Please ensure Javascript is enabled for purposes of website accessibility

Western Digital Corp's Top Chinese Investor Is a Growing Tech Beast

By Leo Sun - Dec 21, 2015 at 7:14AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Tech investors need to be familiar with this growing Chinese tech firm.

China's Tsinghua Unigroup, the state-controlled company that bought a 15% stake in storage-solutions leader Western Digital (WDC 4.42%) 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.

Tsinghua Science Park. Source: Pixabay.

Earlier this year, Unigroup tried to buy U.S. memory-chipmaker Micron for $23 billion, but the deal was blocked by U.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 Taiwan have 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 (QCOM 2.10%), 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-Packard agreed 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 companies can 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 Qualcomm
Unigroup has repeatedly declared its intentions to overtake Qualcomm, the largest mobile chipmaker in the world. At the end of 2014, Qualcomm respectively controlled 51% and 64% of the application-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%, while MediaTek 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 (INTC 1.27%) 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 ahead
Qualcomm 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
$131.23 (2.10%) $2.70
Intel Corporation Stock Quote
Intel Corporation
$42.20 (1.27%) $0.53
Western Digital Corporation Stock Quote
Western Digital Corporation
$59.10 (4.42%) $2.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.