July 14, 2015 / 2:39 PM / 2 years ago

Political ties could prove double-edged sword for Chinese chipmaker

BEIJING (Reuters) - When Intel (INTC.O) CEO Brian Krzanich flew into Beijing last October to tie down an investment in Tsinghua Unigroup, a Chinese chip maker, Unigroup CEO Zhao Weiguo whisked him into a meeting at China's Ministry of Industry and Information Technology (MIIT), where a vice minister blessed the deal.

On Tuesday, following reports that Unigroup was preparing to launch the biggest Chinese takeover bid of a U.S. company, Zhao could not be reached for comment. He was again conferring with MIIT officials.

As Zhao prepares an audacious $23 billion bid for Idaho-based chipmaker Micron Technology (MU.O), the close ties to Chinese policymakers that helped propel Unigroup's swift rise may now be coming back to haunt it.

Over the past year, Unigroup has cemented its role as China's annointed technology champion, buying two semiconductor firms and Hewlett-Packard's server business - two sectors deemed strategic priorities by China's economic planners. It has also received more than $6 billion in government-backed loans to carry out research.

Along the way, Unigroup has flexed its political muscle on at least two occasions, brushing aside other bidders that had received approval from China's powerful National Development and Reform Commission to make cross-border acquisitions.

China's leaders, aware that the country's annual semiconductor imports are worth more than its petroleum imports, have stressed cultivating a domestic chip industry.

But analysts say the biggest hurdle to Unigroup successfully acquiring Micron, the only remaining major U.S. maker of DRAM memory, will be political objections on Capitol Hill at a time when the United States and China trade accusations over hacking and other tech-related disputes.

The deal would require approval from the Committee on Foreign Investment in the United States, a process often fraught with politics.

"[Zhao] operates as a commercial businessman, but what he's done is align himself with Chinese national strategy," said Vincent Gu, a veteran semiconductor analyst at iSupply who said there is a "near zero" chance of a deal going through.

POLITICAL ELITE

Unigroup's influence reflects Tsinghua University's decades-old status as a nexus of elite politics and leading scientific research. The school is considered more closely affiliated with the Communist Party than Peking University, known more as a liberal hotbed focused on the humanities.

Tsinghua, which counts former and current presidents Hu Jintao and Xi Jinping among its graduates, founded Unigroup two decades ago as a way to help bring its science faculty's research to market.

Unigroup's parent company, Tsinghua Holdings, was at one point steered by Hu's son, Hu Haifeng, while the father served as China's paramount leader.

Although Zhao, the CEO, told the Wall Street Journal in an April interview that he is not a "white glove" - a front - for government interests, personal relationships between Unigroup and national leaders run deep.

Just last week, vice premier Liu Yandong, another Tsinghua alumna and longtime political ally of Hu Jintao, paid an undisclosed visit to the facilities of a Unigroup subsidiary chipmaker in the eastern city of Tianjin, according to a person with knowledge of the matter.

A Unigroup spokesman declined to comment for this article.

A Micron deal could be particularly sensitive given the recent U.S.-China history involving chips.

China issued Qualcomm Inc (QCOM.O) a record $975 million fine this year for anti-monopolistic behavior.

In February, the U.S. Department of Commerce published a note saying it blocked Intel's application to export chips for several Chinese supercomputers, including the Tianhe-2, on grounds they were being used for nuclear weapon research.

Additional reporting by Paul Carsten; Editing by Ian Geoghegan

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