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11 April 2019
Against the backdrop of trade friction between China and the United States, the refusal of the Chinese antitrust authority to green light the Qualcomm/NXP merger garnered significant attention and shone a spotlight on China's merger review practice, particularly with regard to the chip industry. This article does not comment on the potential political implications of or industry concerns surrounding this event, but rather provides an overview of Chinese merger control by examining the major chip industry mergers that the former Ministry of Commerce (MOFCOM) and the current State Administration for Market Regulation (SAMR) have approved with remedies to date.
Chips (generally referred to as the carriers of integrated circuits) belong to the semiconductor industry and are the finished product once an integrated circuit has been designed, manufactured, sealed, packaged and tested. In practice, the terms 'chip' and 'integrated circuit' are used interchangeably.
In 2009 integrated circuits surpassed petroleum as China's largest imported commodity. From 2009 to 2016, China's deficit in integrated circuits was valued at $1 trillion. In 2015 China's integrated circuit self-sufficiency rate was approximately 27%. As the integrated circuit industry is a basic, key and strategic industry for the national economy, it has been widely promoted by the government.
The integrated circuit industry is characterised by frequent mergers and acquisitions. As such, major mergers and acquisitions must often be notified to the competition authorities of the relevant countries before closing. Among the 37 Chinese cases that have been approved with remedies to date, the following cases involved the chip industry:
Based on the decisions of China's antitrust authorities in the above cases, the country's merger control practice in the chip industry can be characterised as follows.
Relatively long review period due to withdrawals and refilings
The review periods for the above cases, which were conditionally approved by China's competition authorities, were as follows:
Apart from Broadcom's acquisition of Brocade, all of the above cases involved withdrawal and refiling procedures. According to the published decision in the NXP/Freescale case, NXP – during the early stages of the acquisition – submitted to MOFCOM its proposed remedy plan for divesting NXP's radio frequency power transistor business, which may account for the relatively short merger review time compared with the other cases.
Soliciting opinions from relevant stakeholders in various ways
The SAMR (and previously MOFCOM) usually solicits opinions on transactions from:
The same applies to transactions in the chip industry. In the case of NXP's acquisition of Freescale, MOFCOM solicited opinions from industry experts in addition to the above stakeholders by:
Notably, the competition authorities place more weight on the opinions of competent government authorities and trade associations. As regards the chip industry, the primary government authorities are:
The China Semiconductor Industry Association is one of the major industry associations.
Focus of competitive analysis
In the abovementioned cases, when assessing the horizontal overlap between the merging parties, the competent competition authority considered whether:
For example, in the ASE/Silicon Precision deal, MOFCOM ascertained from a questionnaire and discussions with customers that the latter usually regarded ASE, Silicon Products, Amkor Technology and Changjiang Electronics Tec as the preferred suppliers of sealing and testing services, as there was a close substitution relationship between these suppliers. In addition, ASE and Silicon Precision were seen as the main sealing and testing service providers. Therefore, MOFCOM believed that this transaction would further reduce customer choice.
Further, MOFCOM compared the two parties' profit margins for different packaging technology types and regions in 2016. It held that after ASE comprehensively assessed the profit margins of the different products, it was likely to adjust its pricing strategies (ie, increase relatively low profit margins), thereby harming customers' interests.
In the NXP/Freescale case, MOFCOM considered that the two parties had:
Further, the two parties competed in the field of technology research and development. The transaction was therefore likely to eliminate competition between the two parties and reduce the driving forces behind their such research and development. There was also a chance that it would adversely affect R&D speed and innovation in the relevant markets.
In addition to competition concerns in horizontal mergers, in the KLA-Tencor/Orbotech deal, the SAMR was mainly concerned that the vertical relationships between the parties could lead to:
Economic analysis considerations
In some relatively complex cases, both the notification party and the competent competition authority have engaged economic experts to conduct a specialised economic analysis of the transaction. MOFCOM repeatedly referred to economic analysis in its decision regarding the ASE/Silicon Precision deal. For example, in its analysis of the close competitor relationship between ASE and silicon products, MOFCOM stated that:
Economic analysis shows that ASE and silicon products are close to Chinese customers' profit margins. The correlation index of profit margins in China is 0.72 (1 is exactly the same), and there is a strong correlation between the two sides' profit margins over time, indicating that they are close competitors in the Chinese market.
Structural and behavioural remedies
The abovementioned cases, which were conditionally approved, involved both structural and behavioural remedies. The remedies in the MediaTek/MStar and ASE/Silicon Precision cases were relatively similar and included:
NXP's acquisition of Freescale involved only structural divestiture, while the Broadcom/Brocade and KLA-Tencor/Orbotech deals involved only behavioural remedies, including:
An assessment of China's previous merger control practice shows that the authorities are paying increased attention to the chip industry and being more rigorous and cautious in their reviews. Thus, companies which are preparing a merger filing in China should bear this in mind. Antitrust lawyers should be involved in the early stages of transaction negotiation so that favourable terms which take into account the various antitrust risks can be considered.
For further information on this topic please contact Hao Zhan, Ying Song or Stephanie Wu Yuanyuan at AnJie Law Firm by telephone (+86 10 8567 5988) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The AnJie Law Firm website can be accessed at www.anjielaw.com.
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