Restrictions on Chinese investment in the semiconductor sector have failed to stymie budding ties among chipmakers on both sides of the Taiwan Strait.
In January, Powertech Technology announced it would annul a share agreement with Tsinghua Unigroup that would have given the Chinese chipmaker a 25% stake in one of Taiwan’s top semiconductor packaging and testing firms. Powertech said it jettisoned the deal because regulators were unlikely to approve it ahead of a one-year deadline agreed to by the company’s shareholders.
The collapse of the Powertech deal was the last in a triumvirate of failed acquisitions. Powertech’s rival ChipMOS and Tsinghua Unigroup agreed to cancel a similar deal last November. In April 2016, IC testing and packager Silicon Precision Industries (SPIL) said it had suspended the sale of a US$1.76 billion stake to the Beijing-based firm.
The Taiwan government was unlikely to approve any of the three deals given public concern over China’s attempts to foray into the local IC sector, observes Andrew Lu, an independent Taipei-based semiconductor analyst. Unigroup was also involved in abortive attempts to acquire U.S. chipmaker Micron, buy a stake in the United States’ Western Digital, and form a tie-up with South Korean chipmaker SK Hynix.
But those failures have not curbed China’s resolve to become self-sufficient in semiconductor production, which it sees as a matter of national security. In 2014, Beijing rolled out a US$160 billion scheme to boost the share of home-grown chips sold in the PRC sevenfold – from 10% to 70% – by 2025. “The Chinese want to own a piece of what they consume and control how it is architected,” says Mario Morales, a semiconductor industry analyst at research firm IDC in San Francisco. “This creates checks and balances.”
To that end, Beijing is now bypassing Taiwan regulators as it accelerates efforts to hire talent away from the island’s IC makers instead of taking stakes in companies. Former executives from Taiwan Semiconductor Manufacturing Co. (TSMC), United Microelectronics Co. (UMC), Micron Taiwan, and Inotera Memories have all joined Chinese semiconductor firms in the past two years. Chinese IC makers are offering Taiwanese industry veterans up to triple their Taiwan salaries, according to Taipei-based DigiTimes Research.
China’s shift in strategy comes as U.S. regulators step up scrutiny of Chinese attempts to acquire sensitive technology (often with military applications) from American companies. During Donald Trump’s presidency, it will likely be difficult for China to buy U.S. high-tech firms or access important U.S. intellectual property, Lu says, adding that Beijing will instead seek to bring in industry veterans from Taiwan to build up Chinese IC makers from within.
For Tsinghua Unigroup, foundry expansion will be a priority, Lu says, referring to the business model in the IC sector whereby semiconductor fabrication plants manufacture chips for other companies under contract, without necessarily doing any of the design work. In January, Tsinghua Unigroup chairman Zhao Weiguo said that the Chinese chipmaker would invest a total of US$70 billion in three new fabs: one each in Wuhan, Chengdu, and Nanjing. The plants will manufacture 3D-NAND and DRAM memory chips, which are used to store data in electronic devices.
“Zhao Weiguo is a smart businessman,” says Roger Sheng, research director at Gartner’s Semiconductors & Electronics Group in Shanghai, noting Zhao’s ability to capitalize on government support for the domestic Chinese IC industry. China’s provincial governments are competing with each other to attract investment, and offering subsidies and other perks to investors who set up manufacturing facilities, Sheng adds.
Former UMC chief executive officer Sun Shih-wei, who joined Tsinghua Unigroup in December, is expected to play a key role in the company’s future. “Dr. Sun will surely help China accelerate its future expansion on the foundry side,” Lu says. He adds that UMC posted strong earnings and controlled costs well under Sun’s leadership, which earned him favorable comparisons with TSMC’s former CEO Rick Tsai.
“Tsinghua Unigroup is looking for leaders who are willing to make a change because they’re limited by the companies they’re currently at,” says IDC’s Morales. Sun fits that description because “UMC has stalled,” he says, citing the company’s anemic sales growth in the past two years. In 2015 UMC fell to No. 3 behind the U.S.’s GlobalFoundries in the global pure-play foundry rankings.
China’s Semiconductor Manufacturing International Corp. (SMIC) remains a distant fourth, but its sales jumped 31% year-on-year in 2016 compared to UMC’s 3% sales growth, according to semiconductor research firm IC Insights. At Tsinghua Unigroup, Sun will have greater capital and other resources at his disposal than he did at UMC, Morales adds.
At Tsinghua Unigroup, Sun will join three other former executives of leading Taiwanese chipmakers: Yuan Dih-wen, a former senior executive at mobile chip designer MediaTek; James Shih, who previously served as vice president of memory chip maker Nanya Technology Corp.; and Charles Kau, former chairman of Inotera Memories.
Former TSMC CEO Rick Tsai was reportedly also offered a job by Tsinghua Unigroup. In December, Taiwan’s Chinese-language news website cnyes.com reported that the Beijing-based firm sought to bring Tsai on board to help it expand into the foundry business. Tsai told the English-language Taipei Times that the report was mistaken, adding that he was unfamiliar with Chinese semiconductor firms.
