Taiwan security officials want Foxconn to drop stake in Chinese chipmaker

Taiwanese national security officials want to force Apple supplier Foxconn to unwind an $800m investment in Chinese chip company Tsinghua Unigroup, as Taipei seeks to align itself more closely with the United States in the face of the escalating threats from Beijing.

The investment from Foxconn, the world’s largest contract electronics maker and China’s largest private sector employer, was announced last month and made the group Tsinghua’s second largest shareholder. But the deal put one of Taiwan’s biggest companies at the center of Beijing’s growing tech competition with the West.

“It will definitely not pass,” said a senior Taiwanese government official involved in national security issues.

The cabinet’s investment committee has yet to formally review the deal, but officials from the president’s National Security Council and Mainland Affairs Council, which implement China policy, say the deal should be stalled. , according to another person informed about it.

Taiwan-listed Foxconn entity Hon Hai said on July 14 that it had acquired an indirect stake in Beijing Zhiguangxin Holding, the controlling shareholder of Tsinghua Unigroup.

The deal sparked warnings from the Taiwanese Ministry of Economy’s Investment Commission that Foxconn could be fined up to NT$25 million ($832,000) for failing to submit the transaction for prior approval.

Officials said the group would not have violated other regulations because the deal fell short of the Chinese investment cap Taipei had set for Foxconn Industrial Internet, the company’s mainland-based subsidiary.

But national security officials have been brought in to review the case, according to officials familiar with the matter and people close to Foxconn – a procedure applied only to controversial investments with political or security implications.

“Clearly now that they’ve elevated this to national security, the outlook is getting darker,” a person familiar with the company said. “With tensions in the Taiwan Strait soaring, it seems even more difficult.”

China claims Taiwan as its territory and has threatened to take it by force if Taipei resists unification indefinitely. Beijing has rolled back that threat over the past week with an unprecedented series of military exercises.

Analysts said the investment in Tsinghua Unigroup made sense for Foxconn, which has traditionally focused on low-margin, labor-intensive assembly of electronics products such as smartphones and manufacturing, but is trying to strengthen its semiconductor business.

Young Liu, the head of the semiconductor division who took over as Foxconn chairman three years ago, has pledged to expand the unit to boost profit margins and secure chip supply.

He defended the deal during an investor call on Wednesday, saying it was a “simple financial investment” that would also benefit the company because some of Tsinghua’s subsidiaries are its customers and suppliers.

Liu added that Tsinghua had already changed after being forced to shed its chipmaking assets as part of the debt restructuring.

“But of course we will comply with the highest legal standards,” he said. “For this case, we also have a back-up plan.”

Although Tsinghua Unigroup had to divest some manufacturing assets as part of a year-long debt restructuring process, the group is seen as a crucial asset in Beijing’s plan to wean itself off its dependence on imports of fleas.

“I think Tsinghua Unigroup is still very important,” said Douglas Fuller, an expert on Chinese industrial policy in the chip sector.

Unisoc, the chip design arm of Tsinghua Unigroup, is a crucial part of this venture.

“Obviously, this asset would provide Hon Hai with some of the additional capabilities that they don’t have,” said Patrick Chen, head of Taiwan research at CLSA, the brokerage.

But Taipei fears the deal could lead Foxconn to fund an acceleration of Beijing’s tech ambitions. Although the group is gradually diversifying its production lines beyond China, 75% of its capacity is on the mainland and analysts said it would be extremely difficult for the company to divest.

“So the solution is for their China-based subsidiaries to localize more and invest the money they can’t get out into new assets on the mainland,” said a Taiwanese tech industry executive in China.

Officials believe such a development could weaken Taiwan economically and give China more leverage to pressure it to submit to Beijing’s control. “How can we ensure that one of our biggest companies becomes one of the main supporters of a policy aimed at reducing our position in world markets? said an official.

The Taiwanese government is particularly concerned that Foxconn’s partner in the deal, Chinese investment firm WiseRoad Capital, has close ties to the government in Beijing.

Additionally, officials said Taiwan must be particularly careful not to be seen as helping China in its technological rivalry with the United States.

“Especially now, as the Chip Act has been passed, Washington is stepping up its initiatives to bolster onshore semiconductor manufacturing, and by working with allies and partners to control the flow of technology to China, we have to be careful where we stand,” one said, referring to a move by the Biden administration to boost the U.S. chipmaking industry.

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