UMC ANNOUNCES DEAL WITH PRC'S HE JIAN

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 001402

SIPDIS

DEPT FOR EAP/TC
DEPT PLEASE PASS AIT/W

E.O. 12958: DECL: 03/24/2015
TAGS: ECON EINV ETTC TW CH
SUBJECT: UMC ANNOUNCES DEAL WITH PRC'S HE JIAN

REF: A. TAIPEI 539


B. TAIPEI 1343

Classified By: AIT Director Douglas H. Paal, Reason 1.5 b/d

Summary
--------------


1. (C) Semiconductor manufacturer United Microelectronics
Corp. (UMC) announced a deal whereby it would receive 15
percent of He Jian Technology Co. It is not yet clear
whether this deal will help UMC resolve accusations that it
illegally provided assistance to the PRC competitor in
violation of its shareholders' interests and Taiwan
regulations on Mainland investment and technology transfer.
Meanwhile, UMC's Chairman has left Taiwan for the United
States, possibly to flee prosecution. However, if the deal
eventually goes through, UMC's gamble in circumventing Taiwan
law could pay off. End summary.

Sweet Deal
--------------


2. (U) On March 20 UMC, Taiwan's second largest semiconductor
manufacturer, announced that it had worked out a deal with
PRC semiconductor manufacturer He Jian to receive a 15
percent stake in He Jian worth USD 110 million. The deal is
intended to resolve accusations UMC violated the trust of its
shareholders by providing assistance to a competitor.
According to UMC's Chairman Robert Tsao, the deal would be
subject to approval by Taiwan authorities.

Not Sweet Enough
--------------


3. (C) However, it's not clear how this proposed arrangement
would resolve the accusations against UMC. In announcing He
Jian's USD 110 million compensation deal, UMC admitted that
it provided very substantial assistance to He Jian. The head
of Taiwan's Securities and Futures Bureau Wu Tang-chieh has
called on UMC's Tsao to explain the deal in an open hearing.
Furthermore, some analysts believe that even a 15 percent
stake in He Jian doesn't adequately compensate the
shareholders of UMC. Sino-Pac Securities Co. Senior
Consultant Huang Wen-jur told AIT/T that he estimated the
value of UMC's assistance to He Jian to be 30 to 40 percent.
Some sources have said that He Jian was a 50-50 joint venture
between UMC and the Suzhou local government.


4. (C) The interests of shareholders aside, the proposed deal
does little to resolve the accusations that UMC invested in
the Mainland without Taiwan government approval and illegally
transferred technology. Ministry of Economic Affairs (MOEA)
Investment Commission Deputy Executive Secretary Emile Chang
told AIT/T that he had discussed the proposed deal with UMC
officials on March 23 and the Investment Commission still had
many questions. UMC claims that the stock would be
compensation for administrative consulting and denied claims
that UMC had provided patented technology. Chang observed to
AIT/T that USD 110 million in stock for administrative
consulting just doesn't make any sense. The Investment
Commission has asked UMC for more information about what it
provided to He Jian. If it illegally transferred technology
to He Jian, Chang said that UMC would face a fine of NT$ 25
million (USD 800,000).


5. (C) Chang also observed that the issue of whether the
Investment Commission could approve the deal after the fact
was still not clear. In addition to the post facto nature of
the application, the Commission may not be able to approve
any investment in He Jian because of the advanced technology
it uses. He Jian already produces semiconductors with
0.15-micron feature size. Current Taiwan regulations forbid
Mainland investment in technology finer than 0.25 microns.
Chang said that these questions would require more review by
MOEA.

Chairman Tsao On the Lam?
--------------


6. (C) Meanwhile, UMC's Tsao left Taiwan for the United
States this week. Many observers believe that he is fleeing
prosecution. The Securities and Futures Bureau has formally
asked him to return to explain the UMC-He Jian case. In a
media interview conducted in the U.S., Tsao maintained that
UMC had violated no laws. Tsao claims that he is traveling
to attend an art exhibition and visit friends. He has
refused to cut his trip short and has not yet given any
indication when he will return to Taiwan.


7. (C) Taiwan authorities had not restricted Tsao from
leaving Taiwan, but they have prevented almost two dozen He
Jian senior executives and engineers from returning to the
PRC since the Lunar New Year. According to some observers,
Taiwan authorities have essentially depopulated the ranks of
He Jian's engineers and it is having a serious impact on the
company's operations.

Comment ) A Gambling Man
--------------


8. (C) Tsao has a reputation as a gambler. Despite UMC's
current difficulties, his gamble with He Jian could still pay
off. He made a strategic decision some years ago to
circumvent intentionally the intent and probably the letter
of Taiwan law by assisting He Jian under the condition that
UMC would be formally compensated later. Mainland Affairs
Council Department of Economics Director Fu Don-cheng
recently told AIT/T that when MAC was consulting with
industry leaders about plans to open up investment in the
Mainland in the semiconductor industry, Tsao was vocally
opposed to the model that was approved ) allowing Taiwan
firms to build their own fabs under strict technology limits.
Instead Tsao advocated permitting Taiwan firms to form
strategic alliances with Mainland competitors. Even though
his recommendation was rejected, it's clear now that Tsao
proceeded with those plans.


9. (C) In contrast, Taiwan Semiconductor Manufacturing Co.
(TSMC) scrupulously observed Taiwan law and now has a
wholly-owned, operational 8-inch fab using 0.25-micron
technology in the PRC, technology TSMC told AIT is six year
out-of-date. UMC may or may not be able to formalize its
significant stake in He Jian. However, He Jian already has
at least 0.15-micron technology, the capacity to produce
30,000 wafers per month, and a strong customer base. UMC is
one of the crown jewels in Taiwan's economy. The Taiwan
government will strive to preserve its economic viability and
protect the interests of its shareholders. The game is still
in play, but UMC may yet turn out to be the big winner. End
comment.
PAAL