The Silterra sale saga

Chip sale: Attempts by Khazanah in the past to sell Silterra faced political objections due to national interest issues.

THE ongoing sale process of Silterra Sdn Bhd, Khazanah Nasional Bhd’s chip manufacturer, has put top government officials in a quandary.

This has come about because of the late entry of a bid from Taiwan’s Foxconn for the entire equity interest in Silterra at a price higher than bids from two local parties. This means that the board of Khazanah Nasional Bhd, which include the prime minister and finance minister, has to decide between selling the wholly-owned wafer fabrication firm entirely to foreign parties or maintaining a national interest in the venture by insisting that majority ownership ought to remain in the hands of Malaysian companies.

First, some background to the saga. After previous attempts at hiving off Silterra, Khazanah began a sales process early this year using KPMG. Sources involved in putting in bids say that they were verbally informed that majority ownership of Silterra ought to be in the hands of Malaysian-owned parties.

Two Malaysian listed firms, Dagang Nexchange Bhd (DNeX) and Green Packet Bhd emerged as front runners. Interestingly, both were backed by different China-based private equity firms, but with them (the local parties) maintaining majority interest in their respective consortiums.

But towards the end of the sales process, which incidentally was extended due to the movement control order (MCO), Foxconn threw in a bid at a significantly higher price but which entailed them gaining 100% ownership. Naturally, the local players who had participated in the bidding process earlier have been up in arms as they worked on the basis of them having majority control.

“If from the start it was clear that foreign parties could have majority ownership, then the bids would have been higher. It is no surprise that Foxconn can put in a higher bid, as theirs entails them gaining 100% ownership. They would be able to do as they please with the asset without any consideration for local interests, ” says one disgruntled party.

However, for Khazanah, having sunk more than RM2bil into Silterra, the Kulim-based wafer fabrication outfit which has posted accumulated losses of more than RM8bil since its formation in 1995, gaining the highest price for this investment could make perfect sense.

Sources say that attempts by Khazanah in the past to sell Silterra faced political objections due to national interest issues. Silterra, which was created in 1995 and built by 2000, was the brainchild of then prime minister Tun Dr Mahathir Mohamad to nudge Malaysia higher up the semiconductor value chain from merely being an assembler of chips.

However, Silterra’s business struggled from day one for a variety of reasons and saw numerous changes in CEOs. It has not been able to run efficiently, with staff costs alone at around RM130mil a year. Silterra reported a loss of a whopping RM172mil for its financial year ended Dec 31,2019.

Another key factor was the lack of an eco-system of related businesses in Malaysia, such as design houses and suppliers of materials and tools.

Back to the bid by Foxconn, sources say its bid for Silterra is at US$125mil or RM516mil.

In comparison, DNeX is offering RM136mil and Green Packet’s bid is at RM235mil. Yet another bidder is X-FAB, a German-based foundry group manufacturing silicon wafers which also has operations in Malaysia.

X-FAB had merged with 1st Silicon back in 2006, the only other wafer fabrication company in Malaysia that was set up by the Sarawak state government.

In 2015 it was reported that X-FAB had invested invested almost US$180mil into the Kuching site from 2006. In 2015, X-FAB Sarawak contributed US$147.7mil or 44.18% of the group’s total revenue of US$334.3mil.

However, sources say that X-FAB’s bid for Silterra is not as high as that coming from Foxconn.

National interest

The bids coming from local players DNex and Green Packet assume will assume Silterra’s debt of RM210mil. More significantly, their bids have plans to grow Silterra’s business in Malaysia.

DNeX’s bid entails a 60:40 consortium with Beijing CGP Investment Co Ltd and entails spending some RM500mil in total, including further capital expenditure and purchase of new equipment for Silterra. The bid also focuses on securing Silterra’s offtake, raising Silterra’s capacity utilisation to 80% from 50% now.

