Tsinghua UniGroup’s Semiconductor Failure(?)
Author’s note: If you want to watch the video, it is below.
Well! A whole lot has happened since I published this video! Unigroup has about $30 billion in debt, and does not make enough money to pay it off. They are looking for investors to infuse capital and help run the business.
Unigroup is a legacy of the Chinese foreign acquisitions boom, back when you had these massive conglomerates buying hotels and random companies with money they probably shouldn’t be using that way.
I came out of my work in Unigroup feeling that the company itself was not really adding that much value to its subsidiaries. The NYTimes has it right when they said that Unigroup is more of a private-equity style financial buyer than a “real” company. The chairman leveraged political ties and savvy to attempt a big roll-up of various, random companies in the Chinese space.
I do think Unigroup would have eventually secured a coup had it been successful in acquiring foreign technology from its various attempted investments and takeovers for distribution to its various subsidiaries. But considering the general history of global semiconductor industry technology acquisitions, I don’t think you could have expected much success.
Regardless, I will still say that Unigroup won. They won because they managed to build up two gems of the Chinese semiconductor industry: Yangtze Memory and UNISOC. The former is poised to be China’s biggest memory maker - a Chinese SK Hynix. The latter is starting to challenge MediaTek in its critical China market, and might soon become a leading chip design firm alongside HiSilicon.
(Hat tip to Asianometry Discord user Redfire for this one)
So whatever happens to Unigroup itself and its variety of shady owners, if I was a Chinese policymaker, I am on the whole satisfied with the resolution.
If you would like to support the channel, consider subscribing to the Patreon. Members of the Early Access tier get to watch videos first before they released to the public. Right now, I am working on a video about the two Carl Zeisses - not necessarily about Asia but super interesting.
Early November 2020, Chinese semiconductor maker Tsinghua Unigroup (紫光集團) defaulted on $197 million (1.3 billion RMB) of its bonds. China's credit rating agencies downgraded the company's credit rating. The potential for a downward credit spiral is very real.
This company might not ring many bells. People might recognize the Tsinghua part of the name. It is the name of a famous university in Beijing. But not all that much else. Who cares about another company in China - even one with partial state backing - defaulting on its bonds?
I'll talk more about the default later. But to me, this company is interesting because of the "Buy Buy Buy" acquisition strategy China pursued in semiconductor technology development for several years during the 2010s.
In this video, I want to talk about Unigroup, its rise to prominence and its history of company acquisition.
Introducing Tsinghua Unigroup
Tsinghua Unigroup bears the name of the prestigious Tsinghua university in Beijing. It was founded in 1988 as the school's corporate arm for commercializing its research.
Tsinghua University is one of China’s big, prestigious universities. Many of its professors fled to Taiwan at the end of the Civil War where they established NTHU, National Tsing Hua University, in Hsinchu. Across the Strait, the Communist Party re-booted Tsinghua University in 1952 with a focus on engineering and the sciences.
Tsinghua counts Xi Jinping, Hu Jintao and other political leaders as its alumni. It has one Nobel Prize winner amongst its faculty.
The company is a digital infrastructure and services company. It operates as kind of a holding and intellectual property company, owning companies like Unisplendour Corporation and Unigroup Gouxin. As of 2018, they employ over 40,000 employees.
There are a few articles that imply that Unigroup is wholly owned by the university. That does not seem to be true. According to Chinese corporate filings, Unigroup is indeed majority owned by the university, but just 51%. The rest is owned by a Beijing investment company founded by Unigroup Chairman Zhao Weiguo 趙偉國.
Zhao is an interesting guy. Born in Xinjiang as an ethnic Han Chinese, he survived the Cultural Revolution and enrolled in Tsinghua University. He then moved to the university's corporate arm, rising in the ranks at one of Unigroup's subsidiaries.
Then he left to start a real estate investment firm, buying and selling Beijing properties. After earning his first bucket of gold, Zhao fulfilled the dreams of office workers everywhere and used his money to buy a big share of his former employer.
