China's Tsinghua Unigroup , the state-controlled company that bought a 15% stake in storage-solutions leader Western Digital earlier this year, plans to evolve into a chipmaking behemoth during the next few years. Prior to that investment, Unigroup bought Spreadtrum and RDA Microelectronics , two major fabless chipmakers in China, for $2.7 billion.
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Tsinghua Science Park. Source: Pixabay.
Earlier this year, Unigroup tried to buy U.S. memory-chipmaker Micronfor $23 billion, but the deal was blocked byU.S. regulators due to national security concerns. Undeterred, Unigroup recently unveiled plans to buy 25% stakes in three chip test and packaging firms in Taiwan -- ChipMOS Technologies, Silicon Precision Industries, and Powertech Technology -- for $2.6 billion. All three companies welcomed Unigroup's investment, but pro-independence and pro-unification leaders in Taiwanhave opposed the deal, citing national security concerns and a potential loss of intellectual property.
If those controversial investments are approved, Unigroup could gain ground against its top rivals, American chipmaker Qualcomm , Taiwanese chipmaker MediaTek, and South Korean tech giant Samsung. Therefore, tech investors should keep a close eye on Unigroup, and understand how its growth could affect the ability of U.S. chipmakers to compete in China.
Why was Tsinghua Unigroup established?Tsinghua Unigroup is 51% owned by Tsinghua Holdings, a conglomerate that is wholly owned by China's elite Tsinghua University. The other 49% is held by Beijing Jiankun Investment Group. Zhao Weiguo, who controls the latter, became the chairman and CEO of Tsinghua Unigroup after the company was privatized in 2010.
To strengthen China's domestic chip sector, Unigroup signed major deals with Western chipmakers, tried to consolidate the domestic fabless semiconductor market, and tried to invest in, or acquire, overseas tech companies. In May, Hewlett-Packardagreed to sell a 51% stake in H3C Technologies, its Chinese data networking business, to Unigroup for $2.3 billion. HP also agreed to create a group inside China to house H3C's server, data-storage, and technology-services businesses.
The Chinese government hopes that revenues from its domestic chip companiescan grow more than 20% annually and become a 350 billion yuan ($54 billion) market by 2020. That growth could help China reduce its dependence on U.S. tech, which the country doesn't like using due to security concerns, while establishing a pillar of growth for its domestic economy.
Consolidating the market against QualcommUnigroup has repeatedly declared its intentions to overtakeQualcomm, the largest mobile chipmaker in the world. At the end of 2014, Qualcomm respectively controlled 51% and 64% of theapplication-processor and wireless-modem markets, according to research firm Strategy Analytics.
But by July, Strategy Analytics reported that Qualcomm's share in application processors had slipped to 47%, whileMediaTek controlled 15%. In October, the company reported that Qualcomm's share of the wireless modem market had fallen to 60%, compared to 19% for MediaTek, and 6% for Unigroup's Spreadtrum.
Investing in, or acquiring, MediaTek could help Unigroup become Qualcomm's biggest competitor. In a recent interview with Taiwan's Commercial Times, Unigroup's Zhao stated that if cross-strait investment rules were relaxed, he planned to meet with MediaTek chairman Tsai Ming-kai to discuss a potential merger between MediaTek, Spreadtrum, and RDA Microelectronics. Such a merger could significantly strengthen MediaTek's position against Qualcomm. MediaTek recently told Taipei Times told the company would adopt an "open attitude" toward cooperating with Unigroup.
The enemy of my enemy...While regulators in the U.S. and Taiwan have viewed Unigroup's growth with suspicion, the company has welcomed foreign investments. Last September, Intel bought 20% stakes in Spreadtrum and RDA through a $1.5 billion investment in Unigroup.
Intel invested in those two low-cost chipmakers to gain ground in the mobile market against Qualcomm, which dominates the high-end and mid-range markets with its Snapdragon processors. Intel has gained ground in tablets, but its market share in smartphone application processors and wireless modems remains in the single digits. By teaming up with a state-backed firm and releasing cheap reference designs for low-cost Chinese OEMs, Intel hopes to gain mobile market share in Qualcomm's biggest market.
More investments and buyouts aheadQualcomm has recently been struggling all across the world. In China, it was slapped with a $975 million antitrust fine and forced to lower its patent licensing fees for Chinese-made phones. Regulators in South Korea and Taiwan also recently launched similar probes against the company. The European Commission is also investigating allegations that the company used predatory pricing to force rivals out of the market.
All this regulatory pressure on Qualcomm is creating an opportunity for Tsinghua Unigroup to catch up. The company has already established footholds in the data-storage, data-center, networking, and low-cost mobile chipmaking markets. If it continues to invest in more chipmakers, it could eventually become China's equivalent of Samsung.
The article Western Digital Corp's Top Chinese Investor Is a Growing Tech Beast originally appeared on Fool.com.
Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool owns shares of Western Digital.. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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