Taiwanese national security officials want to force Apple supplier Foxconn to scrap an $800 million investment in Chinese chip firm Tsinghua Unigroup as Taipei seeks to align itself more closely with the US in the face of escalation of Beijing’s threats.
The investment by 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 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 at the president’s National Security Council and the Mainland Affairs Council, which implements China policy, believe the deal should block, according to another person briefed on the matter.
Hon Hai, the Taiwan-listed entity of Foxconn, said on July 14 that it had acquired an indirect stake in Beijing Zhiguangxin Holding, the controlling shareholder of Tsinghua Unigroup.
The deal prompted warnings from Taiwan’s economy ministry’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 was not believed to have violated other regulations, as the deal was below the Chinese investment ceiling that Taipei had set for Foxconn Industrial Internet, the company’s subsidiary on the peninsula. .
But national security officials have been called 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.
“It’s clear now that they’ve elevated it to the level of national security, the outlook is getting darker,” said a person close to the company. “With rising tension in the Taiwan Strait, this looks even more difficult.”
China claims Taiwan as its territory and has threatened to take it by force if Taipei resists unification indefinitely. Beijing has taken up this threat in 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 assembling low-margin, labor-intensive electronics such as smartphones and manufacturing, but is trying to strengthen its semiconductor business.
Young Liu, head of the semiconductor division who took over as chairman of Foxconn three years ago, has pledged to expand the unit to boost profit margins and secure chip supplies.
He defended the deal on 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 turned around after being forced to shed its chip-making assets in the 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 let go of some manufacturing assets in a year-long debt restructuring process, the group is seen as a crucial asset in Beijing’s plan to wean off its reliance on chip imports.
“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 effort.
“Obviously, this asset would bring Hon Hai some of the incremental capabilities that they don’t have,” said Patrick Chen, head of Taiwan research at CLSA, the brokerage.
But Taipei worries that the deal could lead to Foxconn funding an acceleration of Beijing’s technology ambitions. Although the group is gradually diversifying its production lines beyond China, 75 percent of its capacity is on the mainland and analysts said it would be extremely difficult for the company to divest.
“The solution is therefore for their China-based affiliates to localize more and put the money they can’t get into new assets on the mainland,” said a Taiwanese tech industry executive in China.
Officials believe this development could weaken Taiwan economically and give China more leverage to pressure it to submit to Beijing’s control. “How can we get one of our largest companies to become a key proponent of a policy that seeks to reduce our position in global markets?” 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 Beijing government.
In addition, officials said Taiwan must be especially careful not to be seen as helping China in its technology rivalry with the US.
“Especially now, as the Chip Act has been passed, Washington is stepping up initiatives to strengthen semiconductor manufacturing on the ground, and working with allies and partners to control the flow of technology to China, we must be careful to “where we are.” he said, referring to a move by the Biden administration to boost the U.S. chip-making industry.