In interviews and public statements, he toes the party line. He talks about strengthening China's abilities in the semiconductor space and supports openness in the US-China relationship. Last year, he urged American technology companies to help ease relations:
On the one hand, they’re earning lots of money here in China, and on the other hand, they’re making malicious remarks about China to the U.S. government behind the scenes ... U.S. companies can do better, especially technology giants. Some American companies do well, and some do not
He's probably referring to Mark Zuckerberg and Facebook. The Zuck played up the China threat in his remarks to Congress. Yet at the same time, Facebook Inc. makes over $5 billion a year from advertisers in China trying to reach customers around the world.
Anyway, that is off-topic. As you might guess, Zhao's rags to riches journey is very interesting to me. So interesting that I wonder if there's more to it. The Nikkei Asian Times note that he used to be ex-colleagues with the son of former Chinese President Hu Jintao. In 2008, Hu Haifeng served as party secretary of Tsinghua Holdings, UniGroup's parent company. That might help.
Tsinghua Unigroup’s goal is to be the leading company in the production of integrated circuits and information technology. They want to help narrow the IC gap between the Chinese and the West.
This is a tough problem. In a crowded industry with a lot of well-funded competitors and very specialized knowledge, how do you "catch up"? How do you make your way from the back of the pack to the front?
Taiwan and South Korea benefitted from technology transfer agreements. China has too in the past, trading access to their massive market with agreements to acquire advanced technologies. But it is harder to do this in the semiconductor space. Countries tend to be very protective of where their technologies are going.
Unigroup's strategy appears to be two pronged. The first is to pay up for large acquisitions of companies in the West. Once acquired, Unigroup drives R&D efforts to file international patents and reap the resulting patent revenue. Unigroup has filed for over 10,000 patents in the past decade covering all parts of the integrated circuit industrial value chain.
Unigroup first entered the semiconductor space with the 2013 acquisition of China's largest fabless semiconductor company - Spreadtrum. After buying Spreadtrum, UniGroup added a second domestic purchase, RDA. I believe they then merged the two companies together and rebranded them as UNISOC. The two acquisitions cost the firm some $6 billion, but leapfrogged the company into being the third largest mobile phone baseband chip supplier in the world. (Number one and two are Qualcomm and MediaTek.)
Okay, so you bought two fabless companies. Does that really mean anything? In a previous video, I talked about the importance of validating your product in the world market, like through foreign investment. Thus, UniGroup set out and received a 9 billion RMB investment from Intel - proof of their global competitiveness.
This perfectly positioned the company to receive funds from the 140 billion RMB National Integrated Circuit Industry Investment Fund - formed a year later in 2014. Excellent timing. They got 10 billion RMB from the fund and another 20 billion from the National Development Bank.
Buy, Buy, Buy
Chinese foreign acquisitions had been on the rise during the 2013-2016 period. And UniGroup was single and ready to mingle ... for bigger buys abroad. They would attempt a number of foreign transactions in an attempt to absorb foreign technology and advance China's semiconductor industry.
The first was in 2014, when UniGroup spent $3 billion in a 51% majority stake takeover of Hewlett Packard's Chinese server, storage and technology unit, H3C.
The next year in July 2015, Unigroup attempted to acquire Micron Technology for $23 billion. Micron is the United States’ largest memory chip company, making DRAM memory chips and data storage products. At the time, Micron's stock was down 50% and the industry was working through a memory glut. Had the transaction gone through, it would have been the biggest US purchase by a Chinese company ever.
The problem is that large transactions by foreign companies need to be reviewed by an inter-agency committee for national security implications. This committee is called CFIUS, the Committee on Foreign Investment in the United States. CFIUS has the right to review and block any acquisition after a review. It is the successor to a 1988 law (the Exon-Florio Amendment) passed in response to foreign acquisitions by Japanese companies.
Micron had concerns about the bid from Tsinghua and turned it down before the talks got serious. Tsinghua Unigroup's association with the university, which is directly under the PRC’s Ministry of Education, made it likely that CFIUS would consider it a Chinese Government-controlled company.
Unigroup modified its strategy that same year in September 2015 with its second attempted acquisition. In this transaction, one of the company’s subsidiaries Unisplendour released a cooperation statement with American storage maker Western Digital. In this transaction, Western Digital (WD) would issue to Unisplendour $3.77 billion of shares, a 15% stake in the company, and one board seat.
