By Eva Dou
BEIJING--Two years ago, Zhao Weiguo was running an obscure
Chinese state-owned company peddling tech services, natural gas and
Chinese herbal medicines.
Today, that company is China's microchip national champion--and
a beacon for how Western tech companies might get to do business in
China in the future.
Tsinghua Unigroup Ltd. is in talks to buy a controlling stake in
Hewlett-Packard Co.'s China data-networking operations, Mr. Zhao,
its chairman, said in an interview earlier this week. Discussions
are still taking place over the 51% stake in H-P subsidiary, H3C
Technologies Co., he said, in a deal that people familiar with the
talks say could value H3C at as much as $5 billion.
Mr. Zhao, who says he herded goats as a child and later amassed
a fortune in coal, gas and real estate in the northwestern desert
region of Xinjiang, said his company isn't an arm of Beijing
despite its high-level political connections. Instead, he said, he
offers foreign companies a connection to the vast China market.
"Many people suspect I'm a 'white glove' for the government,"
Mr. Zhao said in a rare interview, using a term for a front. "But
we're really just a very market-oriented company."
Foreign technology companies increasingly are partnering with
Chinese companies to reach consumers, as sales slump in the face of
increasing pressures from Beijing. Chinese leaders are worried
about a dependence on foreign gear as well as cybersecurity,
following revelations in 2013 that the U.S. government used
infrastructure belonging to American companies for spying.
Some of Silicon Valley's largest firms have deepened their China
partnerships in the past year. Chip maker Intel Corp. is already a
partner of Tsinghua Unigroup, having bought a 20% stake last year
for $1.5 billion. Intel also launched a partnership with Huawei
Technologies Co. in March to make cloud solutions for telecom
carriers.
International Business Machines Corp. struck a deal with Chinese
server-making rival Inspur Group Ltd. in August. And Lenovo Group
Ltd. last year acquired IBM's low-end server unit last year, which
was facing tougher competition from Chinese rivals and political
pressure on its Chinese customers to buy from domestic
companies.
"A lot of this is driven by the Western side," said Chris
DeAngelis, Beijing-based general manager of tech consulting firm
Alliance Development Group. "If you're losing market share, how do
you do something different? That's the only way these U.S. firms
can expand in the market."
The talks between Tsinghua Unigroup and H-P were previously
reported by The Wall Street Journal but not confirmed by either
company. An H-P spokeswoman declined to comment.
Mr. Zhao's company has drawn interest from both U.S. firms and
support from China's top officials, as Beijing strives to develop a
homegrown semiconductor sector. Tsinghua Unigroup became China's
largest chip maker after acquiring two of the country's largest
mobile-chip firms, Spreadtrum Communications and RDA
Microelectronics, in 2013. Intel executives said last year that
they believe partnering with Spreadtrum is opening doors for the
company in the low-cost smartphone market, a sector that Intel has
its eye on.
Tsinghua Unigroup's largest chip subsidiary Spreadtrum is a
major maker of processors for low-cost smartphones in emerging
markets. The company's main rival is Taiwan's Mediatek Inc., which
supplies low- to midrange smartphone chips.
It faces a steep climb to become a major global player. China's
chip makers still mainly make processors for low-end smartphones,
with their technology two to three years behind the cutting edge,
according to Nicole Peng, China research director of research firm
Canalys.
"They won't be able to catch up anytime soon," she said.
Mr. Zhao said he believes that by following the lead of Chinese
companies like Huawei and investing over the long term, he can
build a world-class company.
Little is known about Tsinghua Unigroup outside of China. It was
founded in 1988 by China's elite Tsinghua University, the alma
mater of many of the country's top leaders, including current
President Xi Jinping. It is still controlled by a university
holding company and has close ties with the government through
Tsinghua's alumni network. The son of former Chinese President Hu
Jintao was previously the Communist Party head of the firm's parent
company.
Beijing's new chip support fund announced in February it would
invest 10 billion yuan ($1.6 billion) in Tsinghua Unigroup in the
next five years.
H-P inherited H3C, a major supplier of corporate-data networking
gear in China, when it bought 3Com Corp. in 2010. H3C was formed in
November 2003 as a joint-venture between China's Huawei and 3Com,
but recently has faced uncertainty under H-P ownership because of
Beijing's push for state-owned firms to use domestic technology
suppliers, people familiar with the matter said.
Tsinghua Unigroup is expanding the chip business rapidly,
planning to add 1,000 employees by the end of the year to the 4,000
already on the payroll, Mr. Zhao said. He estimated chip revenue to
reach $1.8 billion this year, up from $1.5 billion last year--still
a drop in the bucket of the $340 billion world-wide chip market,
according to tech research firm Gartner's estimate for 2014.
Mr. Zhao, 48, said his decision to transform Tsinghua Unigroup
into a chip business wasn't directed by the government and he
didn't know that Beijing would announce plans to funnel more than
160 billion yuan ($25.8 billion) into the country's chip industry
last year. Instead, he said, it was a combination of his personal
interest in technology--he's a graduate of Tsinghua University's
electrical engineering program--and the opportunity arising to
acquire Spreadtrum in 2013.
"It's like if you carry your gun up the mountain, you just know
there's game there," said Mr. Zhao, who also controls an investment
firm that owns 49% of Tsinghua Unigroup. "Maybe you'll catch a
deer, maybe a goat, you don't know. It was when I came upon
Spreadtrum that I realized chips would be the key direction for
Tsinghua Unigroup."
China's top officials are eager to develop advanced smartphone
chips domestically to avoid having to rely on foreign ones that
could have "back doors" built into them, Spreadtrum Chief Executive
Leo Li said in an interview in January.
Mr. Zhao said he hopes to forge more partnerships with U.S.
companies such as H-P.
"I believe we are creating a new kind of model for U.S.-Chinese
company partnerships," he said.
Write to Eva Dou at eva.dou@wsj.com
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