February 3, 2023

Taiwanese national security officials want to force Apple supplier Foxconn to phase out an $800 million investment in Chinese chip company Tsinghua Unigroup as Taipei seeks to align more closely with the US in the face of escalating threats from Beijing.

The investment by Foxconn, the world’s largest contract electronics manufacturer and the largest private sector employer in China, was announced last month and made the group the second largest shareholder in Tsinghua. But the deal put one of Taiwan’s largest 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 issues.

The cabinet’s investment committee has yet to formally review the matter, but officials of the president’s National Security Council and the Mainland Affairs Council, which implements China’s policy, believe the deal should be blocked, according to another person on the list. the matter has been informed.

Hon Hai, Foxconn’s Taiwan-listed entity, 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 Taiwan Economy Ministry’s Investment Committee that Foxconn could face a fine of up to NT 25 million ($832,000) for failing to submit the transaction for pre-approval.

Officials said the group was not believed to have broken any other rules, as the deal was below the cap on Chinese investments Taipei had made for Foxconn Industrial Internet, the company’s mainland subsidiary.

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

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“Obviously now that they’ve raised this to the national security level, the outlook is diminishing,” said a person close to the company. “With the rising tension in the Taiwan Strait, this looks even more difficult.”

Foxconn did not respond to a request for comment.

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

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

Young Liu, head of the semiconductor division that took over from Foxconn chairman three years ago, has pledged to expand the unit to increase profit margins and secure the supply of chips, especially for the group’s electronic vehicle business.

Although Tsinghua Unigroup had to let go of some manufacturing assets in a year-long debt restructuring process, the group is seen as a key asset in Beijing’s plan to deleverage itself from its dependence on chip imports.

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

Unisoc, the chip design arm of Tsinghua Unigroup, is a critical part of that endeavor.

“Obviously this asset Hon Hai would bring to the table some of the incremental capabilities they don’t possess,” said Patrick Chen, head of Taiwan Research at CLSA, the brokerage.

But Taipei is concerned that the deal could lead to Foxconn funding an acceleration in Beijing’s tech ambitions. While the group is gradually diversifying its production lines outside of China, 75 percent of its capacity is in the mainland and analysts said it would be extremely difficult for the company to divest.

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“The solution, therefore, is for their China-based affiliates to localize more and put the money they can’t spend in new assets in the mainland,” said a Taiwanese technology industry director 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 largest companies becomes a major supporter of a policy of reducing our position in global 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 Beijing government.

In addition, officials said Taiwan should be especially careful not to be seen as helping China in its technological rivalry with the US.

“Especially now, with the Chips Act passed, Washington is stepping up initiatives to bolster onshore semiconductor manufacturing, and working with allies and partners to control the flow of technology into China. We need to be careful where we go.” stand,” one said, referring to a move by the Biden administration to boost the U.S. chip industry.