms in Hong Kong and Shanghai and author of The Coming Collapse of China (Ran- dom House, 2001). “If Jiang senior is out, his son is out and those aligned to his son are out.”
Since Grace began production in December, China’s IPO market has cooled. Last year, Chinese companies had the world’s most-sought-after shares as gross domestic product surged 9.1 percent. The biggest IPO, China Life Insurance Co., racked up $80 billion of offers for shares valued at $3.4 billion, say bankers from Citigroup Inc. and Credit Suisse First Boston who arranged the sale. That’s more than the $50 billion investors worldwide spent last year on IPO shares, according to data compiled by Bloomberg. On the first day of trading, China Life’s shares surged 25 percent to 4 Hong Kong dollars and 50 cents from HK$3.60.
Now, Premier Wen Jiabao, 61, is ordering banks to restrict lending as he tries to cut annual growth to 7 per- cent. The decision to slam on the economic brakes has dampened investor enthusiasm for Chinese share sales, says Glenn Henricksen, a former risk manager at Bear Stearns Cos. who is now a principal at Hong Kong– based CIF Consultants, which advises companies on in- vesting in China. “Individual investors in Hong Kong are starting to panic and in some cases are throwing the baby out with the bath water,” Henricksen says.
Also weighing onGrace is the projected 6 percent drop in global chip revenue—to $44.4 billion next year—that’s forecast by Scottsdale, Arizona–based researcher IC Insights Inc. At the same time, Grace’s competition is increasing. In April, the Taiwanese government approved Taiwan Semiconductor Manufacturing Co.’s plan to open its first factory in China. Taiwan Semiconductor, the world’s largest supplier of made-to-order chips, can produce 356,000 silicon wafers a month compared with Grace’s monthly target of 27,000. Both companies make wafers and imprint them with circuitry based on the designs customers supply. “The timing for Grace could be quite bad in the short order,” says Gerald Smith, head of emerging markets at Edinburgh, Scotland– based Baillie Gifford & Co., who oversees $3 billion. “It’s going to be a tough, competitive environment.”
The case of Semiconductor Manufacturing, Grace’s next- door neighbor in Pudong, serves as a warning to investors, Smith says. In March, China’s biggest chipmaker raised $1.8 billion in its IPO. Since then, the stock has tumbled 32 per- cent on the Hong Kong Stock Exchange to HK$1.84 on June 8 from the IPO price of HK$2.72. That compares with a 14 percent decline in the Hang Seng China Enterprises Index of mainland Chinese stocks traded in Hong Kong. “There was just too much optimism,” says Samir Mehta, who helps man- age $3 billion at Lloyd George Management in Hong Kong. “It got sold as a China play, not so much as a foundry.”
Semiconductor Manufacturing CEO Richard Chang says he isn’t worried about more chipmakers in his backyard. “We believe in friendly competition and welcome them to China,” he says.
The volatile relationship between China and Taiwan over- rides all of the other issues. The countries are enmeshed in one of the last Cold War standoffs, with China pointing 450 missiles at its island neighbor, according to the U.S. Depart- ment of Defense. The U.S. sells weapons to Taiwan to help the island defend itself should Beijing attack. On May 19, the China Daily reported that China would use force to prevent Taiwan from formally splitting from the mainland, even at the risk of forfeiting economic growth and incurring a boycott of the 2008 Summer Olympics in Beijing. Five days later, Zhang Mingqing, spokesman at the Taiwan Affairs Office of China’s cabinet, said China doesn’t welcome proindependence businesspeople from the island.
Wong, who says he voted for Chen, says he and Jiang don’t discuss politics, so they don’t have disagreements. Jiang declined to be interviewed for this article. As for chips, Wong says demand is rising. “We have more orders than we can handle,” he says.
Right now, Grace exports all of its semiconductors. Its customers include Silicon Storage Technology, which got a 10 percent stake for its investment in Grace. Wong wants to get closer to buyers in China. Finland’s Nokia Oyj, the world’s No. 1 cell phone maker, has a research center in China. Round Rock, Texas–based Dell Inc., the world’s No. 1 person- al computer maker, opened a factory in the southern city of Xiamen to tap demand in the world’s second-largest computer market.
