Taiwan security officials want Foxconn to give up Chinese chip maker stake

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

The investment of Foxconn, the world’s largest contract electronics manufacturer and the largest private sector employer in China, was announced last month and made it the second largest shareholder in Qingdao. Flower. But the deal puts one of Taiwan’s biggest companies at the center of Beijing’s growing technology competition with the West.

“This is definitely not going to happen,” said a senior Taiwanese government official involved in national security matters.

The cabinet’s investment committee has yet to formally review the case, but officials from the President’s National Security Council and the Mainland Affairs Council, the agency that enforces China policy, believe that the deal needs to be blocked, another person briefed on the matter said.

Hon Hai, Foxconn’s Taiwan– listed entity, said on July 14 that it had purchased indirect shares of Beijing Zhiguangxin Holding, the controlling shareholder of Tsinghua Unigroup.

The deal sparked a warning from Taiwan’s Ministry of Economy’s investment committee that Foxconn could be fined up to NT$25 million ($832,000) for not submitting the transaction for pre-approval.

Officials said the group is not believed to have violated other regulations, as the deal is lower than the ceiling on Chinese investments that Taipei has set for Foxconn Industrial Internet, the company the company’s mainland-based child.

But national security officials have been sent to look into the case, according to officials familiar with the matter and people close to Foxconn – a procedure that applies only to controversial investments. political or security related.

A person close to the company said: “Obviously now that they’ve raised this to the national security level, the outlook is increasingly dim. “With tensions rising in the Taiwan Strait, this looks to be even more difficult.”

China claims Taiwan as its territory and has threatened to use force if Taipei opposes reunification indefinitely. Beijing has pushed back against this threat over the past week with a series of unprecedented military exercises.

Analysts say the investment in Tsinghua Unigroup makes sense for Foxconn, which has traditionally focused on assembling electronic products such as smartphones and low-margin manufacturing. but is trying to strengthen its semiconductor business.

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

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

Liu added that Tsinghua changed after being forced to cut off its chip-making assets during a debt restructuring.

“But of course we will adhere to the strictest legal standards,” he said. “For that case, we also have a backup plan.”

Although Tsinghua Unigroup had to give up some of its manufacturing assets during a year-long debt restructuring, the group is seen as a key asset in Beijing’s plan to eliminate dependence on import chips.

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

Unisoc, the chip design arm of Tsinghua Unigroup, is a key part of that effort.

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

However, Taipei is concerned that the deal could cause Foxconn to accelerate Beijing’s technological ambitions. Although the group is gradually diversifying production lines outside of China, 75% of its capacity is in the mainland and analysts say the company will be very difficult to divest.

“The solution is for their China branches to localize more and put the money they can’t get into new assets,” said a Taiwanese tech industry executive in China. on the mainland”.

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 let one of our biggest businesses be a major advocate of a policy aimed at undermining our position in the global marketplace?” an official said.

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.

Furthermore, officials say Taiwan must be especially careful not to be seen as helping China in its technological competition with the United States.

“Especially now that the Chips Act has been passed, Washington is stepping up initiatives to increase production of semiconductors on land and working with allies and partners to control the flow of semiconductors. technology flows to China, we have to be careful about our position,” one said, referring to another moved by the Biden administration to boost the US chip industry.

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