The domestic AC/DC leader Angbao may become a US company after being acquired

Onbao Electronics, a leading Chinese power semiconductor company, has encountered its biggest crisis since its establishment 15 years ago. On August 8, 2019, Diodes, an American semiconductor company, announced that it would acquire the Taiwanese semiconductor company Dyna Semiconductor for US$428 million.

According to the announcement of Diodes, the focus of this transaction is Onbao Electronics, which is controlled by Dunan. According to the financial report, Onbao Electronics contributed 39.5% of Dunan's revenue and 54.8% of its net profit in 2018. Diodes believes that the acquisition of Onbao can bring excellent investment returns.

Ontech was established in the Shanghai Free Trade Zone in 2004, and was listed on the Taiwan Stock Exchange in 2011. Currently, Dunan Technology holds a 31.19% stake. Since its establishment, Ontech has been a key domestically supported enterprise, and has repeatedly received support from the government and industry. Today, Ontech has become a leading company in China's AC/DC chips, supplying the top ten smartphone manufacturers in China. Its AC/DC accounts for more than 50% of the smartphone market, and it has a very high market share in the network communications, TV, home appliances, and laptop markets.

Now, this leading enterprise that has received strong support from the Chinese government and industry is about to be acquired by the United States. Several Onbo customers analyzed to Jiwei.com: "This acquisition will have a great impact on China's consumer electronics industry, and once Onbo becomes an American company, China will have another layer of supply chain risk."

Leading enterprises supported by key sectors

Although it is a Taiwanese-controlled enterprise, Angbao has always positioned itself as a "local IC design company that is key supported by the Chinese government" in its financial reports. For example, Angbao has been rated as one of the "top ten in sales" and "top ten in economic efficiency" integrated circuit design companies by the Shanghai Municipal Government many times. It has been selected as an "integrated circuit design enterprise within the national planning layout" by the National Development and Reform Commission and Shanghai for many consecutive years; it has been rated as a "high-paying technology enterprise" by the Ministry of Science and Technology, Shanghai Science and Technology Commission, and Guangzhou City, and enjoys corporate tax incentives; it has won the "Science and Technology Innovation Fund" from Guangzhou City and was selected as a "Guangdong Province Innovation Pilot Enterprise". In 2018, Angbao's revenue reached 1.05 billion yuan, ranking first among power semiconductor design companies in the country, with sales accounting for 13.3%.

In 2018, Onpo produced 2.055 billion AC/DC chips, of which 1.921 billion were shipped to the Chinese mainland market. Many industry insiders said: "At present, in domestic mobile phone chargers, foreign AC/DCs are almost invisible, and all are Onpo products." According to Onpo's financial report information, Onpo accounts for 51.27% of the Chinese smartphone market.

At the same time, the smartphone market of Onbo is growing by 30% every year, but other international suppliers are basically shrinking in the domestic market. In 2018, PI, the world's largest AC/DC company, shrank by 20% in the Chinese smartphone market.

In recent years, with the rise of Chinese consumer electronics brands, Onbo's revenue has increased by 100 million yuan every year. In addition to its absolute share in smartphones, Onbo currently accounts for nearly 90% of the network communication field. In the domestic TV, home appliances, and computer adapter fields, Onbo's market share also ranks in the top two.

According to the current market trend, Onbo will soon be able to achieve full domestic substitution in these areas. It is for this reason that Onbo has become the focus of this acquisition. After integrating Onbo with the opportunity of acquiring Dunan, Diodes will be able to supplement its AC/DC product line and significantly improve its competitiveness in the Chinese consumer electronics market.

But for China, once Angbao is acquired, the high-quality enterprise cultivated by the Chinese government and industry over the past decade will be directly transformed into an American company, which will not only hinder the process of domestic substitution, but in extreme cases will also bring serious supply chain security risks to domestic mobile phone, communications and other industries.

Foreign capital impact on high-quality assets

This is not the first time that China's high-quality chip companies have faced foreign acquisition.

