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.

According to Patrick Chen, head of Taiwan research at the brokerage CLSA, "obviously, this asset would bring to the table for Hon Hai some of the incremental capabilities that they do not possess."

Taipei is worried that the deal might allow Foxconn to finance Beijing's tech ambitions as they grow. Although the group is gradually expanding its production lines outside of China, analysts said it would be extremely difficult for the company to divest because 75% of its capacity is on the mainland.

A Taiwanese technology industry executive in China stated, "The solution is, therefore, that their China-based affiliates localise more and put the money they can’t get out into new assets on the mainland."

According to officials, such a development could economically weaken Taiwan and give China more clout to pressure it into submitting to Beijing's rule. One official questioned, "How can we have one of our largest companies become a key supporter of a policy which seeks to weaken our position in international markets?"

The Chinese investment company WiseRoad Capital, Foxconn's deal partner, is linked closely to the Beijing government, which worries the Taiwanese government particularly.

Officials added that Taiwan must take extra care not to be perceived as supporting China in its technological conflict with the US.

"We have to be careful about where we stand," one said, referring to a step taken by the Biden administration to strengthen the US chipmaking industry. "Especially now as the Chips Act has been adopted, Washington is stepping up initiatives to strengthen semiconductor manufacturing onshore, and working with allies and partners to control the flow of technology to China.

By fLEXI tEAM