Could Global Trade Frictions Stifle Chip Industry “M&A Fever?”November 14, 2020 by Luke James
Although 2020 has been one of the biggest years for mergers and acquisitions in the chip industry, global trade conflicts could slow deals from being finalized.
2020 has been a blockbuster year for chip industry mergers and acquisitions (M&As), with several billions of dollars’ worth of deals announced in the last couple of months alone. If all of this year’s deals are to go through and finalize, 2020 will end up being the largest year on record for the total value of semi industry M&As.
Given the current trade relationship between the United States and China, however, some commentators believe that some of the largest of this year’s deals may not go ahead if state regulators stand in their way.
Past US-Chinese Semiconductor Relations
Trade sanctions placed on China by the United States have been a setback to the country’s goal of becoming self-sufficient in semiconductor manufacturing within the next decade.
China currently produces only around 16 percent of the chips that it needs for its domestic tech sector and wants to up this to 70 percent by 2025. Analysts aren’t sure China will be able to achieve this goal if the United States continues to restrict sales of important chip manufacturing technologies and equipment to China.
By 2025, China aims to supply 70 percent of its chip demand. Image used courtesy of the BBC
Last year, the U.S. imposed restrictions on trade between U.S. companies and Chinese telecoms giant Huawei. The restrictions mean that U.S. companies wishing to do business with Huawei must now obtain an export license from the U.S. Department of Commerce.
In September of this year, the U.S. also placed restrictions on dealings with Semiconductor Manufacturing International Corp., or SMIC, China’s largest and partially state-owned semiconductor foundry, determining that equipment supplied to SMIC could potentially be used for military purposes. This is significant because SMIC—despite it being three-to-five years behind peers like Samsung Electronics and TSMC, according to analysts—is a major player in China’s efforts to grow its domestic semi industry.
Potential Regulatory Challenges
Both US and Chinese regulatory bodies could slow down ongoing and future trade deals and acquisitions, such as the $40bn Nvidia-Arm, which could face scrutiny from China’s State Administration for Market Regulation (SAMR) and China’s Ministry of Commerce (MOFCOM).
Some analysts believe China may block the sale of SoftBank-owned firm Arm to Nvidia. If this were to happen, it wouldn’t be the first time that Beijing has blocked a major deal. In 2018, SAMR blocked Qualcomm’s (a U.S. company) attempt to buy Dutch chipmaker NXP. Of course, even if China blocks the deal, it could still go ahead sans Arm business operations in China.
“The tense relations between the US and China, and their high degree of economic interdependence, create an operating environment that companies are finding increasingly challenging,” says Jon Shames, EY Global Geostrategic Business Group Leader. He went on to add that tariffs and increasing scrutiny of cross-border deals are impacting M&A timelines.
Image used courtesy of Dave Cutler and Investor's Business Daily
If firms believe that their deals could be thrown off course and/or outright rejected by regulators, it’s not unreasonable to assume that they’ll quite rightly be put off M&A activities and consolidation efforts that are crucial for the ongoing growth of and innovation in the semi industry.
The trade frictions also affect semiconductor stocks, which is bad news for an industry that often sees deals backed by shares. In the U.S., trade restrictions on dealings with Huawei and other Chinese firms have harmed sales for semiconductor stocks like Xilinx and Micron Technology.
Analysts at Investor's Business Daily have also pointed out how September’s SMIC trade restrictions have been found to hurt major semiconductor equipment suppliers like Applied Materials and ASML.
A Different Negotiating Situation
Huawei is also developing plans to build its own dedicated chip plant in Shanghai to work around U.S. sanctions. The plant could help Huawei survive and prosper in the long-term and would not use any American technology. It would be operated by Shanghai IC R&D Center, a chip research company backed by the Shanghai Municipal government.
Huawei's new plant would, in part, aim to supply 5G equipment. Image used courtesy of Getty Images and the BBC
The new plant, which could be a potential new source of semiconductors after Huawei’s stocks of imported chips run out, will initially experiment with making 15-year-old 45nm chips but aims to produce 20nm chips by 2022. These latter chips could be used in 5G telecoms equipment.