May, 2018

Qualcomm's bid for NXP Semiconductors hits regulatory roadblock in China

Original article: Ming Pao

Qualcomm's $44 billion bid for Holland's NXP Semiconductors has hit a regulatory roadblock in China, where the US chipmaker has been previously embroiled in patent disputes. China's Ministry of Commerce must green light the deal for it to proceed. Qualcomm is a key supplier of microchips to Chinese electronics makers. Should Qualcomm take ownership of NXP, the US firm's patent licensing authority could grow. By acquiring NXP, Qualcomm hopes to reduce its reliance on smartphones and transition into emerging sectors like smart vehicles and artificial intelligence. 


Many media reports have framed Qualcomm's stalled bid for NXP in the context of the Sino-U.S. trade dispute. The prevailing argument of those reports holds that China is retaliating for a crackdown on Chinese investment in the U.S., which has most recently included a ban on the sale of telecoms equipment to China's ZTE and a rejection of Singapore-based Broadcom's $140 billion bid for Qualcomm. Broadcom has closes to China. 

For Beijing, Washington's newfound toughness on trade and investment comes as a surprise after years of U.S. China policy that prioritized the economic relationship, not withstanding the rare Dalai Llama cameo at the White House. Beijing could be forgiven for assuming the good times would keep rolling. After all, burgeoning two-way trade and investment have long buoyed the bottom lines of America's largest firms and the consultants who supported their forays into the Middle Kingdom, and later, the entry of Chinese corporate titans into U.S. markets. Until recently, it seemed improbable that the U.S. would want to derail the gravy train.

Of course, that was before U.S. multinationals realized how many of their trade secrets had ended up in the hands of Chinese competitors. And it was before Beijing announced it would subsidize Made In China 2025, a massive push to become the world's foremost technology power. With that in mind, if Washington is now reducing access of Chinese firms to its markets, Beijing is likely to do the same. Qualcomm is an easy target: It depends on China for 2/3 of its $22 billion annual revenue. 

But that's not the whole story. As The Financial Times points out in an April report, Qualcomm has a colorful history in China unrelated to Donald Trump, tariffs or IP theft. In 2015, Chinese regulators slapped a record $975 million fine on the San Diego-based chipmaker, alleging that it overcharged Chinese firms for patents. Beijing alleged that Qualcomm bundled less important patents together with essential ones, requiring Chinese customers to buy the entire package if they wanted the essential patents. Fining Qualcomm wasn't a hasty move by the central government either: It followed extensive lobbying by Chinese industry groups. 

Qualcomm agreed to pay the fine and to charge local customers less for patents. Since then, Qualcomm's fortunes have become even more closely tied to China. "In 2017, China became the major growth driver for Qualcomm," says Roger Sheng, a Shanghai-based semiconductor analyst for research firm Gartner. He points out that Chinese smartphone makers Oppo, Vivo and Xiaomi are now nearly as important to Qualcomm's business as Samsung and Apple. Looking ahead, Qualcomm can expand its business in China by cooperating with local contract electronics manufacturers and even the Chinese government - in the server-process segment, Sheng says. 

The NXP deal, meanwhile, is integral to Qualcomm's bid to diversify into automotive semiconductors, an area where NXP is strong, says Jane Yeh, a senior industry analyst at the Taipei-based Market Intelligence & Consulting Institute (MIC). "Qualcomm and NXP Semiconductor can create synergies in semiconductors, sensors, and power management units for vehicles," she says. "After the merger, Qualcomm will likely to be more competitive in emerging applications such as IoV (Internet of Vehicles)." 

It's possible Beijing will block the deal outright, but we don't expect that to happen just yet - not when the US and China are still looking for ways to avoid a full-throated trade war. At the same time, vetoing the deal would raise eyebrows about the Chinese leadership's stated intent to further open China's markets to foreign companies. Slamming the door on Qualcomm's NXP bid is probably not the best way to attract additional top-tier FDI.

What's more likely is that China will first push Qualcomm to make concessions, addressing the concerns of local companies. It has already permitted Qualcomm to refile its application for approval, giving the company until July to get the green light. If Washington and Beijing manage to dial down trade tensions before then, the deal could well be approved.