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    China Business
     Jul 4, 2006
Two chip scandals set back China's IT industry
By Wu Zhong, China Editor

HONG KONG - China's efforts to design its own computer microprocessors suffered another major setback when the state-supported research and development (R&D) project for the Arca-3 embedded CPU (central processing unit) chip was interrupted because of suspected embezzlement of research funds.

The crisis in the Arca-3 project was exposed just weeks after the "Hanxin chip" scandal erupted, leading to the disgrace of a star chip designer, Chen Ji of Jiaotong University in Shanghai. Chen's Hanxin chip, a digital signal processing chip hailed as a "breakthrough invention" by the Chinese government, turned out to be simply a copy of a US design.

The twin scandals have dealt a blow to China's ambition to catch

up with advanced countries in information technology. What China has lost is not only the public funds for the two research projects, a considerable sum, but more important, also invaluable time in a race that China started very late.

The ARCA case
Beijing-based ARCA Technology Corp is responsible for the R&D on the Arca-3 CPU chips, which have been financially supported by the government as a key national high-tech project.

ARCA Technology Corp used to be a rising star in Zhongguanchun Science Park, known as Beijing's Silicon Valley. In July 2001, the firm's predecessor developed the 166 megahertz Arca-1, acclaimed as China's first independently designed 32-bit CPU chip. The birth of the Arca-1 was hailed by the Chinese media as "ending China's history without its own CPU chips". The 330-400MHz Arca-2 chips issued by the company in December 2002 were also cheered as "another milestone" in the development of China's information-technology (IT) sector.

The development of the Arca-1 and Arca-2 chips was supported by the central government as China, no longer content with being the world's low-cost manufacturing workshop, is eager to advance science and promote high-technology industries to show it can compete with others in science and technology as well.

According to an article in the latest issue of the Guangzhou-based IT Time Weekly, direct and indirect financial support by the government for the development of the Arca-1 and Arca-2 may have totaled more than 100 million yuan (US$12.5 million), including government procurement of computers using the Arca CPU chips.

Based on the earlier achievements, the government quickly decided to include the R&D of the more powerful Arca-3 CPU embedded chips as a key projects under its so-called 863 Program, and give financial support to ARCA Technology for the project.

In March 1986, four renowned Chinese scientists wrote a letter to the Communist Party's Central Committee, urging the country's top policymaking body to take measures to promote the development of high technologies so that China could catch up with advanced countries. Then-leader Deng Xiaoping attached great importance to their views, and under his supervision the party Central Committee and the State Council, China's cabinet, quickly jointly worked out an outline plan for high-tech development, called the 863 Program for short. Since then, the government has annually allocated special funds for the 863 Program to support major high-tech R&D projects across the country.

According to a late May report by the 21st Century Business Herald, one of China's leading business newspapers, based in Guangzhou, the government granted 15.38 million yuan to fund the R&D for the Arca-3 chip, the largest funding for any IC chip R&D project under the 863 Program during the 10th Five-Year Plan (2001-05) period.

As required, ARCA Technology signed a contract with the Ministry of Science and Technology for the financial support under the 863 Program for the Arca-3 project. According to the contract, ARCA Technology would have to complete the project by December 2003, presenting completed 400-450MHz embedded CPU chips for government inspection.

Half a year after the deadline passed, there was still no news from ARCA Technology. So in June 2004, the 863 Program sent experts to check the company's progress. After a preliminary investigation, the experts suspected that government funds were not spent "in accordance with the contracted budget".

In early 2005, ARCA Technology reported to the 863 Program that it had completed the Arca-3 project and asked to be inspected. However, experts from the 863 Program, after a check, refused to accept the firm's samples, pointing out that they did not meet the technological requirements specified in the contract.

At the same time, ARCA Technology's chief executive officer Li Delei began to state publicly that his company would no longer do any R&D on CPU chips, citing "no future" for marketing China-made chips, the report said. He even directly told the experts sent by the 863 Program that ARCA Technology would give up CPU R&D and focus instead on making IC (integrated circuit) chips for Little Smart phone handsets (the Little Smart phone, called Xiaolingtong in Mandarin, is a kind of stripped-down mobile phone based on the fixed-line network).

According to the IT Time Weekly, Li admitted there were problems with the progress of the Arca-3 project. He said that according to rules of the 863 Program funding, the company could only spend less than 15% of the 15.38 million yuan R&D fund, or about 2.3 million yuan, on salaries for its staff. There were some 60 persons participating in the Arca-3 R&D project, which meant each could receive only 2,000-plus yuan a month. However, that level of monthly salary was too low for the industry, Li reportedly said.

