A few months ago, Japanese industrial giant Toshiba Corp, having experienced serious internal governance failings, decided to sell its valuable semiconductor division — Toshiba Memory Corp — to restructure its finances.
The prospective deal has attracted several consortiums, which have been locked in fierce competition.
When all the bids were in, Toshiba resolved to prioritize negotiating a contract with a so-called “US-Japanese-South Korean consortium.”
Toshiba’s decision was influenced by the intervention of the Japanese government, which wants to safeguard domestic employment and ensure that key technologies remain in Japan.
For Taiwan, the world’s second-biggest producer of semiconductors, this case is an excellent point of reference.
The US-Japanese-South Korean consortium was formed under the influence of the Japanese Ministry of Economy, Trade and Industry. Its principle members are Innovation Network Corp of Japan, which is a joint venture of the Japanese government and a number of corporations, along with Development Bank of Japan, US private equity firm Bain Capital and South Korean memorychip maker SK Hynix.
SK Hynix is offering a loan to help finance the bid, which would give it no actual controlling rights, avoiding monopolization concerns.
Nonetheless, its bid has caused worry in Japan about potential technology outflow, because of SK Hyunix’s record of stealing Toshiba’s patented technology.
Toshiba’s US business partner Western Digital Corp (WDC) is also worried that when private equity funds pull out after making a profit, they will sell their shares to competitor SK Hynix.
WDC has called for international arbitration and is demanding that Toshiba stop selling business interests in which the partners have joint investments.
These companies have fared better than Hon Hai Precision Industry Co, also known as Foxconn Technology Group, whose bid fell at the last hurdle.
During the bidding process, the Japanese government repeatedly let it slip, intentionally or otherwise, that it was concerned about Hon Hai’s relations with the Chinese government, given that most of its factories are in China, and is worried that Toshiba’s semiconductor technologies, which could have military applications, are at risk of falling into China’s hands.
Hon Hai bid separately at first, but then changed tack by inviting partners, including Apple Inc and Amazon.com Inc, to form a “Taiwanese-US-Japanese consortium.”
This consortium bid ¥3 trillion (US$27 billion) — much more than the offer made by the US-Japanese-South Korean one.
Hon Hai swore that there was no Chinese capital involved and promised to make long-term commitments to Japan, even hinting that it would sue the Japanese government over its interference.
This did nothing to dispel concern about the “China factor.”
That Japan would rather accept SK Hynix while rejecting Hon Hai reveals a thing or two about its industrial strategy priorities.
Hon Hai chairman Terry Gou (郭台銘) thinks his company is still in the game and is determined to get around the obstacles.
Nonetheless, his setback will remind many people of the enthusiasm Taiwan showed not long ago for joining the “China team.”
It was widely reported that Taiwanese integrated circuit design businesses, headed by MediaTek Inc, were under pressure to choose between the “China team” and the “foreign team.”
At the time, the idea that the “red supply chain” cannot be beaten caused pervasive defeatism regarding Chinese capital investment in Taiwanese firms.
During the administration of then-president Ma Ying-jeou (馬英九), the Ministry of Economic Affairs was preparing to ease restrictions on Chinese investment.
Luckily, there was an election in which Ma’s Chinese Nationalist Party (KMT) administration was voted out and replaced by the Democratic Progressive Party, putting a halt to that idea.
Scrutiny over the “China factor” has now become the biggest stumbling block for Taiwanese businesses seeking international mergers and acquisitions — one they cannot afford to ignore.
China’s technology industry might be huge, but memory chips are its Achilles’ heel. China is an immense market for semiconductor chips from around the world, but it has no proprietary technology or productive capacity.
If a worldwide trade war were to break out, all Western nations would need to do is ban memory shipments to China, upon which many key Chinese industries — such as mobile phones, computers, televisions, automobiles and digital networks — would grind to a halt.
Over the past few years, China has been racking its brain about how to buy semiconductor technology from around the world and is willing to spend big money to do so.
Memory chips are the thing it covets most as it seeks to fill this vital gap.
It tried to get involved in Micron Technology Inc and SK Hynix, but could not get its foot in the door. It then tried turning to a headhunting strategy, but the patent threshold for memory chips is too high for such underhand tactics.
Toshiba’s offer is the largest-scale acquisition opportunity in many years, involving the most hard-to-get technologies that China most sorely needs, so why has it not made a peep?
Even the normally outspoken Tsinghua Unigroup and the so-called “big funds” have not expressed an interest, but why?
It must be because China knows that no matter what terms it offers, Japan will not be interested, since it will not sell this kind of technology to a foreign nation with which it has such a sharp clash of interests.
Japan’s national attitude has been clear from the start and Taiwan would do well to learn from it.
The Japanese government’s position is that, even for a listed company, it reserves the right to safeguard national interests by examining any prospective deal from the angles of employment and talent retention, as well as technology and information security.
Japanese and the nation’s media see this as normal, and no one has accused Tokyo of being “isolationist.”
This attitude does not only apply to powerful nations; even in the case of South Korea’s SK Hynix, whose technology lags a way behind Japan’s, the Japanese government is still being cautious and has repeatedly told Toshiba to explain its precautionary measures.
Taiwan has reached a crossroads in its relationship with China and faces multiple choices. Following eight years of an accelerated “go west” policy during the Ma administration, now is a good time to settle down a bit.
Even China itself imposes tight restrictions on foreign capital investment in its key industries.
In January, the US President’s Council of Advisors on Science and Technology published a report saying that China is exerting the state’s full power to foster the development of its semiconductor technology.
The report warned that this poses risks to US national security and recommended keeping a close eye on Chinese semiconductor companies.
At an EU summit, many national leaders agreed to scrutinize investment by Chinese state-owned companies and they agreed that there should be restrictions on Chinese investment in strategic industries in the fields of national infrastructure and defense.
In view of this trend, Taiwanese companies should consider why Hon Hai has been openly shunned by Japan and should bear this in mind when planning for global deployment.
Translated by Julian Clegg
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