Introduction

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.

Chip industry

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:

  • MediaTek's acquisition of MStar, which was approved in 2013;
  • NXP's acquisition of Freescale, which was approved in 2015;
  • Broadcom's acquisition of Brocade, which was approved in 2017;
  • Advanced Semiconductor Engineering's (ASE's) acquisition of Silicon Precision, which was approved in 2017; and
  • KLA-Tencor's acquisition of Orbotech, which was approved in February 2019.

Defining features of merger review practice

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:

  • MediaTek/MStar – approximately 13 months;
  • NXP/Freescale – approximately seven-and-a-half months;
  • ASE/Silicon Precision – approximately 15 months;
  • Broadcom/ Brocade – approximately seven months; and
  • KLA-Tencor/Orbotech – approximately nine-and-a-half months.

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:

  • competent government industry authorities;
  • industry associations;
  • key competitors; and
  • downstream customers.

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:

  • issuing questionnaires;
  • holding symposiums; and
  • conducting on-the-spot investigations.

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 Ministry of Industry and Information Technology Electronic Information Department (integrated circuit division); and
  • the High-Tech Industry Department of the National Development and Reform Commission.

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:

  • the concentration would reduce customer choice;
  • the enterprises were likely to increase their prices following the concentration; and
  • the transaction would affect technology development and innovation.

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:

  • leading positions in the radio frequency power transistor market; and
  • technological advantages that other competitors in the market did not have.

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:

  • vertical foreclosures;
  • tying practices; and
  • the exchange of commercially sensitive information.

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:

  • hold-separate orders;
  • the exercise of limited shareholder rights; and
  • the imposition of some behavioural conditions for customers and cooperation.

NXP's acquisition of Freescale involved only structural divestiture, while the Broadcom/Brocade and KLA-Tencor/Orbotech deals involved only behavioural remedies, including:

  • maintaining interoperability;
  • refraining from tying or bundling sales; and
  • ensuring fair, reasonable and non-discriminatory practices.

Comment

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 ([email protected], [email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.

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