TELECOMS: Unigroup Flexes $47 Bln Chip War Chest

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Bottom line: Tsinghua Unigroup is likely to soon announce big new tie-ups with SanDisk and a major second-tier Asian chip maker, in its bid to become a major memory chip maker that can challenge Samsung and Toshiba.

Unigroup eyes 2 new chip tie-ups

After becoming a regular fixture in the headlines over the last year, Tsinghua Unigroup is finally giving the world a more detailed picture of its plans to become a leading global chip maker in one of the first in-depth interviews with its talkative chairman. In that interview Zhao Weiguo is disclosing for the first time that he has a massive war chest of 300 billion yuan ($47 billion) to spend on building his empire.

What he doesn’t say is where exactly all that money is coming from, since it’s quite a large sum for a company that was an unknown name in most semiconductor circles until it embarked on its buying spree over the last 2 years. The answer is almost certainly that Beijing and big state-run institutions are supplying all the funds, as China looks to succeed in an areas where many smaller earlier initiatives have failed in the high-tech chip sector.

An important question as Unigroup embarks on its spending spree is how other governments and global chip companies will respond to the challenge. Washington lawmakers have already signaled they may block some tie-ups with major local chipmakers, prompting Unigroup to shelve a $23 billion bid for leading memory chip producer Micron (Nasdaq: MU) earlier this year.

Other major chipmakers are also probably watching closely, as some of their smaller rivals get pulled into Unigroup’s orbit in its recent buying spree. Unigroup, which is part of China’s leading sciences university, has previously formed tie-ups worth $1 billion or more with global tech giants Hewlett-Packard (NYSE: HPQ) and Intel (NYSE: HPQ). It has also formed billions of dollars in tie-ups with mid-sized players like hard drive maker Western Digital (Nasdaq: WDC) and Taiwan chip firm Powertech (Taipei: 6239), and announced a multibillion-dollar plan to build new memory chip plants in China.

Now Zhao is giving the $47 billion figure for the size of his total war chest, which means he still has lots of cash to spend even after all his latest activity. (English article; Chinese article) A report on the interview says Unigroup has made $9.4 billion in purchases to date in its recent acquisition spree. An affiliated company also announced plans last month to raise up to 80 billion yuan ($12.7 billion), most of that from big state-run institutions, to build new chip plants in China.

$25 Billion Left to Spend

Those 2 big figures add up to about $22 billion, meaning Unigroup still has about $25 billion left it in its war chest for more acquisitions and other investments. Zhao said his company is currently in talks for a tie-up with a “world class memory chip giant” to build a factory in China, and that he was also in talks for another tie-up with a US company that could be finalized by the end of this month.

I suspect the US company is flash memory maker SanDisk (Nasdaq: SNDK), which announced a $19 billion deal to be acquired by Western Digital just 2 weeks after Unigroup announced a separate deal to buy 15 percent of Western Digital for $3.8 billion. (previous post) It’s less clear who the “world class memory chip” maker might be, though I suspect it would be a major second-tier company like South Korea’s Hynix (Seoul: 000660) or Taiwan’s Powerchip (Taipei: 5346).

As Unigroup raises its profile, its ultimate strategy is becoming more apparent. That strategy involves using its huge war chest from Beijing to buy mostly minority stakes in other chip companies to gain access to their technology. It will then use that technology to design its own chips and manufacture them through a massive plant-building spree in China. The ultimate goal is to someday challenging global leaders Samsung (Seoul: 005930) and Toshiba (Tokyo: 6502) in the memory chip space, and Qualcomm (Nasdaq: QCOM) and Intel in microprocessors.

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