Internet & Tech

Memory game

Will Apple support Hon Hai’s bid for Toshiba’s semiconductor business?


Hon Hai’s Gou: wants chips now

The Japanese tradition of hanami (flower viewing) reaches its peak in April when the population holds parties under the cherry blossom (sakura). For the Japanese, the short-lived but beautiful blossom symbolises life’s transience and perpetual renewal.

Asahi Shimbun evokes the tradition as a metaphor to describe the rise and fall of Toshiba, which has put its prized semiconductor flash memory business up for sale following massive losses at its nuclear unit Westinghouse. The newspaper describes the company’s flash memory division as its toranoko (the tiger cub a mother protects above all else). Other domestic newspapers paint a picture of a sale that’s not only painful for Toshiba, but also for the country, which did so much to build the foundations of the global semiconductor business – or ‘industrial rice’ as Japan’s Ministry of International Trade and Industry once so memorably called it.

It was a Toshiba employee, Masuoka Fujio, who, in 1984, invented flash memory: the process of storing data when a power source is switched off. But Masuoka left the company in the early 1990s and has very little sympathy for its current travails. He tells Asahi Shimbun that if Toshiba had spent more time focusing on the semiconductor business it would not be in the mess it is today.

The academic successfully sued his former employer for not recognising his groundbreaking work and also tells the newspaper that he left after Toshiba failed to support his efforts to develop NAND flash technology. Instead, it favoured DRAM (dynamic random access memory), a memory chip that depends upon an applied voltage to retain data.

Fujio also has little truck with reports that the Japanese government will prevent Toshiba’s sale to Chinese or affiliated companies on national security grounds. “It’s too late to worry about technology leakages now,” he says. “It happened 30 years ago when we sold the technology to South Korea on the cheap.”

In the early 1990s, Toshiba shared its NAND flash technology with Samsung Electronics, which proceeded to invest heavily in R&D and overtake its partner. In 2016, Samsung was the world’s dominant NAND flash supplier with a 38% market share according to Gartner. Second is Toshiba on 21%, followed by Western Digital on 16%, SK Hynix 12%, Micron 11% and Intel 3%.

SK Hynix and Western Digital have both come through the first round of bidding for Toshiba, but it is two new entrants which are said to have put in the largest non-binding bids so far: Singapore-listed Broadcom, which is bidding alongside private equity firm Silver Lake and Taiwan’s Hon Hai Precision, which is reportedly trying to get Apple or Softbank on board as well.

Western Digital is not happy there are rival bidders at all, given it already has a joint venture with Toshiba. It has written a strongly worded letter to Toshiba management describing the legal separation and sale of the group’s memory business as “a breach of contract”. It says the two should be in “exclusive negotiations” based on a sale price, which reflects analysts’ valuations around the ¥1.5 trillion ($13.8 billion) mark.

Hon Hai, which is also known as Foxconn, is believed to have bid around the ¥3 trillion level. Analysts say it is exceptionally keen to acquire Toshiba to continue its transition away from its roots as a pure contract manufacturer to an integrator with a wide array of brands. Sharp, for example, is Hon Hai’s most notable recent acquisition.

The Taiwanese company beat Japanese government-funded Innovation Network Corporation of Japan (INCJ) for the electronics group last August. Recent newspaper reports suggest INCJ may now try and ‘get its own back’ by playing kingmaker in the Toshiba sale as a minority participant with another bidder, preferably Japanese. Its chairman says it is paying close attention to the sale.

Foxconn – one of mainland China’s biggest employers with over a million staff – may enter its second bid via Sharp to underscore its Japanese credentials and also enlist the help of Softbank, which supported it with the former M&A deal. The two companies’ leaders, Terry Gou and Son Masayoshi, have been friends for decades. Earlier this year, they forged a new joint venture when Hon Hai purchased a 54.5% stake in Softbank Group Capital, which will look for initiatives marrying Softbank’s investment expertise with Foxconn’s manufacturing abilities.

In addition, NHK reports that Apple may attempt to gain more control over a key supplier and utilise some of its enormous $246 billion cash pile by joining a Hon Hai-led consortium in return for a 20% stake. Foxconn currently derives about half its revenues from the American tech giant and intends to use Sharp to build that out further. In addition to assembling iPhones it is also deploying Sharp’s OLED technology to manufacture display screens and camera parts.

If Apple does join the bid at the valuation Hon Hai has pitched, then the deal will be its largest known corporate purchase to date, ahead of its $3 billion acquisition of Beats Electronics in 2014. Typically, Apple has concentrated on small start-ups with synergies to existing businesses, but earlier this year CEO Tim Cook emphasised a desire to do more.

“We are always looking at acquisitions,” he said. “There’s not a size we wouldn’t do.”

As for Hon Hai, analysts say its new strategy is paying off even though overall revenues declined 2.18% last year, the first annual fall since 1991.

Fourth quarter earnings beat analysts’ estimates by 41%. Net income rose 30% year-on-year to NT$69 billion ($2.26 billion) and the group’s gross margin expanded from 7.1% to 8.4% thanks to enhanced use of robotics (which cut operating costs) and a better product mix. Six months after acquiring Sharp, it also managed to turn it around, recording a first profit after eight quarters of consecutive losses.

Hon Hai’s determination to bolster its standing with Toshiba is based on fears its bid might be blocked by Japanese worries that vital chip technology will be later employed at Foxconn’s mainland China-based factories. The Japanese concern: IP might then seep out of the gates to be exploited by rival Chinese firms. Notably, there is no direct bid from a mainland Chinese entity, particularly from Yangtze River Storage (YRS), the Tsinghua Unigroup subsidiary, which is building up China’s flash memory capabilities (see WiC357).

In an interview with Taiwan’s Digitimes, its chairman, Charles Kau, bemoans the opposition YRS is facing on multiple fronts. “Samsung’s dominance of the global memory chip market is a global issue and China can serve as an emerging force to balance that power,” he remarks.

He says the group will begin sampling 32-layer 3D NAND chips at the end of 2017 and then jump to 64-layer, at which point it will be just one generation behind the global leaders. He adds that the aim is to develop the technology in-house, but YRS would still like a global partner and has Micron in mind (the company it was blocked from acquiring in 2015). But Kau believes cooperation talks will be prolonged because “the political atmosphere is unfavourable to us as the US is worried about the rise of China’s semiconductor industry”.

These were once very familiar words to the Japanese. Back in 1987, the US House of Representatives held a series of hearings on the issues confronting the domestic semiconductor industry. Participants said they were keen not to be portrayed as anti-Japanese (the country was and remains a key US ally). But they noted the aggressiveness with which the Asian country had elevated itself to world leadership in semiconductors in a single decade. Japan was commended for its “foresight and fortitude to focus their national resources on industry and technology, which is so fundamental to leadership in electronics”.

These will be galling words for the Japanese to hear three decades later. Indeed, Asahi Shimbun concludes that Toshiba’s sale is a “symbol of Japan’s decline”.

The Wall Street Journal meanwhile says Foxconn is seeking to double Sharp’s TV sales to 10 million units this year, with China being the primary sales driver.

The company is even sponsoring Chinese reality shows and rolling out billboard and TV ads with the slogan: “Sharp powered by Foxconn”.

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