UMC considers taking 15% stake in Chinese fab

The deal is the latest twist in a public drama that has seen government agents raiding UMC offices, the temporary imprisonment of He Jian's chairman, and an advertising campaign by UMC chairman Robert Tsao in which he defended assistance given to He Jian and implied prosecutors were using authoritarian scare tactics in their attempt to gather evidence.

In Taiwan, which is worried about the loss of its core foundry business to political rival China, an investment in Chinese foundries that use 200-mm diameter wafer technology requires a lengthy vetting process, which UMC did not enter into. Still, the relationship between UMC and He Jian is one of Taiwan's worst kept secrets. Ever since He Jian's founding by former UMC employees in 2001, UMC executives have been opaque when asked about their links to the foundry.

The government took action last month, launching a series of raids on UMC offices to gather evidence of alleged investments and other assistance UMC may have given to He Jian. The government then charged UMC with breach of trust, accusing it of flouting the law by playing a major role in setting up He Jian. UMC could face fines of up to $800,000 and its executives could be jailed for up to five years if they are found guilty.

Late last week, the prosecutor in charge of the case confirmed that Tsao would be named as a defendant. The decision came after Tsao admitted offering management advice to He Jian and said he was aware He Jian was using UMC technology. He said he did nothing about it because he wanted to use that knowledge as a negotiating tool in potential acquisition talks.

Now UMC is seeking approval from the Taiwanese government regarding the 15 percent stake, but the unique after-the-fact nature of the request may cause delays, analysts noted. It's also uncertain as to how UMC will handle the issue of He Jian using its patents.

In another letter published Monday in local newspapers, Tsao said the 15 percent stake was the culmination of a verbal agreement made long ago between the foundries.

"Due to the current situation precipitated by the search launched by the prosecutor's office, I feel that it is time to turn this verbal indication into a concrete agreement, something that can be defined with precise figures since the prosecutor seems to assume that any non-compensated assistance between two companies is suspicious and entails misappropriating company resources and betrayal of trust," Tsao wrote.

He also asked the prosecutor's office to remove travel restrictions placed on more than 20 key employees of He Jian that are still in Taiwan. Their absence from work, Tsao said, "has begun to have a significant impact" on He Jian's operations.

Analysts speculated that some investors in UMC may become more forthright with questions about why UMC didn't avoid this complicated situation by simply going through the government's permission process. Rival Taiwan Semiconductor Manufacturing Co. Ltd. has done so, and is ramping up a 200-mm wafer plant in Shanghai. If UMC had followed the same route, it could have allowed the foundry to have a wholly owned subsidiary, instead of just 15 percent of a company that may or may not turn out to be a competitor.

On the other hand, UMC's gamble has put it ahead in China. "He Jian is in a better position than TSMC (Shanghai). It's profitable, has more customers and a more complete technology portfolio. Did (Tsao) make the wrong choice? That's hard to say," said Ming-kai Cheng, a semiconductor analyst for CLSA Asia.

He Jian started operations just two years ago, and already has capacity for processing at least 30,000 wafers a month. More importantly, it uses 0.15-micron to 0.5-micron manufacturing technology, while TSMC is supposed to only use 0.25 micron and less advanced nodes until it gets permission from the Taiwan government to transfer more advanced technology.

Unfettered by the Taiwan government, He Jian has big plans for itself in China. It has said it will invest more than $10 billion over the next 10 years to become China's largest foundry. Its close relationship with UMC will make it a natural acquisition target for the Taiwanese foundry, something Tsao said he told the government in January, before the raids on UMC offices.

Tsao has acknowledged directing wafer orders to He Jian, but insisted that those clients wanted China-based manufacturing, perhaps to satisfy incentives for products made in China or to be closer to component suppliers using the chips. Those orders were already "lost" to UMC, Tsao said, so he argued it was better they go to He Jian than Semiconductor Manufacturing International Corp., another China based foundry.

Last month, He Jian denied "any relationship" with UMC "on any level."

In a related development, politics across the Taiwan Strait is making life more difficult for chipmakers. Taiwan and China have been at odds since the end of a civil war in 1949, and China has long feared that Taiwan may try to change its de facto independence into a formal declaration.

China's recent passage of anti-secession legislation codifies the use of force if that were to happen. That has made the Taiwan government even more cautious about loosening its rules on investment and technology transfers to China.

Taiwan's economics ministry, which oversees investment rules relating to China, recently said that it may need to reassess its policy, which could cause further delays for chipmakers as well as the packaging and test industry.