About 10 years ago, Chengdu Chengxin and Wuhan Xinxin faced acquisitions by Texas Instruments and Micron Technology. In the end, Texas Instruments acquired Chengxin, but the Wuhan government kept Xinxin, which also left a certain industrial foundation for building a "storage base" today.

In fact, whether it is investment, joint ventures, or mergers and acquisitions, they are all means for international companies to promote industrial competition and cooperation by relying on their strong capital strength. China's industrial economy has indeed benefited from opening up and cooperation, but there are also a number of well-known private enterprises that have gradually disappeared under the impact of capital.

For example, the once glorious domestic cosmetics brands such as Little Nurse and Dabao were gradually withdrawn from the market due to foreign mergers and acquisitions; the once famous Jianlibao was completely destroyed by foreign mergers and acquisitions; Yongzhong Office, which once challenged Microsoft in China, also gradually became unknown in the mergers and acquisitions controlled by foreign capital.

In fact, such cases are common in the domestic daily chemical, food, camera and other industries. In foreign mergers and acquisitions, what is valued is the market and channels of Chinese companies, rather than brands and products. It is precisely because of this that domestic brands quickly decline after mergers and acquisitions. Although some brands have been repurchased by the domestic government, industry and capital after several years of twists and turns, they have missed the best development opportunities.

Faced with mature capital routines, China's high-quality assets in the growth stage are almost powerless to resist.

Today, integrated circuits have become a national strategic core industry. Due to the huge technological gap, foreign leading companies have restricted the development of domestic companies mainly through technology blockades, bundled sales, price suppression, supply restrictions, etc. However, with the rise of domestic industries, future capital operations will surely emerge in an endless stream.

Preventing future M&A shocks in advance is crucial to the development of China's integrated circuit industry.

China's security review

In contrast, the CFIUS review established by the United States in 1975 is worth learning from. For foreign investment in specific industries, technologies and sectors involving national security, CFIUS has extremely broad security review rights and a veto power. According to Pillsbury statistics, from January to August 2018, Chinese capital submitted 37 mergers and acquisitions to CFIUS, and 18 were rejected.

In August 2018, the U.S. Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA), further expanding the scope of foreign investment subject to CFIUS review. Currently, the scope of CFIUS review has been expanded to 27 industry categories, including aircraft, alumina, computers, aviation, military, semiconductors, biology, batteries, etc. Different from the previous voluntary declaration, foreign mergers and acquisitions in these 27 industry categories are required to be reported to CFIUS. It is expected that FIRRMA will be fully implemented in March 2020.

In September 2011, the Ministry of Commerce issued and implemented the "Regulations on the Security Review System for Foreign Investors' Mergers and Acquisitions of Domestic Enterprises" (hereinafter referred to as the "Regulations"). According to the regulations, the scope of foreign investment mergers and acquisitions review includes "foreign investors acquire key technologies related to national security in China, and the actual control is obtained by foreign investors." In addition, according to the "Notice on Issuing the Trial Measures for the National Security Review of Foreign Investment in Pilot Free Trade Zones" issued in 2015, "foreign investors invest, jointly invest, acquire important information technology and services related to national security in the free trade zone, and obtain actual control of the invested enterprises" should be subject to security review.

According to the above regulations, the merger between Diodes and Dunan requires a security review.

However, it should be pointed out that although the Regulations have been implemented since 2011, so far, the NDRC has only conducted a foreign investment security review on Yonghui Supermarket's acquisition of Zhongbai Group in August 2019. This is the only case of a foreign investment merger and acquisition security review initiated by the competent authority that can be publicly checked.

In March 2019, the Second Session of the 13th National People's Congress passed the "Foreign Investment Law of the People's Republic of China". Foreign investment and merger security review will become an important part of future foreign investment and merger transactions. Moreover, for the future development of China's integrated circuit industry, foreign investment and merger security review will also provide important guarantees for industrial development.