It’s about time. We had a feeling that the job of the SMIC chairman appointed in June was to put CEO Richard Chang’s feet to the fire – in short, step up or step out. This morning Chang resigned. Former Applied Materials exec David N.K. Wang is the new president and CEO. You might remember Wang from his short stint at Huahong NEC – another broken fab. He couldn’t fix that one, so we’ll see if second time’s a charm.

Just a few days ago, in SMIC Needs To Change Its Ways, I said SMIC needed a leadership change so it could start to craft a new strategy.  We’re not talking small adjustments, but something radical that will either enable SMIC to slim down and specialize, or really leverage its size and connections in China to compete with Global Foundries/Chartered or UMC. I’m inclined to think the former strategy is better. But rarely has a Chinese technocrat (and they more or less control SMIC) thought smaller is better, so I suspect they will go with the latter strategy by trying to absorb a few other ailing foundries (Huahong and Grace Semiconductor) so they can make one big ailing foundry.

As for Chang, he was living on borrowed time. Last year’s economic crisis gave him a reprieve, but SMIC’s mediocre performance this year, little hint of any upcoming, innovative changes, and especially, the lawsuit with TSMC are probably the straws that broke the camel’s back. TSMC and SMIC recently reached another out-of-court settlement over allegations of patent infringement. A court found SMIC guilty of this on Nov. 3 and the spectre of major punitive damages loomed, in part because the theft was pretty blatant and extensive.

Under the terms of the settlement, SMIC will pay TSMC $200 million plus an undisclosed amount of SMIC stock and warrants, according to various sources. The court will maintain jurisdiction to enforce the verdict. All other terms of the settlement are confidential, but many suspect one of the requirements was Richard's ouster, and maybe some others -- like Marco Mora, the COO who allegedly orchestrated the theft of the trade secrets from TSMC. 
 
I suspect the timing also has something to do with finding a credible replacement like Wang – rather than a has-been semi exec with a gaggle of hangers-on (think GSMC). Wang is a smart, savvy guy who seems to have a low tolerance for BS – which is probably why he ended up leaving Huahong. His willingness to go to SMIC is sentiment positive in that he would have laid down some basic ground rules for what he wants to accomplish. And I hope he soon makes this clear.

I suspect a few heads should role at the top (at least Mora), and the compensation structure should change to try to lure in (and retain) more top talent who will have access to the resources they need to lure in more business. (No more jokes about how you have to stay at a Motel 6 when traveling on business for SMIC, or entertain clients at Denny’s.)

But there are bigger problems for Wang. SMIC’s fabs are scattered across China; equipment sets don’t match, hurting operational efficiency; it’s viewed as a second- or third-source fab with sometimes unreliable delivery; and there are too many crossed-purposes at work, politically speaking. This is all fine if SMIC is more of a “policy fab,” i.e., its intention is to train a new generation of engineers and give the local fabless community a manufacturing source (though its arguable whether this is needed).

To make money, SMIC will need to be a “practical fab.” That is going to take steady political support, proven technical talent, a smart (and new) business plan and a long time. It will be interesting to see what role, if any, TSMC may play as a minority shareholder. In any event, Wang had better read up on his Sun Tzu, because the battle is just beginning. 

SHAMELESS PLUG: RedTech Advisors offers research, investment and strategy services in China. For more info, please see www.redtechadvisors.com.