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NVIDIA Corporation's (NASDAQ:NVDA) $40 billion decision to acquire Britsh chip design house Arm Ltd. has created shockwaves in the tech industry and opened a pandora's box worth of questions related to the deal's successful execution. The bulk of these questions concern themselves with the reaction of regulatory authorities all around the world, and particularly of those present in China; a country that is currently at the receiving end of American export control sanctions.
To this end, China's Jiemian News sat down with Ji Ma, a senior lecturer at the Peking University School of International Law and a Yale Law School affiliated fellow known for his anti-monopoly expertise and Lin Xiao, member of the "China Core" review expert group and a senior researcher at the Institute of Automation, Chinese Academy of Sciences, to learn about their opinion about the entire deal and whether regulatory authorities in China will give the acquisition the go-ahead.
NVIDIA's Arm Acquisition Dependant On Political Factors With Deal Falling Under China's Anti Monopoly Law Believe Industry Watchers
NVIDIA's deal with Arm will vastly expand the scope of the graphics processing unit (GPU) designer's scope of operations through providing it with a much-needed entry into the central processing unit (CPU) arena. This entry should initially concern itself with the data center market where NVIDIA is currently limited to providing GPUs only since it does not have a license to design CPUs on the x86 microarchitecture developed by Intel Corporation.
Yet, before it can start a new chapter in its history, the company's latest acquisition is subject to regulatory approval from multiple countries in the world. In its interview, Jieman focused on this aspect as it asked both Ma and Lin about their opinions about the deal clearing regulatory approval.
Jiemian: The statement stated that the transaction will follow the "customary closing conditions" of M&A transactions, including submission to relevant agencies in the UK, China, the EU and the US for approval. Nvidia and ARM are not Chinese companies. Why do they need approval from Chinese regulators?
Ma: According to the Ministry of Commerce’s "Guiding Opinions on the Declaration of Concentration of Undertakings", as long as the aggregate annual turnover of undertakings in the world exceeds RMB 10 billion, and the turnover of at least two undertakings in China exceeds RMB 400 million in the previous year Renminbi, then it should be reported to the Ministry of Commerce of China for anti-monopoly review. Among them, 'acquisition' is a typical model of concentration of operators, while the global revenue and scale of business in China of NVIDIA and ARM far exceed the reporting standards and are automatically included in supervision. Therefore, it must pass the review of the Chinese anti-monopoly agency.
In addition, China’s “Anti-Monopoly Law” clearly stipulates that the “Anti-Monopoly Law” shall apply to cases where monopolistic activities outside the People’s Republic of China have an effect on the elimination or restriction of domestic market competition. Although this transaction between Nvidia and ARM is an overseas merger and acquisition, this transaction may have exclusion and restrictions on the Chinese domestic market. For example, this transaction may adversely affect competition in the domestic chip market.
Jiemian: From what perspectives will Chinese regulators consider whether to approve this transaction?
Ma: Chinese regulatory agencies should strictly follow the provisions of the Anti-Monopoly Law, treat all kinds of domestic and foreign enterprises fairly and fairly, and ensure that all kinds of market players participate in competition fairly. In response to this transaction, Chinese regulators should conduct an antitrust review of operator concentration, taking into account the market share of Nvidia and ARM in the relevant market and their control over the market, the market concentration of the relevant market, and the impact of this transaction on market entry and technological progress. Impact, the impact of this transaction on consumers and other relevant operators, the impact on the development of the national economy, etc.
Nvidia can submit additional restrictive conditions to the Ministry of Commerce to pass the approval of the Chinese regulatory agency. The Ministry of Commerce can negotiate with Nvidia on how to eliminate the adverse effects of the transaction on market competition, including a market assessment of the additional restrictive conditions that Nvidia may submit to determine whether the program can effectively reduce the exclusion and restriction of market competition caused by concentration Competitive influence.
Jiemian: How likely is China's regulatory approval?
Ma: In the current environment, the possibility of approval in the short term is very small. (Emphasis added) However, the transaction may last for 18 months. After 18 months, especially if Trump is elected to step down, the rules may change. I think that by then, China and the United States may usher in opportunities for cooperation in various fields such as climate change. It can be compared to Qualcomm's acquisition of NXP a year ago.
Lin Xiao: I think that since this transaction has progressed to this level it is unlikely that it will be unsuccessful. [Author's note: There are two variants of the preceeding sentence. The first, which appears in the original Chinese text seperates the dependent and independent clauses through a comma and a space and results in the translatory output: "I think that since this transaction has progressed to this level, it is unlikely to be successful." Given the logical nature of the sentence, the second variant without a comma has been used.] I think this is actually a relatively normal business practice, and there is no need to inject too many political factors. What we worry about and worry about is actually not directly related to mergers and acquisitions. In other words, even if we prevent the merger, what should happen will happen.
In other words, although ARM is a British company and was acquired by Japan, Apple is actually a major shareholder of ARM. In other words, whether it is a British company or a Japanese company, its major shareholder is already American. If China exercises its veto power in this regard, I think it would be unreasonable, or it would not play a big role.
Jiemian: If China does not approve, can NVIDIA ignore China’s opposition to forcibly promote mergers and acquisitions?
Ma: NVIDIA can choose to ignore it, but the consequences are quite serious. The Anti-Monopoly Law clearly stipulates that the Anti-Monopoly Law Enforcement Agency of the State Council will order the suspension of the concentration, dispose of shares or assets within a time limit, transfer business within a time limit, and take other necessary measures to restore the state before the concentration, and may impose a fine of less than 500,000 yuan.
Competition With Domestic Chinese Companies Likely To Be Key Concern In Regulatory Evaluation
Their opinions clearly show that the chip industry expects the deal's outcome to be affected by political considerations. Even though Li cautions about assigning excessive political influence to the deal analysts all over the globe are eagerly waiting for the year to end before providing solid opinions about the future of the tech industry.
NVIDIA choosing to ignore regulatory disapprovals in China is unlikely as well as it will end up risking the company's access to one of the world's biggest markets for exactly the type of products that Arm's designs cover. NVIDIA foresees a roughly $250 billion total addressable market through the deal by 2023; more than one-third of which will consist of smartphones. Therefore, regulatory approval in China is crucial for NVIDIA's long-term financial targets, and therefore the company is unlikely to play hardball with Chinese authorities when it comes to approval.
Key Chinese concerns when evaluating the acquisition will revolve around potential ramifications for Chinese firms in the future should the U.S. continue its sanctions similar to those that the country has employed against Huawei. This evaluation will, as Ma also highlights, also concern itself with potential anti-competitive effects on domestic Chinese firms. Whether these concerns surround the sale of CPUs for servers is a crucial question – one that is undoubtedly on NVIDIA's mind as well.
After American sanctions that stopped Intel Corporation from selling its high-end Xeon CPUs to China, the country's native industry went into overdrive to negate the effects of the ban. While chips for supercomputers are generally developed by a combination of state institutions and private enterprises in China, those for data centers are often found exclusively in the private domain. Huawei too has its fingers in the datacenter pie, through 7nm server processors and the current sanctions against the company will potentially open up its market share for NVIDIA + Arm to target. Therefore, regulatory authorities will take it upon themselves to see if server products developed by firms that will compete with NVIDIA in the future are at risk from anti-competitive behavior, and factor their conclusions in the decision to either grant or withhold final approval for the acquisition.