Investors and government losing patience with UMC

Much has been made of the United Microelectronics Corp's (UMC, 聯電) links with Chinese chipmaker He Jian Technology (Suzhou) Co (和艦) recently. But no matter what prosecutors end up proving, UMC is challenging not only the government's cross-strait policies but also investors' patience, analysts said.

UMC, the world's No. 2 contract chipmaker, has been pulling out all the stops to narrow the gap between it and bigger rival Taiwan Semiconductor Manufacturing Co (TSMC, 台積電). But despite offering lower prices to court customers, UMC has still been unable to dethrone TSMC -- so the company is looking to the fast-growing Chinese market for future growth.

That explains why UMC forged an ambiguous alliance with He Jian Technology, whom it called "a friendly partner" in the past, at a time when the Taiwanese government still restricts investment in and technology transfer to Chinese chipmakers for fear of losing the nation's competitive edge.

The UMC fiasco started on Feb. 15, when investigators searched the company's offices in both Taipei and Hsinchu and arrested He Jian chief executive Shyu Jiann-hwa (徐建華). Shyu was afterward prohibited from leaving the country. On Feb. 18, UMC chairman Robert Tsao (曹興誠) published an open letter claiming that UMC has no investment in He Jian.

After local prosecutors began questioning several He Jian engineers in early March, Tsao again published an open letter to all shareholders on March 21, announcing that UMC may obtain a 15-percent stake worth US$110 million in He Jian in exchange for UMC's past assistance. Tsao has admitted that he gave management advice to He Jian, many of whose top executives are former UMC employees.

It's still too soon to tell if Tsao -- a noted chess enthusiast -- will elude the authorities' attempts to corner him. But "UMC's crooked way of tapping into the fast-growing chip industry in China is pushing the government and its shareholders to the limit," said Bill Lan (藍新仁), a portfolio manager who helps oversee a NT$5 billion fund for Jih Sun Securities Investment Trust Co (日盛投信).

Stock regulators have requested that Tsao, who was expected to return to Taiwan from an overseas trip yesterday, give a clear explanation on the exact nature of the "assistance" UMC has provided to He Jian in exchange for the Chinese company's offer of a 15 percent stake.

Two-track policy

Premier Frank Hsieh (謝長廷) said last week that the government is pursuing a two-track policy. It is stepping up its efforts to crack down on illegal investments in China to protect local enterprises such as TSMC who follow the letter and spirit of the nation's restrictions on cross-strait investment. At the same time, the government is moving towards a more open attitude on cross-strait trade policies.

Authorities' second target was Richard Chang (張汝京), chairman of top Chinese foundry Semiconductor Manufacturing International Corp (SMIC, 中芯國際集成電路), who was fined NT$5 million last week for alleged illegal investment in China when he still held Taiwanese citizenship in 2000.

The government plans to approve local chipmakers to invest in three factories in China by the end of this year to produce chips at less-advanced 0.25-micron processing technologies. TSMC is currently the only local chipmaker allowed to produce semiconductors in China.