Taiwan security officials want Foxconn to divest its stake in the Chinese chipmaker

Taiwanese national security officials are looking to force Apple supplier Foxconn to withdraw an $800 million investment in Chinese chipmaker Tsinghua Unigroup as Taipei seeks closer ties with the US amid escalating threats from Beijing.

The investment by Foxconn, the world’s largest custom electronics maker and the largest private employer in China, was announced last month, making the group Tsinghua’s second-largest shareholder. But the deal put one of Taiwan’s largest companies at the center of Beijing’s growing technology competition with the West.

“It’s definitely not going to pass,” said a senior Taiwan government official who deals with national security issues.

The Cabinet Investment Commission has yet to formally review the case, but officials from the president’s National Security Council and the Mainland Affairs Council, which implements China policy, believe the deal needs to be blocked, according to another person on the matter was informed.

Hon Hai, Foxconn’s Taiwan-listed company, announced July 14 that it had acquired an indirect stake in Beijing Zhiguangxin Holding, the controlling shareholder of Tsinghua Unigroup.

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

Officials said the group is believed not to have violated any other regulations because the deal fell below the China investment cap that Taipei set for Foxconn Industrial Internet, the company’s mainland-based subsidiary.

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

“It’s clear they’ve now raised this to the national security level and the outlook is getting bleak,” said a person close to the company. “This looks even more difficult given the rising tensions in the Taiwan Straits.”

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

Analysts said investing in Tsinghua Unigroup makes sense for Foxconn, which traditionally focuses on low-margin, labor-intensive assembly of electronics products like smartphones and manufacturing, but is looking to bolster its semiconductor business.

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

He defended the deal at an investor meeting on Wednesday, saying it was a “simple financial investment” from which the company would also benefit as some of Tsinghua’s subsidiaries are its customers and suppliers.

Liu added that Tsinghua has already changed after being forced to downsize its chip-making assets as part of the debt restructuring.

“But we will of course comply with the strictest legal standards,” he said. “We also have a backup plan for that case.”

Although Tsinghua Unigroup had to divest some manufacturing facilities in a year-long debt restructuring process, the group is seen as a key asset in Beijing’s plan to break free from its reliance on chip imports.

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

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

“Obviously this asset would bring Hon Hai to the table some of the incremental skills that they don’t have,” said Patrick Chen, head of Taiwan research at CLSA, the brokerage firm.

But Taipei is concerned the deal could result in Foxconn funding an acceleration of Beijing’s tech ambitions. Though 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 itself.

“So the solution is for their China-based subsidiaries to localize more and put the money they can’t figure out into new mainland assets,” said a senior executive of Taiwan’s tech industry in China.

Officials believe such a development could weaken Taiwan economically and give China more clout to pressure it to submit to Beijing’s control. “How can we turn one of our largest companies into a major supporter of policies aimed at 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 must be particularly careful not to be seen as an accomplice to China in its technological rivalry with the US.

“Especially now that the Chips Act has passed, Washington is stepping up initiatives to boost land-based semiconductor manufacturing and working with allies and partners to control the flow of technology into China. We have to be careful where we stand,” one said, referring to a move by the Biden administration to boost the US chip industry.

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