CHIPS: Western Digital Snubs Washington, Eyes Beijing Largess with China JV

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Bottom line: Western Digital’s new China joint venture is unlikely to raise national security objections from Washington, but could add to a looming global semiconductor glut due to an aggressive build-up of the sector by Beijing.

Western Digital China JV moves ahead

Just a half year after Washington killed its plans for a major investment from China, memory storage giant Western Digital (Nasdaq: WDC) is thumbing its nose at US security regulators by moving ahead with joint venture that was part of the earlier tie-up plan. I’m probably overstating Washington’s objections in this instance, since US officials never formally vetoed a deal that would have seen Western Digital sell 15 percent of itself to China’s Unisplendour for $3.8 billion.

Instead, Washington simply said the deal would require a review for national security risk, refuting Western Digital’s earlier view that the sale shouldn’t require such approval. The threat of a review was enough for both sides to decide to scrap the sale, though their latest announcement shows they are continuing ahead with a joint venture that was part of their broader tie-up plan.

The bigger backdrop to this story is that China wants desperately to build up its high-tech chip industry, and is trying to do that by purchasing big foreign names and forming other tie-ups with overseas partners. That drive has met with some resistance not only in the US but also in nearby Taiwan, where local politicians have expressed concerns about losing these relatively cutting-edge companies and their technology to the Chinese.

Despite formally abandoning their planned equity tie-up in February, Western Digital and Unisplendour have just formally announced their “celebration” of an upcoming launch for a joint venture to make memory storage products in the city of Nanjing. (company announcement; Chinese article) This announcement is somewhat unusual, as more often such partnerships would hold media events at the joint venture’s formation and then later at the actual launch. By comparison, this particular announcement was made simply in anticipation of the upcoming launch.

That indicates that perhaps the companies simply want to show the world they’re moving ahead with their plans despite Washington’s earlier intervention. It could also be a signal to Washington of Western Digital’s intent, since US regulators could theoretically try to block the export of equipment and other technology to the joint venture if they felt such a move might pose a national security risk.

There’s not much additional information in the new announcement, which says Western Digital will hold 49 percent of the joint venture, with Unisplendour holding a majority 51 percent. The pair will make memory storage products that are the central component of data centers. Such centers lie at the center of cloud computing, an industry that China has earmarked for strong state support.

Foreign Tech Train to China

Other major foreign tech names including Hewlett-Packard, IBM (NYSE: IBM) and Cisco (Nasdaq: CSCO) have formed similar tie-ups with Chinese partners in the last 2 years, in bids to maintain access to the market amid growing national security worries by Beijing. Thus many might view Western Digital’s new joint venture as part of that trend, and say that this new joint venture is unlikely to attract any objections from Washington.

At the same time, Western Digital’s chief executive Steve Milligan is sounding some cautionary words warning that China’s sudden focus on microchips could send the global semiconductor market into chaos. (English article) Milligan made his remarks in an interview at the new joint venture’s celebratory event, calling on China to build up its semiconductor industry in an “economically responsible way”.

His words were reference to China’s tendency to throw huge sums of money at industries it wants to develop, which often results in huge overcapacity that throws global markets into turmoil. In this case, previous reports have indicated China has earmarked $100 billion to build up the domestic semiconductor industry, both through acquisitions and also development of its own manufacturing and technology.

Western Digital’s rush to join the foreign train of tech firms piling into China shows it wants to get its share of the funds from Beijing’s build-up. But Milligan’s words also reflect the very real possibility that the spending spree will result in a major supply glut in the next 5 years — a development that could pose far bigger risk than national security concerns from Washington or other foreign governments.

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