However, the report added, according to the company's balance sheets for December 2004, the salaries of three top managers in that month totaled 320,000 yuan. The three included Li himself, his brother and deputy Li Dejing and his brother-in-law Wang Xiaosu, the company's chief financial officer. But one of the directors of ARCA Technology, Su Jiawei, said the salary of Li, the CEO, did not come from the 863 Program fund, and therefore it was wrong to allege that senior managers had misappropriated the R&D fund to pay themselves high salaries.

But Li's explanation cannot justify the company's failure to complete the R&D project in time. If he thought the government fund was not enough to pay his research team, why was he willing to sign the contract to accept the funding - which implied he accepted the funding terms - in the first place? And the company could have applied for additional funds had it found a shortage, instead of making a complaint long after the completion of the research project was overdue.

So it was no surprise that Li Delei's explanation directed media's attention to the ARCA Building, with a total floor area of 15,000 square meters, in Zhongguanchun Software Park, the construction of which is nearing completion.

The land for the construction of the building was allocated to the company at low cost by the Zhongguanchun Software Park after it produced the Arca-1 chips. The Software Park also gave its full support to ARCA Technology for the construction of the building. Early in 2005, Li Delei told his staff that the total investment for erecting the building was 60 million yuan, half of which came from the company's own funds and another from bank loans the Zhongguanchun Software Park helped to arrange.

It was reported that Li Delei often took his guests to visit the construction site of the ARCA Building and told them, "In China, having land means having money. In China the sector that makes real money is property development, not high-tech industries."

So the question was naturally raised: if ARCA Technology was short of funds to complete the Arca-3 research project, why then did it have money to construct a building? This led to the suspicion that the 863 Program funds might have been embezzled.

In any case, the Ministry of Science and Technology, which oversees the 863 Program, has set up a special task force to investigate the Arca-3 case formally. So far ARCA Technology has held off media inquiry into the Arca-3 case.

The Ministry of Science and Technology's investigation into the Arca-3 case follows the exposure of other scandals involving government-funded research projects, involving fraud and embezzlement of funds.

The Hanxin scandal
The most recent and notorious case was Chen Jin's faking the invention of the Hanxin chip. After earning his PhD in computer engineering in the United States, chip designer Chen returned to Shanghai in 2000. Three years later, Chen, then 35 and a professor with the prestigious Shanghai Jiaotong University, announced that his team had created one of China's first home-developed digital signal processor (DSP) chips, which it named Hanxin ("Chinese chip").

The achievement was hailed as a milestone for China's fledgling IT industry. Chen was honored as one of China's outstanding young scientists; the government granted him a huge research fund and he was appointed dean of Shanghai Jiaotong University's Institute of Microelectronics.

But at the end of 2005, government agencies began to receive letters complaining that Chen's Hanxin chips in fact were copies of US designs. The scandal was soon exposed by the media, with some reports saying that Chen bought US-made chips, erased the trademark on the back, and reprinted the Hanxin trademark.

The allegations, after being widely reported by the media, prompted the central government and Shanghai Jiaotong University to launch an investigation.

In early May, the investigation concluded that Chen did indeed fake his research, and had cheated the authorities and the public, presumably for money and fame. On May 12, Shanghai Jiaotong University sacked him and stripped away all his honors and privileges. The government decided to retrieve all funds allocated to the Hanxin research, and permanently banned Chen from doing any government-funded research.

Lessons and problems
The twin chip scandals have done significant damage to the development of an independent IT industry in China. The lost funds - about 15 million yuan - are a drop in the ocean of the government budget. What the state regrets, rather, is the loss of invaluable time. The several years squandered on illegitimate projects will make it even harder for China to catch up with advanced countries in IC technology, whose complexity is growing exponentially every year.

The two cases have also exposed a serious problem in China's government-funded research establishment, namely, the apparent lack of supervision of the Hanxin and Arca-3 research projects. If the research efforts had been closely monitored, it is argued, problems could have been discovered at an early stage.

But perhaps more ominous, the two cases show that the nation's zeal to chase after money has led to corruption invading scientific research. It is truly a pity that in China, where learning has been highly respected for millennia, and scholars considered moral exemplars according to the Confucian tradition, corruption has begun to run wild even in the educational and scientific research arenas. It is no wonder that some Chinese are asking, "Is there any 'clean soil' in China nowadays?"

(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing .)

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