Security officials in Taiwan want Foxconn to sell its stake in a Chinese chip manufacturer

Officials in charge of Taiwan's national security want to compel Apple supplier Foxconn to sell its $800 million stake in Chinese chipmaker Tsinghua Unigroup as Taipei seeks to strengthen its ties with the US in the face of growing Chinese threats.

Following the announcement of its investment last month, Foxconn—the largest contract electronics manufacturer in the world and the largest employer in China's private sector—became Tsinghua's second-largest shareholder. However, the agreement put one of Taiwan's largest businesses at the epicenter of Beijing's expanding technology rivalry with the West.

A senior Taiwanese government official involved in national security matters said, "this will not go through."

The deal needs to be stopped, according to officials from the president's National Security Council and the Mainland Affairs Council, which implements China policy, according to another person briefed on the situation. However, the cabinet's investment commission has not yet formally reviewed the case.

On July 14, Hon Hai, a Foxconn subsidiary with a Taiwan stock exchange listing, announced that it had acquired an indirect stake in Beijing Zhiguangxin Holding, the company that controls Tsinghua Unigroup.

The deal prompted warnings from the investment commission of the Taiwanese economy ministry that Foxconn could face fines of up to NT$25mn ($832,000) because the transaction had not been submitted for prior approval.

As the deal fell below the limit for China investments Taipei had set for Foxconn Industrial Internet, the company's mainland subsidiary, officials said they did not believe the group had broken any other laws.

However, according to officials familiar with the situation and people close to Foxconn, national security officials have been brought in to review the case. This procedure is only used for contentious investments that have political or security ramifications.

One person close to the company said, "“It is clear that now they have elevated this to the national security level, prospects are getting dim. With the soaring tension in the Taiwan Strait, this is looking even more difficult. "

If Taiwan continues to oppose unification indefinitely, China has threatened to annex Taiwan and take it by force. With a series of unprecedented military drills over the past week, Beijing has hammered home this threat.

According to analysts, Foxconn's investment in Tsinghua Unigroup made sense given that it has historically concentrated on the labor-intensive, low-margin assembly of electronics products like smartphones and manufacturing while attempting to grow its semiconductor business.

Young Liu, the head of the semiconductor division and former chair of Foxconn, has promised to grow the division in order to boost profit margins and ensure chip supplies.

On a conference call with investors on Wednesday, he defended the agreement, calling it a "simple financial investment" that would also be advantageous to the business because some of Tsinghua's affiliates are its clients and suppliers.

Tsinghua had already undergone change, according to Liu, after being forced to sell off its chip manufacturing assets as part of the debt restructuring.

However, he assured them, "but we will of course comply with the strictest legal standards.  ."

Despite having to sell off some manufacturing assets as part of a year-long debt restructuring process, Tsinghua Unigroup is still regarded as a key component of Beijing's strategy to wean itself off of its reliance on chip imports.

According to Douglas Fuller, an expert on Chinese industrial policy in the chip industry, "Tsinghua Unigroup is still very important."

In order to succeed, Unisoc, the chip design division of Tsinghua Unigroup, is essential.