Exclusive: Changdian attacks Xindong for blackmail, but many mining machine companies say they were "cheated"

The dispute between Innosilicon, one of the four largest mining machine companies in China, and Changdian Technology, a leading Chinese chip packaging and testing company, is still ongoing. On May 1 and 2, the two sides issued statements to explain their views. Wu said that the blockchain investigation found that in addition to Innosilicon, other mainstream mining machine companies also said they suffered losses due to quality issues of Changdian packaging and testing.

On April 30, Changdian Technology received a "Notice of Response" in which Innosilicon claimed 25 million U.S. dollars, equivalent to about 174 million RMB. Changdian accused Innosilicon of defaulting on its debts. At the end of March 2018, Innosilicon was supposed to pay 8 million U.S. dollars in testing fees, and 13.25 million U.S. dollars in June, but Innosilicon refused to pay due to unqualified quality.

On the evening of May 1, Changdian suddenly issued a statement to severely attack, accusing Xindong of illegally obtaining payment credit by false and forged business documents since 2017, and then fabricating unwarranted quality reasons to put pressure on Changdian Technology when its Bitcoin mining machine products encountered a cliff-like business decline, and refusing to pay high unpaid payments for a long time, which was a typical act of commercial fraud and extortion.

Innosilicon subsequently issued a statement, accusing Changdian of deliberately avoiding quality issues, spreading false information to discredit the company, and seriously damaging its reputation. It also said that Changdian immediately admitted the quality problems after discovering them in March 2018, and sent a team of more than ten people to apologize and agree to negotiate the amount of compensation. However, in June 2018, it suddenly seized a large number of wafers and chips and began to avoid compensation negotiations.

Innosilicon also said in its statement that from March to June 2018, while waiting for the compensation plan and not continuing to pay, Changdian knew it was in the wrong and did not stop shipping. But in June 2018, Changdian Technology suddenly seized a large number of wafers and chips.

This sentence translates to: Xindong thought there was a problem with the first batch of goods and asked Changdian for compensation. If Changdian didn't pay, Xindong would not pay for the packaging and testing. Changdian thought it had improved the packaging and continued to ship. In June, Changdian saw that the other party had not paid, so it seized the wafers and chips. Today, those chips have long become waste sand, and Xindong will not pay.

In short, both sides have their own opinions, and the final decision will depend on the court. But Wu said that the blockchain investigation found that in addition to Xindong Technology, there are also mining machine manufacturers that have suffered considerable losses due to similar reasons.

The core problem lies in the stability of the substrate used by Changdian for chip packaging and testing of mining machines. The IC packaging substrate provides circuit connection, protection, support, heat dissipation, assembly and other functions for the chip. However, when multiple batches of mining machine chips packaged by Changdian are operated at high power in a dense space, the substrate may be delaminated and the pins may be cracked due to thermal expansion and contraction due to the use of high-temperature solder paste, which may lead to instability of the mining machine chips.

The person in charge of a mining machine manufacturer said that because packaging and testing is a relatively low-tech part of the chip process, most mining machine companies initially did not think that there was a problem with packaging and testing. However, after multiple comparisons, it was confirmed that there was a problem with Changdian's packaging and testing. Since BTC chips are very sensitive to temperature, packaging and testing are difficult and require packaging and testing technology close to that of high-end chips. However, Changdian's main business in early 2018 was low-end packaging and testing, and it did not yet have the strength in this area, so this problem occurred.

However, industry insiders said that Xindong may have adopted a relatively advanced high-temperature solder paste packaging technology in order to achieve better heat dissipation, but found substrate delamination and tube corner fracture during the PCBA furnace stage, so Changdian suggested using medium and low temperature solder paste to avoid it. However, the specific division of responsibilities depends on the liability clauses of both parties, that is, who will bear the consequences of adopting a certain new technology.

The current point of contention may still be whether there is a problem with the substrate or the technology for processing the substrate. Changdian only provides the latter, and the substrate is provided by other manufacturers. This is also the reason why Changdian emphasized in its statement that "our company is not responsible for the processing link." The subtext of this sentence may be to admit that there are overall quality problems, but it is not the responsibility of Changdian's processing.

However, the statement of Innosilicon clearly pointed out that after the problem occurred, the other party not only admitted it but also proposed a temporary solution of medium and low temperature solder paste, and sent a team of more than ten people to apologize. The value of the wafers seized by Innosilicon is several times greater than the packaging fee. After March, it continued to pay the packaging fees of other packaging factories, and the shipment volume of such products from March to August hit a record high. There is no situation where the market is not good and it does not ship.

The prospectus shows that Bitmain's packaging and testing partners include ASE and Changdian Technology, and Canaan also includes ASE, Changdian Technology and Siliconware Precision Industries. Among them, Taiwan-based ASE has acquired Siliconware Precision Industries, accounting for 30% of the market share. However, it is reported that the cooperation between Bitmain, Canaan and Changdian did not encounter this problem, and Changdian should have fixed this problem.

In 2019, Changdian’s controlling shareholder gradually reduced its holdings in the company , The company's major shareholder was changed to the Integrated Circuit Industry Fund （ 19% stake ） and SMIC's wholly owned subsidiary, SMIC Semiconductor （ Holding 14.28% ), Zhou Zixue, Chairman of SMIC, was appointed Chairman of JCET. SMIC is also a close partner of Innosilicon's IP business and has won the Best IP China Partner Award from SMIC for many consecutive years.

Changdian Technology has a poor profit margin. In 2019, it achieved operating income of RMB 23.526 billion, but the net profit attributable to shareholders of the listed company was only RMB 89 million. In the first quarter of 2020, its revenue was RMB 5.708 billion and its net profit was RMB 134 million.

What was the reason for Innosilicon's lawsuit? According to people familiar with the matter, both parties had suffered losses before, so the case was put on hold for the time being. However, after Changdian Technology changed its leadership team recently, it began to collect the outstanding payments for packaging and testing. Innosilicon believed that it had evidence of the failure, so it simply took the case to court. However, Changdian issued an extremely stern statement later, and Innosilicon also said in its statement that it felt "sudden".

On the other hand, Changdian chose to release the news of the lawsuit before the stock market closed on May 1st, and then used the holiday to launch a statement attack, probably because it was worried about the impact on its stock price.

Changdian Statement: Changdian Technology solemnly declares: firmly resisting Xindong's commercial fraud and blackmail

Xindong statement: Xindong statement full text: Changdian sent a team to apologize but suddenly seized a large number of wafers

According to the "Risk Warning on Preventing Illegal Fund Raising in the Name of "Virtual Currency" and "Blockchain"" issued by the China Banking and Insurance Regulatory Commission and other five departments, please establish correct investment concepts and enhance risk prevention awareness.