China’s lack of foreign chipmakers leaves the field wide open for Grace and its rivals. Last year, Schaumburg, Illi- nois–based Motorola Inc., the only U.S. company to have made semiconductors in China, sold its $1 billion chip business in Tianjin to Semiconductor Manufacturing in ex- change for 11.4 percent of the company.
This year, semiconductor sales in China will rise to $39 billion—a 32 percent surge from 2003 and triple the project- ed global increase, predicts Gartner Inc., a Stamford, Connecticut–based research firm. Wong says the demand ensures that China will defy a worldwide chip slowdown. “China is a different picture,” he says, seated in a reception room on the executive floor atop Grace’s five-story Shanghai plant.
Wong is trying to boost Grace’s odds for success by shift- ing production to 12-inch wafers. The bigger, dinner-plate- size disks more than double the number of chips produced compared with the previous, 8-inch standard, cutting production costs. Grace expects new equipment for the 12-inch format to start running next year. Semiconductor Manufacturing will have the first plant in China with 12-inch technology when it begins production this year. “China’s moving really fast,” says Dorothy Lai, a Hong Kong–based analyst at Gartner. “In 10 or 15 years, it could be like Taiwan or Korea is today.” Taiwan has four factories with 12-inch technology, ac- cording to the Taiwan Semiconductor Industry Association.
Wong’s interest in semiconductors dates to his days at his father’s Formosa Plastics Corp., Taiwan’s largest industrial company. After getting a doctorate in physics from Imperial College in London, Wong returned to Taipei to lead Formosa’s push into chips from its businesses in PVC resins, acrylic fibers and caustic soda. He helped form Nanya Technology Corp., which is now Taiwan’s biggest memory chip maker.
In 1995, Wong says, Taiwan’s newspapers reported he was having an affair with a student at National Taiwan Universi- ty, where he’d been teaching part-time. Wong acknowledges the affair and says his father used it as an excuse to oust him from the family company. “It was a very big shock,” he says. “I was totally kicked out. I did not leave of my free will.” Moor Chen, a Nanya Technology spokesman, says Wong had to leave when the affair became public. He wouldn’t elaborate.
With $10 million of his own money, Wong started over in mainland China. He began manufacturing electronic lam- inates for printed circuit boards in the southern city of Guangzhou. In 1996, he set up Grace T.H.W. Group, naming it for his then 10-year-old daughter and adding the initials of the motto he chose for the company: “Trust, hard work, warmth.” Daughter Grace chose the company color, pink, which is used on everything from factory walls to executives’ business cards.
One attribute that sets Grace apart from its rivals is guanxi. Wong’s partner Jiang is the best known of China’s so-called princelings: the offspring of Communist Party leaders who are emerging as powerful capitalists. Jiang’s 77-year-old father retired as China’s president last year. He retains one of the country’s top posts: chairman of the government committee that runs the 2.5-million-strong People’s Liberation Army.
The younger Jiang is chairman of Shanghai Alliance Investment Ltd., or SAIL, an investment company founded in 1994 and funded by the Shanghai municipal government, SAIL spokesman Yang Qinyong says. SAIL has a 40 percent stake in regional carrier Shanghai Airlines Co., according to Bloomberg data. It also controls China Netcom Corp., the country’s second- largest fixed-line phone operator, and Shanghai Information Investment Inc., which runs the city’s biggest cable television network, Yang says. On June 4, SAIL and Citigroup Inc., the world’s biggest financial services company, said that they had formed a joint venture to set up a life insurance company in Shanghai.
Jiang is also vice president of the Chinese Academy of Sciences, which oversaw China’s first manned space mission in October 2003. Jiang got a Ph.D. in electrical engineer- ing from Drexel University in Philadelphia in 1993. Bruce Eisenstein, head of Drexel’s Electrical and Computer En- gineering department, says Jiang would have had a bril- liant career even without his connections. “He was very serious, very hardworking,” Eisenstein says. “Electrical engineering is one of the most difficult things you can possibly do, and he did an excellent job on his doctoral dissertation. He got no privileges or benefits as a result of his position.”
