US embassy cable - 05TAIPEI1402

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, Cross Strait Economics 
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