CHIPS: Beijing Eyes Finnish Chip Maker, New Approach Needed

Bottom line: China’s latest plan to buy Finnish chip maker Okmetic could get vetoed on national security concerns, reflecting foreign government concerns about selling technology companies to government-backed entities.

Finland’s Okmetic gets buyout bid from China

China’s ambitions of building a world-class high-tech microchip industry were in the headlines again last week, when the small Finnish chip maker Okmetic (Helsinki: OKM1V) revealed it had received a takeover bid from a government-backed company based in Shanghai. Beijing’s ambitions are understandable, since China currently buys over 60 percent of the world’s microchips to feed its vast manufacturing complex that makes everything from smartphones to computers and home appliances.

But recent resistance in the US and Taiwan has also highlighted reluctance by overseas governments to seeing their companies purchased by the big state-run vehicles that Beijing has recently set up to achieve its aims. Historically speaking, China has also achieved mixed results when the government backs big microchip projects, which often fall victim to government agendas that limit their ability to quickly respond to the fast-changing market.

To circumvent those issues and boost its chances of success, Beijing should seriously consider a shift in its microchip strategy to a model similar to one used by Taiwan. That strategy focuses on private investment with strong government support, which has helped to transform the island into one of the world’s leading chip makers over the last 30 years.

Chinese companies have embarked on a buying binge for global chip makers over the last 2 years, announcing a number of multibillion-dollar deals in the space. Many of those have been spearheaded by a group of Beijing companies including Unigroup and Unisplendour, which are all based in Tsinghua, China’s leading sciences university.

Another government-backed company, Shanghai-based National Silicon Industry Group (NSIG), joined the global buying parade last week after offering to buy Okmetic, the Finnish company said in a statement. Under the deal, NSIG, which was founded just last year to invest in chip-making technology at home and abroad, would pay 9.20 euros and a dividend of 0.65 euros for each Okmetic share. (English article)

The deal values Okmetic at about 165 million euros ($190 million) and represented a premium of nearly 30 percent over the company’s previous share price, repeating a recent trend that has seen Chinese chip makers often offer rich premiums for their purchases. Okmetic’s board recommended its shareholders approve the deal, and the stock jumped 25 percent after the announcement.

While shareholders are almost certain to approve the deal, it’s not at all clear that the Finnish government will be willing to let Okmetic get sold to this kind of a state-backed Chinese vehicle, at least based on recent similar experience.

Global Resistance

Most recently, US hard drive maker Western Digital (Nasdaq: WDC) in February scrapped its plan to sell 15 percent of itself to Unisplendour for $3.8 billion due to concerns that Washington would veto the deal on national security grounds. Less than a year earlier, leading US memory chip maker Micron Technology (Nasdaq: MU) called off talks for a similar deal to sell itself to Unigroup for $23 billion due to similar concerns.

Unigroup has also announced plans to buy major stakes in 3 Taiwan chip makers, Siliconware Precision Industries (Taipei: 2325), ChipMOS Technologies and Powertech (Taipei: 6239), for a combined $2.6 billion. (previous post) But those plans have also come into doubt after local leaders expressed deep reservations about letting mainland Chinese buyers invest so much in the island’s important chip industry.

Unigroup has made no secret of its plans to build a China-based chip empire, and previously boasted it has a war chest of 300 billion yuan ($46 billion) to spend on that effort. Its campaign to date has included not only global acquisitions, but also a number of major tie-ups with names like Intel (Nasdaq: INTC) and HP Inc (NYSE: HPQ) for China-based manufacturing projects. That kind of spending is undoubtedly alarming to many foreign governments, who see the buying spree as a ploy by Beijing to directly acquire and control foreign technology.

Instead of using such an approach, Beijing should consider Taiwan’s model that relied on private investment with strong government support to build its cutting-edge chip empire. That effort dates back to 1980 with the government’s establishment of the Hsinchu Science and Industrial Park, which has nurtured many of the island’s biggest players including global leader Taiwan Semiconductor Manufacturing Corp (TSMC) (Taipei: 2330).

Such a tact could ease concerns of foreign governments by putting China’s chip-building plans in the hands of private companies without direct ties to Beijing. Equally important, such an approach would create a new field of companies that would act commercially in their decisions. That would free them from pressure to manufacture based on political factors, and allow them to quickly respond to global conditions and make products that the market wants.

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