Here it comes again — a Chinese investment that poses a potential threat to Taiwan’s long-term interests. No, this is not about the planned buyout of Next Media Group’s Taiwanese businesses that has prompted concerns over how China may use the deal to influence Taiwan in the future. However, as with the Next Media deal, LED chip supplier Formosa Epitaxy’s (ForEpi) plan to ally with China’s Sanan Optoelectronics warrants the same concerns over the Taiwanese industry’s development.
Last week, ForEpi announced plans to sell up to 120 million new shares to Sanan, giving the Chinese company a 19.9 percent stake in the firm and making it its largest institutional shareholder, ahead of Japan’s Mitsui & Co, which holds 15 percent.
The NT$2.35 billion (US$80.8 million) deal, pending approval from both the company’s shareholders and from regulators, marks the first Chinese investment since late March, when Taiwan launched its third round of market liberalization with China, affecting 161 types of industries. Chinese investors are still banned from having managerial control, or becoming major shareholders in several key sectors such as the LED, flat panel, semiconductor and solar battery industries.
If approved by the Ministry of Economic Affairs’ Investment Commission, the deal will also become the largest single Chinese investment in Taiwan since it relaxed rules on Chinese investment in 2009.
The deal has surprised many in the LED industry and caused mixed reactions inside and outside of the sector, as Sanan is a major rival of Taiwanese LED chipmakers such as ForEpi and Epistar Corp.
The capital injection would help ForEpi strengthen its finances and expand the scale of its business. Moreover, the strategic partnership would provide it with greater access to China’s LED market. Advocates of this first cross-strait cooperation in the LED industry also expect the deal to help ease the cutthroat competition among LED makers, under which Chinese companies have cut prices in recent years because of over-investment and a production glut. These advocates hope that more collaboration will come in future.
The downside of such collaboration is the possibility of technology leaks that could hinder Taiwanese firms’ growth. While ForEpi has vowed to protect its patent portfolio and retain managerial rights, concern over Sanan gaining the upper hand in new technological innovation will remain, given Chinese firms’ notorious record in this area.
It is not yet known how Mitsui, which became a strategic partner of ForEpi early last year, and Toyoda Gosei Co, which inked a cross-license agreement with the firm last month, will respond to the tie-up. However, the possibility of technology leaks may have touched a raw nerve. For instance, a dispute over the next-generation indium gallium zinc oxide panel technology is said to be a key factor holding up financing and partnership negotiations between Taiwan’s Hon Hai Precision Industry Co and Japan’s Sharp Corp, as Sharp has been reportedly reluctant to share its proprietary technology with Hon Hai for fear of leaks.
Moreover, the deal has rekindled worries that as increasingly affluent Chinese companies are on the lookout for favorable investment targets in Taiwan with a global customer base and superior technology portfolios, financially troubled local firms will want to follow in ForEpi’s footsteps in securing much-needed capital and a foothold in the Chinese market.
This would allow Chinese firms to shorten their learning curve and quickly upgrade their technology, while eliminating a major competitor.
Closer cross-strait cooperation could bring benefits to Taiwanese industries if executed carefully and under tight government oversight. However, local firms must consider whether inviting Chinese rivals to be investors will benefit them in the long term.
Perhaps what they need to do is resist the temptation to think that their only hope of salvation is to be found in China.