Foxconn’s investment in DNeX an extension of its chip ambition
THE investment by Hon Hai Precision Industry Co Ltd, or better known as Foxconn, in Dagang NeXchange Bhd (DNeX) has become the talk of the town over the last two weeks as it is not often that a Malaysian company receives the attention of a global powerhouse.
What role will the electronics manufacturing services giant play in DNeX, a trade facilitator platform service provider and low-cost oil and gas production player? Especially now that DNeX is finalising the acquisition of a 60% stake in SilTerra Malaysia Sdn Bhd, a semiconductor wafer fabrication company based in Kulim, Kedah, which was also eyed by the Taiwanese company.
The other 40% will be acquired by Beijing Integrated Circuit Advanced Manufacturing and High-End Equipment Equity Investment Fund Center (Limited Partnership) (CGP Fund). The total acquisition cost amounts to RM273 million.
It all boils down to what Foxconn is doing at the moment. While it is better known as the assembler of iPhones, it is currently developing its own semiconductor wafer fabrication business to support its ambition of building electric vehicles (EVs).
“Foxconn’s entry as a substantial shareholder of DNeX will be able to offer opportunities to unlock and create value across the high technology sector value chain and beyond. Potential areas of collaboration between DNeX and Foxconn would include semiconductor and downstream products, electric vehicles and businesses related to the electric vehicle value chain,” DNeX says in a statement to The Edge.
In February, Foxconn announced that it had agreed to build EVs for Fisker Inc, a start-up founded by automotive designer Henrik Fisker. Then early this month, Foxconn signed a memorandum of understanding with PTT PCL, the Thai national oil company, to create an “open platform” for producing EVs and key components.
Just last week, Foxconn announced that it had invested NT$995.2 million (RM148.4 million) in Giga Solar Materials Corp, a manufacturer of solar cell materials, to develop EV battery materials. Foxconn is the second largest shareholder of Giga Solar following the deal.
To be successful in its bid to become a manufacturer of EVs, Foxconn will need to secure the supply of semiconductors, a commodity that has become increasingly scarce due to rising demand for chips used in electronic gadgets as remote working and learning have gained ground.
The closing of borders due to the pandemic has exacerbated order backlogs. Industries from automotive to multimedia devices have had to scour the world for chips.
Foxconn has been trying to build its own semiconductor business since at least 2017, when it put in a US$27 billion bid to acquire 90% of Toshiba Corp’s memory chip business through a consortium with Apple Inc, SoftBank Group Corp and Sharp Corp.
However, Foxconn lost the bid to a consortium led by Bain Capital, which also included Apple Inc, SK Hynix, Dell Inc and Seagate Technology Inc. The consortium had put in an US$18 billion bid.
Fresh from the loss, Foxconn went ahead to build its own fab. In 2018, news broke that it was investing US$9 billion in a 12in chip fab in Zhuhai city, in China’s Guangdong province.
The Zhuhai fab would produce chipsets for ultra-high-definition TVs and CMOS sensors for phones, and eventually produce higher-value chips for robotics and autonomous vehicles, according to news reports. Construction on the plant was expected to start in 2020.
Since then, Foxconn has entered into deals with various provincial governments in China to build its chip manufacturing and design businesses. The company’s chip ambition coincides with Beijing’s desire to be a technological leader.
Therefore, when SilTerra was put up for sale, Foxconn jumped on it. The group is said to have offered the highest price for the stake and was initially favoured by Khazanah Nasional Bhd for the sale. However, the government decided that SilTerra should be kept in Malaysian hands as it is considered a strategic asset. SilTerra is the most advanced semiconductor wafer fabrication player in the country.
Why is Foxconn interested in SilTerra?
While Foxconn has lost the bid to directly own SilTerra, it appears that the company has not given up on owning a slice of the chip fabricator. Hence, the deal to take up a 5% stake in DNeX from its major shareholders Annedjma Capital Sdn Bhd, Azman Karim and Arcadia Acres Sdn Bhd.
The 120 million shares were bought at 90 sen each on June 10, which was a 5.9% premium to DNeX’s closing price of 85.5 sen on that day. The group paid RM108 million for the stake, the bulk of it to Azman Karim, who sold RM86.72 million worth of shares.
SilTerra has been loss-making for years. It was reported that Khazanah had sunk in RM2 billion into the company, while SilTerra’s accumulated losses were to the tune of RM8 billion. The financial situation was the main reason for Khazanah’s decision to sell the semiconductor wafer fabrication company.
Industry observers say SilTerra’s failure to become sustainable was because it had not been able to keep up with the fast-evolving technologies in chipmaking, and that its plant in Kulim had been underutilised.
“While SilTerra is not in the realm of the likes of TSMC [Taiwan Semiconductor Manufacturing Co Ltd], UMC [United Microelectronics Corp] and even SMIC [Semiconductor Manufacturing International Corp], the product that it produces is actually very much in demand in today’s world, due to the increase in electrification, connectivity and the rise of the Internet of Things,” says an executive at a chipmaking foundry.
SilTerra produces chips that use up to 110nm nodes, which are hardly the most high-end, as global fab leaders such as TSMC and UMC are already making chips with process nodes of up to at least 40nm.
However, these more advanced chips are required for mobile phones, laptops and tablets as they provide high processing capacity and use low energy. While some of the more advanced cars will have a greater number of the more advanced chips, the need for mature chips, such as the ones produced by SilTerra, remains strong.
Demand for mature chips is so high that SilTerra is currently facing a capacity issue, rather than underutilisation of its plant, as is often bemoaned by its detractors. The company’s order backlog now runs up to the second quarter of 2022, according to an executive The Edge spoke to.
“SilTerra had to turn away US$120 million worth of business due to lack of capacity. This is because its customers in computing, data centres, communications, media and entertainment are experiencing a boom because of increased internet, personal computer and media consumption around the world,” says the executive.
The global semiconductor market is expected to grow at a double-digit rate over the next three years. International Data Corp forecasts that semiconductor sales are going to grow by 12.5% this year to US$522 billion.
While the likes of TSMC and UMC are investing in more advanced chips with smaller nodes — TSMC is already designing and developing chips down to 3nm nodes — the demand for mature chips is still so huge that even Foxconn is investing in these.
Apart from its recent acquisition of a stake in DNeX to gain access to SilTerra, Foxconn is said to be eyeing a 150mm fab in Hsinchu, Taiwan, owned by Macronix International.
DNeX and its partner CGP Fund have already committed RM200 million to SilTerra to invest in technology and capacity to turn around the ailing fab.
When asked whether Foxconn will be injecting capital into SilTerra, DNeX says it intends to maintain its majority position in the company as it believes in the viability of the investment. “Our immediate plans to drive SilTerra’s transformation are to increase plant utilisation, undertake cost optimisation and expand market access. These include initiatives to improve efficiencies and increase the company’s operational capacity, as well as new capital investment to remove bottlenecks and improve plant utilisation.
“In addition, we will lead SilTerra to ready market access by leveraging the network of our partner, including strategic customers and long-term supplier contracts. Also in the pipeline is the adoption of technology upgrades, including micro-electromechanical systems (MEMS) and silicon photonics, thus enabling a change in product mix that can generate improved business margins.”