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August, 2018

Beijing blocks Qualcomm-NXP deal

Original article: CNN

The Chinese government has blocked a deal that would have seen the U.S.'s Qualcomm purchase Dutch semiconductor maker NXP for $44 billion. Eight other jurisdictions had approved the deal, including South Korea and the United States. Qualcomm is the world's largest chipmaker. 


China's Ministry of Commerce denied a link between Beijing's rejection of the deal and the Sino-U.S. trade dispute. "This case is about the enforcement of antitrust laws. It has nothing to do with China-US trade," the ministry's spokesman Gao Feng was quoted as saying by state media.

Analysis:

Global media reports have been quick to link the abortive Qualcomm-NXP deal to Sino-U.S. trade tensions. In a July 18 report, Bloomberg said "that the deal is now entirely subject to the whims of Chinese authorities as they consider ways to respond to Donald Trump’s trade attacks. This is no longer just about antitrust consideration." 


As The Globe and Mail notes in a July report, most heavyweight chipmakers have a presence in China that would require Chinese regulators to greenlight any acquisition. This was the case with Netherlands-based NXP. 


Gordon Chang, author of the 2001 book The Coming Collapse of China (for the record, it's still standing), wrote in a July National Interest op-ed that Beijing had "escalated the trade war" by killing the deal. With that in mind, "America has no choice but fight Beijing to the end," Chang wrote. 


We have to politely disagree. To be sure, by rejecting the deal, Beijing signaled its displeasure with Trump's tariffs and the U.S.'s rejection of attempted Chinese acquisitions of American tech firms. With Sino-U.S. trade tensions running high, it would have been politically impossible for Chinese President Xi Jinping to approve the Qualcomm-NXP deal. 


But the rejection of the Qualcomm-NXP deal is not an escalation of the trade conflict. Beijing hasn't sanctioned Qualcomm or fined it (this time). Rather, China blocked an important deal for the company, much as Washington vetoed Broadcom's attempted $117 billion takeover of Qualcomm in March. Both Qualcomm CEO Steven Mollenkopf - who requested government intervention - and the Trump administration were concerned about Singapore-based Broadcom's ties to China. 


Further, China has long been wary of Qualcomm's dominance of semiconductor patents. Smartphone makers pay Qualcomm royalties to license its chip technology. In 2015, Beijing fined the San Diego-based chipmaker $975 million for violating the country's anti-monopoly laws. With its increasing focus on the China market, Qualcomm gladly paid the fine. At the time, China accounted for 50% of Qualcomm's annual revenue; that figure is now 2/3. 


In a March report, The Economist points out that Chinese law requires regulators to support “the healthy development of the socialist market economy." If regulators believe that a deal runs counter to that objective, they can nix it. They don't have to make a convincing case that the deal is anti-competitive. 


Meanwhile, China's State Administration for Market Regulation (SAMR) said in a July statement that it still hoped to resolve anti-trust concerns around the Qualcomm-NXP deal. The deal was rejected because Qualcomm's proposals were inadequate, the SAMR said. 


It would behoove Qualcomm to reevaluate its dependence on the China market at this point. The trade dispute aside, China is determined to build its own semiconductor champions. Market insiders say that the initiative leaves little room for foreign participation. The near death of Chinese smartphone maker ZTE at Washington's hands has only hardened Beijing's resolve to reduce its dependence on U.S. semiconductors. 

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