Eisenstein recalls the year 1989, when the Tiananmen Square crackdown sparked anti-Chinese protests around the world. He says officials from the city of Philadelphia and the U.S. Justice Department offered Jiang protection because his father was mayor of Shanghai at the time. Jiang turned them down, Eisenstein recalls. “During Tiananmen, we used to have a little joke,” Eisenstein says. “I would say to him, ‘How are you.’ He would reply, ‘Still alive.’”
At Grace, Jiang’s main job is to negotiate with investment bankers vying to handle the chipmaker’s IPO, says Wong, who won’t disclose which banks Grace is talking to. “Bankers like to call on Dr. Jiang,” says Kevin Yip, 39, executive vice president of GEMS. “He has a huge amount of contacts both on the commercial and political side of things in China, where connections are very, very important.”
Not all investors agree that the connections Jiang and Wong enjoy make Grace more attractive than rivals. “In a bull market, that kind of guanxi would have added a couple of points to the price-earnings ratio,” says Mehta at Lloyd George Management. “In a bear market, which I believe we have in equities in China now, I have not seen any evidence of connections’ withstanding market sentiment. Investors are more interested in whether a company can manufacture a good product and deliver it on time.”
Debate on the value of guanxi has escalated since Jan. 2, 1996, when Citic Pacific Ltd., a Chinese company chaired by Larry Yung, 62, son of China’s then vice president, Rong Yiren, 88, sold shares in Hong Kong. In its first year, shares of Citic soared 67 percent to HK$49.10 on Jan. 2, 1997, from the IPO price of HK$26.95. The surge for Citic, which is 29 percent owned by Citic Hong Kong Holdings Ltd., a subsidiary of Chi- na’s biggest investment company, was more than double the 30 percent increase in the benchmark Hang Seng Index. In the eight and a half years since the share sale, Citic lost 28 percent of its value, closing at HK$19.20 on June 8. By comparison, the Hang Seng rose 21 percent to 12,344.
“The story of relationships in China is becoming less strong,” says James Squire, who helps manage $3 billion in Asian equities at Baring Asset Management in Hong Kong. “The business model is the most important thing, and the market does find you out.”
As for Neil Bush’s qualifications to advise Grace, Wong says Bush’s understanding of the world economy is key. “He is very good at helping us with the macroeconomic situation, especially in the U.S.,” Wong says. “In Shanghai, where there are not very good communications, people do not have a total grasp of the world economic situation.”
The third of George H.W. and Barbara Bush’s four sons, Neil has a bachelor of science degree in international economics from Tulane University in New Orleans and a master of business administration from the same school.
Wong says he met Bush several years ago—he says he can’t remember the exact date—when Bush was looking for inves- tors for Ignite, which is seeking to raise $12 million through a private stock sale. Wong says he was one of the first to put money into Ignite; he won’t say how much. Wong says he admires the software, which uses music, graphics and anima- tion to encourage children to read. In a letter on Ignite’s Web site, Bush says he was inspired to found the company in 1999 in part because of his childhood dyslexia. Ignite CEO Ken Leonard says the company will make its first profit this year.
In 2002, Grace awarded Bush a contract valued at $2 mil- lion in Grace stock, information disclosed during Bush’s 2003 divorce from Sharon Bush. In an oral deposition in Harris County District Court in Houston, Bush confirmed that he had been appointed a director of Grace and that he had no previous experience in the semiconductor industry. Attached to the deposition was a contract Bush had signed
with Wong, whom he described as a friend.
Bush declined to comment for this story via Leonard, who says the president’s brother has been busy with family issues. Wong says Bush hasn’t attended any Grace board meetings and hasn’t taken any pay.
U.S. corporate lawyer Chang says it’s unlikely Bush’s appointment will win contracts or attract investors to Grace. “He’s not going to say, ‘Hey, W., I need a favor,’” Chang says. “It’s not going to help the company.”
What Jiang and Wong do need is evidence that Grace can compete successfully against its Chinese, Taiwanese and U.S. rivals, says Winson Fong, who oversees $2.4 billion at SG Asset Management Pte, a Singapore-based unit of Société Générale SA. China’s slowing growth and cooling market for IPOs combined with increasing tension with Taiwan will complicate their task.