CHIPS: Unigroup Boosts Taiwan Ties in Global Chip Challenge

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Bottom line: Next year’s likely election of a Taiwan president from its current opposition party could delay many of Tsinghua Unigroup’s pending Taiwan acquisitions, crimping its plans to build a Chinese chip giant using Taiwanese technology.

Unigroup buys into 2 more Taiwan chip firms

Barely a week seems to pass without news of a major new acquisition by Tsinghua Unigroup, the Beijing-backed company that suddenly seems intent on building a global chip giant able to challenge worldwide leaders like Intel (NYSE: INTC), TSMC (Taipei: 2330) and Samsung (Seoul: 005930). The company is once again in the headlines as we head into year-end, this time in new deals to buy stakes in 2 Taiwanese chip firms for a combined $2.1 billion.

These latest deals follow another major purchase in Taiwan last month, making it increasingly clear that Unigroup hopes to combine its own financial resources and government connections with Taiwan’s high-tech expertise to realize its chip-making dreams. That plan looks good in principle, since China and Taiwan are highly complementary and also share many cultural elements. But the plan could run into big problems next year, as Taiwan’s political landscape looks set for major change that could see the current China-friendly regime replaced with a more conservative government.

The latest headlines say that Unigroup, which is based at the influential Tsinghua University in Beijing, will invest T$56.8 billion ($1.7 billion) for a quarter of Siliconware Precision Industry Co, in the larger of the 2 newly announced deals. (English article; Chinese article) The other deal will see Unigroup pay about T$12 billion for a similar sized stake in ChipMOS Technologies Inc.

Siliconware Precision has been at the heart of several takeover battles this year by other Taiwanese companies, including an unsolicited bid for 25 percent of the company by Advanced Semiconductor Engineering that it failed to fend off. A subsequent offer by Foxconn Technology Group for a similar stake in the company was defeated by a shareholder vote in October.

The frenzy of bids reflects a broader wave consolidation now sweeping the global chip sector, as technology matures and profit margins come under pressure at most of the world’s major players. Mid-sized and smaller companies are feeling the biggest pinch, and have become some of the most attractive acquisition targets for buyers like Unigroup.

Many of those smaller companies are located in Taiwan, which may partly explain Unigroup’s sudden fixation on the nearby island. Last month Unigroup stepped into the market with announcement of its plan to buy 25 percent of Powertech (Taipei: 6239) for about $600 million. (previous post) The company also recently hired a high-profile industry veteran from Taiwan, with connections to some of the world’s major players.

Those moves complement an earlier string of global tie-ups, which included Unigroup partnerships with US giants Intel and Hewlett Packard (NYSE: HPQ), a purchase of a stake in hard drive maker Western Digital (Nasdaq: WDC) and a failed bid for leading US memory chip maker Micron (Nasdaq: MU). All of that came as the company’s aggressive chairman Zhao Weiguo announced that he had a $47 billion war chest to build up his planned chip empire, reflecting his strong government backing. (previous post)

Taiwan Diversion

This sudden turn into Taiwan marks a new diversion in Zhao’s earlier roadmap. The change of route has been helped by Taiwan’s recent warming relations with the mainland, previously considered an economic and sometimes political enemy. Part of the warming ties have seen Taiwan rewrite rules that previously banned mainland companies from investing in sensitive areas like telecoms and high-tech hardware. This flurry of new deals will test those new rules, and the fact that each of Unigroup’s new investments is capped at a 25 percent stake reflects ongoing limitations of such tie-ups.

All that said, a wild card that will soon enter the equation is Taiwan’s upcoming presidential election, which is set for next year and will see the departure of a China-friendly administration that has ruled for the last 8 years. Most expect the new election will be won by the current opposition, which advocates Taiwan independence and has a history of much stormier relations with Beijing.

That same opposition, centered on the Democratic Progressive Party (DPP), has sharply softened its rhetoric in the last few years, after realizing that most Taiwanese prefer to keep relations smooth with Beijing and also capitalize from their cultural and historic connections to China. Still, I do expect that if the DPP wins it will feel some pressure from its core supporters to slow down the China lovefest of the last 8 years. That, in turn, could seriously delay approval of some of Unigroup’s Taiwan deals, which could crimp its plans to build its global chip empire using Taiwan technology.

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