The situation at SMIC (HKEx: 981; NYSE: SMI), China’s leading microchip maker, seems to finally be nearing resolution with the announcement that David Wang had resigned as CEO and is being replaced by Zhang Wenyi, who will fill the position on an acting basis and will also become SMIC’s new chairman after the the previous chairman’s death 3 weeks ago. (company announcement) I would expect to see a permanent new CEO named in the next few months, but what’s most interesting here is Zhang’s background: specifically his position as chairman of Huahong Group. (English article; Chinese article) Industry followers will know that Huahong is parent of another chipmaker, Sino-Japanese joint venture Huahong NEC, which has struggled for years due to lack of scale and in the past was the frequent subject of merger talk with SMIC or venture-backed Grace Semiconductor, another smaller struggling player. In fact, David Wang was a former CEO of Huahong NEC, but was clearly only an executive at the company and probably had little clout to pursue an acquisition of his former company after arriving at SMIC in late 2009. Zhang, on the other hand, as chairman of both SMIC and Huahong, is in a perfect position to push such consolidation, and perhaps even bring Grace into the mix, as that company’s stakeholders have long wanted to sell off the investment. If all goes according to plan, I would expect to see SMIC merge with Huahong NEC in the next 12 months, and perhaps also with Grace during that time, to create the world’s clear number-three contract chipmaker. Handling such a difficult merger would be tough for the most experienced of executives, and will be even more difficult for whoever SMIC names as its new CEO. For that reason, I’d look for lots of problems with this company over the next two years, and high volatility in its share price as it seeks to find its new footing.
Bottom line: SMIC’s naming of new top management will bring its leadership crisis closer to resolution, but look for volatility in the next two years with an upcoming industry consolidation.
Note: For a more in-depth commentary I’ve written for the Global Times on the upheaval at SMIC, please click on the following link: SMIC Commentary
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