Stake in Chinese Foundry Put into Trust for UMC

United Microelectronics (UMC), the world’s second-largest contract chip maker, said a 15 percent stake in a Chinese chip maker has been put into a trust as payment for aid in establishing the company when it was breaking into the business a few years ago.

But it’s likely to raise the Taiwan government’s ire because the stake in He Jian Technology (Suzhou) could be considered illegal due to regulations controlling the flow of sensitive technologies to China.

Taiwan maintains careful control over high-technology investments to China, in part due to fears certain chips or other IT gear could be used against the island in an attack. Investing in China’s chip industry without permission from Taipei remains banned, and UMC has never gained permission to take a direct 15 percent stake in He Jian.

China and Taiwan separated in 1949 amid civil war, and political tensions remain high between them. In 1996, China fired missiles over the island because it didn’t like the candidate deemed most likely to win Taiwan’s presidential election. Instead of frightening Taiwanese voters, it galvanized their support for the candidate, who went on to win in a landslide.

“[The shares] have been put into a trust until government rules change,” said Alex Hinnawi, a spokesman for UMC.

By using a trust, UMC could ensure that a third party is watching over the shares, and that He Jian has formally made the payment. A few years ago, He Jian offered the stake as payment to UMC in return for advice on how it should set up its operations. But it’s unclear whether the trust violates Taiwanese regulations against investing in China’s chip industry.

He Jian was built mainly by former employees of UMC, who moved to China to start the company. Early last year, Taiwanese prosecutors raided UMC offices in Taipei and Hsinchu, and detained nearly two dozen Taiwanese employees of He Jian. The government had been gathering evidence for a case against UMC over alleged illegal investments in He Jian.

UMC has repeatedly denied wrongdoing in the He Jian case. Although the chip maker’s executives have admitted to offering extensive aid to the development of He Jian, they have maintained that they did so within legal bounds. Robert Tsao, the company’s former chairman, resigned along with another key executive in January after Taiwanese prosecutors indicted them over the issue, and Taipei has leveled fines on UMC and He Jian executives.

When the 15 percent stake was offered to UMC last year, it was valued at US$110 million. The offer was made in part to allay one of Taipei’s main criticisms of the relationship between the two companies: that UMC built a competitor, threatening its shareholders by hurting its own competitive position.

-Dan Nystedt, IDG News Service (Taipei Bureau)

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