“Wafer fabrication is a difficult space, no doubt and the technology is very advanced. Our plan is to play in the second tier level. You cannot compete head on with the likes of TSMC, which is why they are going to focus on a niche area, which is MEMS technology to target the automotive industry, ” says a source close to DNeX.

TSMC or Taiwan Semiconductor Manufacturing Company is the world’s largest semiconductor foundry and supplies some of the biggest global tech companies.

Green Packet’s plans are similar but with an added twist. Aside from bringing in new large customers to nudge Silterra to profitability by 2021, the acquisition is also seen as the foundation of a broader plan of nurturing a homegrown semiconductor hub at Kulim.

Dubbing it the Asia semiconductor hub, the site is being planned in Kulim, not far from where Silterra’s operations are in the Kulim High-Tech Park.

CC Puan, the founder and group MD while declining to comment specifically on his company’s bid for Silterra, says there is a huge opportunity Malaysia in the semiconductor space due to a confluence of factors.

“The idea is to propel Malaysia’s E&E (electrical and electronics) sector. A number of countries are seeking new production bases. The US-China trade barriers are nudging Taiwan to relocate some operations overseas. South Korea requires larger capacity to hits its goal of becoming a semiconductor leader by 2035, while Covid-19 has impacted the capacity of China’s “Made In China 2025 Blueprint” meaning that local capacity cannot meet demand there”.

Puan enthuses that with Malaysia’s current E&E industry, coupled with good infrastructure, talent and the government’s push for technology, the country stands a good chance to making a success of such a technology hub.

“Best of all, this will be a privately funded initiative, ” he adds, estimating that the project could attract up to RM50bil in funding from investors and tenants and has the potential to create 500,000 new jobs from 2020 to 2050.

The idea is to create an end-to-end semiconductor ecosystem.

“We think this hub can help facilitate strategic partnerships between local companies and established overseas semiconductor players from China, Taiwan, Japan and South Korea, ” adds Puan.

From all that, the benefits of divesting Silterra to local players becomes more clear.

It remains a question mark as to what Foxconn intends to do with Silterra. While Taiwan is known for its wafer fabrication firms such as TSMC and UMC, Foxconn is a big company in its own right but not a chip manufacturer.

Foxconn is described as the world’s biggest maker of electronic components. Primarily an original equipment manufacturer, its clients include some of the world’s best known electronics and information technology companies, and products manufactured at its plants include iPads, iPhones, iPods for Apple, Kindles for Amazon, PlayStations for Sony and Xboxes for Microsoft.

The question is, does Foxconn have an ambition to get into chip manufacturing or is it being backed by another party in its bid? And should it be favoured over the local bidders simply because of its higher price being offered?

National interests should be a crucial factor in making the decision in the disposal of Silterra, opines Datuk Seri Syed Zainal Abidin Syed Mohd Tahir, an independent director of DNeX.

“This is probably the only chance for a Malaysia firm to get into the wafer fabrication space, which was the original intent of the government in setting up Silterra in the first place.

“True, a lot of government money has been sunk. But the cost of setting up such a plant along with the execution risks of getting it up and running, will be too daunting for any Malaysian company or entrepreneur to embark on. So why not favour home grown companies in the disposal even if there is a price difference. After all the potential multiplier effect will be much bigger to the country in the longer run, ” he tells StarBizWeek.

Syed Zainal was a former MD of Petronas Dagangan and held top management roles at Perodua and Proton Holdings.

It is unclear what Khazanah’s next move will be in its sale of Silterra. One possibility is that it may go back to the local bidders and suggest they propose a higher price in their bids, following the new ‘valuation’ of Silterra set by Foxconn. Or it could be that a new tender process is called stipulating clearly guidelines as to whether foreign parties can own majority stakes or even wholly own Silterra.

Whatever the case, it is likely that any new sale process could attract even more bidders for Silterra, considering that a race is ongoing now globally to build out more wafer fabrication capacity.

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