(FROM THE WALL STREET JOURNAL 4/16/15)
By Eva Dou
BEIJING -- Two years ago, Zhao Weiguo was running an obscure Chinese state-owned company peddling technology services, natural gas and Chinese herbal medicines.
Today that company, Tsinghua Unigroup Ltd., is China's microchip national champion -- and a beacon for how Western technology companies might get to do business in China in the future.
Tsinghua Unigroup is in talks to buy a controlling stake in Hewlett-Packard Co.'s China data-networking operations, said Mr. Zhao, the company's chairman, in an interview 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, natural gas and real estate in the northwestern desert region of Xinjiang, said his company isn't an arm of the government 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, using a term for a front. "But we're really just a very market-oriented company."
Foreign technology companies increasingly are becoming partners with Chinese companies to reach consumers as sales slump amid increasing pressures from Beijing. Chinese leaders are worried about cybersecurity as well as a dependence on foreign gear, after revelations in 2013 that the U.S. government used infrastructure belonging to American companies for spying.
Some of Silicon Valley's largest companies 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 provide cloud-computing services for telecommunications 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, 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 technology 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 U.S. companies 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 companies, Spreadtrum Communications and RDA Microelectronics, in 2013. Intel executives said last year that they believe the Spreadtrum partnership is opening doors for the company in the low-cost smartphone market, a sector that Intel has its eye on.
Spreadtrum, Tsinghua Unigroup's largest chip subsidiary, makes 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 significant global competitor. 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 any time soon," she said.
Mr. Zhao said he believes that by following the lead of Chinese companies such as Huawei and investing over the long term, he can build a world-class company.
Little is known about Tsinghua Unigroup outside of China. The company 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. 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 said in February it would invest 10 billion yuan ($1.6 billion) in Tsinghua Unigroup during the next five years.
H-P inherited H3C, a 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 3Com and Huawei, but recently has faced uncertainty under H-P ownership because of Beijing's push for state-owned companies 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 would reach $1.8 billion this year, up from $1.5 billion last year -- still a small slice of the $340 billion world-wide chip market, according to research firm Gartner Inc.'s estimate for 2014.
Mr. Zhao, 48 years old, 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 into the country's chip industry last year. Instead, he said, it was a combination of his personal interest in technology -- he is 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.
Rick Carew contributed to this article.
Access Investor Kit for Hewlett-Packard Co.