Taiwan keeps door to China closed for chip maker UMC

Taiwan will have to revise chip-industry regulations before United Microelectronics (UMC) can invest in China, an official said Friday.

UMC, the world’s second-largest contract chip maker, announced a plan in April to pay US$285 million for an 85 percent stake in He Jian Technology, which was established by former UMC employees in China in late 2001. At the time of the announcement, UMC said it believed having a production base in China was key to increasing profitability and promoting growth at the company.

But old chip investment regulations in Taiwan will keep UMC out of China entirely for now.

Taiwan long ago enacted rules allowing only three Taiwanese chip plants in China that make chips from 8-inch wafers. More modern fabs make chips from 12-inch wafers and are moving toward 18-inch wafers.

All of those factories have been spoken for, therefore UMC will have to wait until regulations are changed before it can complete its purchase of He Jian, according to John Deng, vice minister of economic affairs in Taiwan, speaking at a news conference in Taipei.

“We’re working with UMC now, but we have not given them permission yet,” he said.

UMC is a world-leading semiconductor foundry

UMC declined to comment.

UMC already owns 15 percent of He Jian through a deal made by UMC executives several years ago in return for advice on how to set up the business.

Taiwanese authorities at the time charged two UMC executives with crimes under laws designed to prevent Taiwanese chip makers or personnel from establishing factories in China or transferring technology there without express permission from the government. The two were acquitted.

At the time the UMC executives faced trials, a pro-Taiwan independence party ruled the government. Now, a Beijing-friendly party reigns in Taipei, but the chip regulations have still not been changed, despite the easing of other rules, including direct commercial flights between Taiwan and China, the first since their 1949 civil war separation.

He Jian operates a factory in Suzhou, China, making chips on 8-inch wafers. The company was profitable from 2005 to 2007, and its operating performance and financial condition remain promising, UMC has said.

The world’s largest contract chip maker, Taiwan Semiconductor Manufacturing (TSMC) already operates an 8-inch chip factory in Shanghai, while Taiwanese DRAM maker ProMOS Technologies built an 8-inch factory in Chongqing, a city in southwestern China. Powerchip Semiconductor won approval to build an 8-inch factory in China as well, rounding out the three factories allowed by Taiwanese regulations.

UMC Board of Directors Important Announcement
Taipei, Taiwan, R.O.C. – April 29, 2009 – United Microelectronics Corporation (NYSE: UMC, TSE: 2303), (“UMC”) convened its 19th session, 10th term of its Board of Directors meeting today. During the meeting, its board approved to propose the acquisition (the “Acquisition”) by UMC of the holding company of He Jian Technology (Suzhou) Co., Ltd. (“He Jian”) for resolution at the annual shareholders meeting.

Established in late 2001 as a semiconductor foundry business, He Jian operates an 8-inch fab in Suzhou, China with a monthly capacity of 41,000 wafers, He Jian has made significant inroads into the China market and has established strong relationships with local companies across the semiconductor supply chain. He Jian was profitable from 2005 to 2007 and its operating performance and financial condition remain promising.

UMC’s core business has been in semiconductor foundry for many years. In order to facilitate UMC’s global business reach beyond its current markets, to help expedite business growth, to increase profitability, to enhance shareholder value and to increase UMC’s business competitiveness, UMC believes that a production base in China is key.

During the past six months, the global semiconductor market suffered in the significant financial crisis that led to a worldwide economic downturn. The net value and market value of many semiconductor companies were negatively impacted. Conversely, China’s market was relatively strong during this period, attracting many customers that preferred the option of local production. UMC viewed these circumstances as an opportunity to invigorate itself towards long-term growth. After considering the required manpower, capital and time required to build a new fab, which would exceed one year, UMC proposed the Acquisition. In addition to realizing the value of the 15% ownership interest in the indirect holding company of He Jian held in trust for UMC and promoting its shareholders’ interest, UMC could acquire a fully built, fully staffed and fully operational production base at an attractive price. UMC further anticipates that, by focusing on customer satisfaction, the strong foundation established by He Jian in China will lead to further gains in market share. For He Jian, as an independently operated semiconductor foundry company, the Acquisition is expected to accelerate market penetration and increase profitability as a result of being incorporated into UMC’s world-class operations.

Under the terms of the definitive agreement governing the Acquisition, holders of shares of the holding company that indirectly own He Jian, but excluding the 15% ownership interest held in trust for UMC, are entitled to receive an aggregate consideration of approximately US$285 million. These holders may elect to receive payment in the form of cash or an equivalent value of UMC common stock or American Depositary Shares (“ADS”). The basis of the number of shares to be delivered will be calculated by using the arithmetic average closing value of UMC’s common shares and ADSs during the 6-month period prior to, but excluding, April 29, 2009, the date of the Board of Directors’ meeting.

Consummation of the Acquisition is subject to approvals from governmental authorities, the passage of appropriate resolutions of the shareholders of UMC and the holding company of He Jian and certain other customary conditions.

After the consummation of the Acquisition, UMC plans to integrate resources, reduce operating costs, and expand business scale, as well as to rapidly shorten the time required for establishing a production base in China. With China’s current market still growing and the eventual overall semiconductor industry recovery, UMC expects to expand the potential to grow its long-term revenue and earnings. The expanded international presence of UMC will also enhance its global competitiveness in the rapidly developing semiconductor industry.

Nomura International (Hong Kong) Limited, Taipei Branch, is the sole financial advisor to UMC on the Acquisition.

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