Access to China
Meanwhile, a growing number of Taiwan IC firms are eager to tap the China market. “China’s massive local demand, coupled with the technology support of international brands such as Intel, has put the Chinese fabless IC industry at an advantage and Taiwanese counterparts at a disadvantage,” says Chris Hung, a director with the government-backed Market Intelligence & Consulting Firm (MIC).
In November, ChipMOS and Tsinghua Unigroup announced that they would form a joint venture. Under the agreement, ChipMOS BVI, a wholly-owned subsidiary of ChipMOS Taiwan, will sell a 54.98% stake in its Shanghai unit to a group led by Tsinghua Unigroup for RMB 498.4 million (US$72.4 million). ChipMOS BVI will take a 45.02% stake in the Shanghai unit, while Tsinghua Unigroup’s subsidiary Tibet Unigroup Guowei Investment Co. will hold a majority stake of 48%. ChipMOS Shanghai is expected to receive an additional capital injection of RMB 1.074 billion (US$156.2 million) once the deal closes.
“The joint venture will allow us to accelerate the planned expansion of ChipMOS Shanghai, while adding on new lines given the higher demand we are seeing for our LCD driver ICs, touch driver, AMOLED, OLED and memory testing, assembly and bumping services,” said ChipMOS chairman S.J. Cheng in a statement. He said the capital injection of RMB 1.074 billion “will help us achieve our targeted economies of scale and our long-term goals.”
“ChipMOS had no choice but to go with a JV,” says independent analyst Lu. The Taiwan government is concerned about losing R&D knowhow and ownership in the IC sector, but that’s less of a problem with a joint venture than if Tsinghua Unigroup takes a direct stake in ChipMOS, he explains. With a stake in a ChipMOS subsidiary, Tsinghua Unigroup has no control over the Hsinchu-based chipmaker’s board. Lu says he expects the Taiwan government to approve the deal.
As the top supplier of handset chips to China, IC designer MediaTek has been the most vocal proponent of closer ties between the Chinese and Taiwanese semiconductor sectors. MediaTek is looking for new avenues for growth as an escalating price war with rivals like San Diego-based Qualcomm and China’s Spreadtrum Communications weighs on its bottom line. At a June press conference, MediaTek’s chief financial officer and spokesman David Ku said that there was a general consensus among Taiwan’s IC firms that Chinese firms should be allowed to buy stakes in the subsidiaries of local chip designers.
At the same time, MediaTek is pushing into new market segments as smartphone sales in China ebb. The company said in November that it would aim to capture 20-30% of the global automotive semiconductor market between 2020 and 2025.
China will play a key role in MediaTek’s foray into automotive ICs. MediaTek unveiled a plan in May to establish a joint venture with Chinese electronic navigation map provider NavInfo Co. Following that move, the Taiwanese chipmaker said in November that it would spend up to US$100 million to acquire a 35-49% stake in Mapbar Technology. That company has an 80% market share in China’s largest online and wireless map service provider Beijing Mapbar.
Analysts say the automotive segment will grow faster than other segments in the semiconductor sector in the coming years. For that reason, “MediaTek’s focus on the automotive market is a very good strategy,” says Gartner’s Sheng. “They acquired Mapbar technology for a very reasonable price,” he adds.
Sheng further notes that NavInfo is a major supplier to every automaker in China. MediaTek has found itself a good partner as it moves to access opportunity in the Chinese automotive sector, he says.
Maintaining an edge
For Taiwan’s chipmakers, balancing the China market’s opportunities and risks is a perennial challenge. Some industry observers worry about a narrowing in the technology gap between Chinese and Taiwanese IC makers. That may be the case in IC packaging and testing, but Chinese foundries still lag significantly behind the Taiwanese.
In the short run, “Taiwan’s foundries will be able to remain ahead of their Chinese competitors in the high-end China chip market,” says MIC’s Hung. “When it comes to packaging and testing, Taiwanese companies are advised to conduct M&A activities with their Taiwanese counterparts as the threats from Chinese companies keep rising.”
Taiwan’s Fair Trade Commission (FTC) in November approved the creation of a joint holding company by this country’s top two IC packaging and testing providers – SPIL and Advanced Semiconductor Engineering (ASE). Under the agreement, SPIL and ASE will continue operating independently while the holding company will own 100% equity interests in both entities.
IDC’s Morales urges Taiwan’s IC makers to develop succession plans as some of the local industry’s most prominent leaders are advanced in age. “Who is going to replace Morris Chang at TSMC?” he asks. “Who will lead MediaTek in the future?” TSMC chairman Morris Chang is 85, while MediaTek chairman Tsai Ming-kai is 66.
Hung advises Taiwan’s IC makers to continue developing emerging applications and advanced technologies. Meanwhile, the government should roll out several system-integration schemes “to provide Taiwan manufacturers more space for development,” he says. Those moves would “reduce the risk of overreliance on Chinese 3C applications.”
Speaking at an industry symposium in September, TSMC co-chief executive officer Mark Liu said that local IC makers should seek closer ties with nations more technologically advanced than Taiwan. Such exchanges have played a vital role in making Taiwan a successful technology hub, he said. Liu acknowledged China as an important market, but cautioned: “It cannot help us upgrade our industry.”