China foundry SMIC is in deep doo-doo. We all know that. But it's not just because of the 'whisper number' of $1 billion in damages it might have to pay TSMC for shamelessly and openly pilfering its trade secrets -- that number will come way down after negotiation. No, the company is in increasingly dire straits because its leadership, especially CEO and founder Richard Chang, hasn't realized they have lost their bid to be a top-tier foundry and must craft a strategy to survive as a niche player.

For this to happen, we suspect there needs to be a leadership change. Richard has brought the foundry a long way, and China and its IC community should be grateful for that, but if the company is to survive it needs someone who will push it to streamline and focus. Its present course of far-flung expansion in multiple cities (at the whim of local pols) is simply the continuation of a bankrupt strategy. SMIC cannot trade blows with TSMC, UMC or even Global Foundries/Chartered and expect to live. It is already punch drunk, and has been for years.

Richard has been under tremendous pressure from the board to make SMIC profitable. Last year's global financial crisis gave him a welcome reprieve -- an excuse to say why the company couldn't possibly turn its fortune. This year is a recovery for everyone, so he still has some breathing space. Next year, no excuses.

But even if SMIC turns profitable in 2010, the nature of its profitability should be what matters. Is it because better times are floating all boats in the industry, or because SMIC has taken serious steps to change its strategy beyond bigger is better? It needs to become more of a first-source supplier for large and medium size firms, not a second- or third-tier supplier surviving off scraps. To make this change, it must move toward pursuing niche opportunities, where smaller and more nimble is usually an advantage.