Unigroup likely was hoping that the fact that the WD transaction was an equity purchase in addition to the fact it was being done through a subsidiary would allow it to evade CFIUS review. CFIUS was like, nice try, and in Feb 2016, WD got a letter from CFIUS telling them that the transaction would need to be reviewed. Unisplendour and WD called it off.
The third big attempted acquisition came in November 2015 when UniGroup proposed a merger with Taiwanese fabless company MediaTek. Zhao Weiguo told Taiwan media that he wanted to merge his two companies RDA and Spreadtrum, together the number three baseband chip maker, with MediaTek, the number two baseband chip maker. The combined company would be larger than Qualcomm, the number one.
This merger proposal came in at the same time with the announcement of Tsinghua's acquisition of a 25% stake in Powertech Technology, a provider of test and packaging services for the IC industry. This particular niche in the IC industry is open to mainland Chinese investment.
MediaTek is a spinoff from UMC, Taiwan's first electronics foundry. Depending on how you measure things, it's the world's fourth largest IC designer ahead of names like AMD and Marvell. MediaTek is a Taiwanese national champion second probably only to TSMC. The government declined to change the laws to allow the merger to happen.
2016 would see the last big Chinese foreign acquisition of the era - Midea's purchase of German robotics maker KUKA. The KUKA acquisition, though successful, got a lot of press and kicked off a new era of weariness surrounding big Chinese acquisitions. A year later, China clamped down on capital flight and the shopping spree came to an end.
After these failed acquisition attempts, Tsinghua UniGroup turned inward. Their failed investment in WD reflected their interest in breaking into the memory chip market. The market is currently dominated by a small coterie of American and Korean firms like Samsung, SK Hynix and Micron.
In July 2016, Tsinghua purchased a majority stake in Wuhan Xinxin Semiconductor and rolled it into a shell company it created called Changjiang Storage. Changjiang is in reference to the Changjiang River, more well known to Westerners as the Yangtze River. The company is based in Wuhan.
Zhao vowed that he and his company would invest $100 billion over the next 10 years to turn Yangtze Memory into a world-class domestic memory chip company. He brought in the former CEO of Japan's Elpida Memory to lead DRAM development at Yangtze.
The government has strongly gotten behind Yangtze Memory and in April 2018 President Xi visited the Wuhan factory. He gave a speech there, in which he said that in order to achieve China's 200-year goals, some major core technologies must overcome difficulties on their own.
Two years later, the company announced a major breakthrough in NAND Flash memory. The company had kicked off a pair of massive chip factories in Chengdu and Chongqing, looking to replicate the success they've had in Wuhan. Right now though, those multi-billion dollar projects have stalled as Tsinghua UniGroup works through its debt issues.
It appears that Unigroup's default has been long foretold. Earlier this year in 2020, the Chinese government passed down new economic reform rules that separated state-owned entities like universities from their commercial bodies.
Once Tsinghua University was made unable to subsidize Tsinghua Unigroup, the latter began to struggle. The debt Unigroup has already defaulted on seems to be a small percentage of its overall debt profile. The company has another 157 billion RMB ($22 billion USD, roughly) of debt coming due in the next year and many billions of RMB after that.
The government has apparently decided to get more involved. Zhao has stepped down from the boards of several companies in 2018. An additional executive Chairman for the group was also recently appointed.
Just like with Hongxin in Wuhan, many of UniGroup's projects rely on billions of dollars of funding to come from local governments. By themselves, UniGroup doesn't have enough money. As high profile failures like Hongxin filter through the system, governments start cracking down on projects - looking to avoid having something of the same happen to them.
Not to say that Unigroup is another Hongxin.
Note: You can watch the Hongxin video here
Unlike Hongxin, Unigroup actually owns part of a legit semiconductor business that is actually running and all. No reason that Unigroup can figure things out and eventually arise phoenix-like as a new, slimmed down entity. They still own some interesting assets. But it will take some time for funding to come in. In the meanwhile, the company's projects sit mothballed.