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30 April 2020
China's merger review practice has not been negatively affected by the COVID-19 outbreak. The average review time is currently eight days shorter than the same period in 2019. According to public statistics, in the first quarter of 2020 the State Administration for Market Regulation (SAMR) completed 111 filing reviews, with a slight year-on-year growth of 0.9%.
The current economic downturn raises the question of whether the SAMR will relax its antitrust scrutiny to encourage M&A activity. However, recent merger review practice in China suggests that this has not been the case in the semiconductor sector.
On 8 and 16 April 2020, respectively, the SAMR released its reviews of the first (Infineon/Cypress) and second (Nvidia/Mellanox) cases this year in which it imposed remedies. Both cases related to the semiconductor sector.
Although it may be a coincidence, the SAMR's decisions suggest that:
The Infineon/Cypress deal was notified with the SAMR on 8 August 2019 and approved with remedies on 8 April 2020. The SAMR identified horizontal overlaps in four relevant markets: automotive microcontrollers (MCUs), industrial MCUs, consumer MCUs and power management chips. The neighbouring relationship in five pairs of relevant markets were also identified – namely:
In line with most semiconductor-related precedent, the relevant geographic market was defined as worldwide. Through its comprehensive competitive analysis, the SAMR concluded that this deal may lead to effects of eliminating or restricting competition in the automotive MCUs worldwide market, because of the neighbouring relationship between Cypress automotive MCUs and Infineon automotive IGBTs and between Infineon automotive MCUs and Cypress automotive NOR flesh memory.
Specifically, for the automotive IGBTs, Infineon's market share is 35% to 40% worldwide and 55% to 60% in China. For automotive NOR flesh memory, Cypress has a market share of 65% to 70% worldwide and 30% to 35% in China (ie, ranking number one). Under such market competition landscape, the SAMR elaborated its competition concerns from three perspectives.
First, the SAMR believed that the filing parties may conduct tying practice because of the above neighbouring relationship. When downstream customers refuse to accept the tying, the entity after the merger (the party) would be capable of forcing them to accept the tying by refusal to deal. Second, the SAMR was concerned that the party could develop the all-in-one product and sell automotive IGBTs, automotive NOR flesh memory and automotive MCUs separately. Third, the SAMR suspected that the party could also decrease the interoperability between its NOR flash memory products and third-party MCU products.
In the end, the SAMR accepted four behavioural remedies proposed by the filing parties and approved this deal. The following final remedies will automatically expire in five years.
First, the party is prohibited from tying sales of automotive IGBT and automotive MCUs or sales of automotive NOR flesh memory and automotive MCU in China, without justifiable reasons. Other unreasonable conditions must not be imposed on those sales and refusal to sell those products separately to Chinese customers is prohibited. Second, if the all-in-one product or solution is feasible from a technological perspective, the party should continue to offer Chinese customers a choice of purchasing automotive IGBTs, NOR flesh memory and MCUs separately. Third, the party should ensure that:
Fourth, the party should supply those products to Chinese customers on fair, reasonable and non-discriminatory (FRAND) principles.
The Nvidia/Mellanox deal was notified to the SAMR on 24 April 2019. The withdraw and refile was applied in February 2020 and the SAMR ultimately approved this deal with remedies on 16 April 2020. In this case, the SAMR identified a vertical relationship between a data centre server and a general ethernet adapter. A neighbouring relationship between two pairs of relevant markets was also identified – namely, between GPU accelerators and private network interconnection equipment and GPU accelerators and high-speed ethernet adaptors.
In line with most of semiconductor precedent handled by the SAMR and the Ministry of Commerce, the relevant geographic market was defined as worldwide. Through competitive analysis, the SAMR identified competition concerns in the abovementioned neighbouring markets, including GPU accelerators, private network interconnection equipment and high-speed ethernet adaptors both in China and worldwide.
Specifically, regarding the GPU accelerator market, Nvidia's market share is 90% to 95% worldwide and 95% to 100% in China. As regards private network interconnection equipment, Mellanox's worldwide and China market shares are 55% to 60% and 80% to 85%, respectively. For high-speed ethernet adaptors, Mellanox's market share is 60% to 65% worldwide and 65% to 70% in China (ie, considerably higher than other market players and ranking number one). Under this market structure, the SAMR illustrated its competition concerns from three angles.
First, similar to the Infineon/Cypress case, the SAMR believed that the entity after the deal (the party) can conduct tying because of the above neighbouring relationship and the significant market power in each market. When downstream customers refuse to accept the tying, the party would be capable of forcing them to accept the tying through refusal to deal. Second, the SAMR was concerned that the party would decrease the interoperability between its GPU accelerator and third-party network interconnection equipment or between its network interconnection equipment and third-party GPU accelerators. Third, the SAMR found that the party would have access to competitive sensitive information from other GPU accelerator and network interconnection equipment manufacturers and thus possibly gain unfair competitive advantages.
The SAMR ultimately accepted seven behavioural remedies proposed by the filing parties and approved this deal. Two remedies were made confidential in the released announcement and the other five are set out below. An application to remove the remedies can be filed after six years.
First, the party is prohibited from tying or imposing unreasonable conditions on sales of Nvidia GPU accelerators and Mellanox network interconnection equipment in China. Further, it is prohibited from hindering or restricting customers to separately purchase the above products or discriminating those customers on, for example, service quality, price or soft function. Second, the party should supply those products and related software and accessories to China on FRAND terms. Third, the party should warrant continuous interoperability between GPU accelerator and third-party network interconnection equipment, and between Mellanox high-speed network interconnection equipment and third-party GPU accelerators. Fourth, the party should continue its open source commitment for the point-to-point communication software and collective communication software for Mellanox high-speed network interconnection equipment. Fifth, the party should adopt protective measures for information accessed from other accelerator and network interchange equipment manufacturers.
By looking at these two recent decisions in the semiconductor sector, in combination with reviews of Chinese precedents, the following key observations can be made.
Semiconductor mergers usually go through a relatively long period of pull and refile
The Nvidia/Mellanox procedure lasted approximately one year, during which the parties pulled and refiled their notification once. Regarding Infineon/Cypress, the total review period was eight months, which is a relatively desirable term compared with most of other remedy cases in the semiconductor sector. The merger review procedure lasted approximately 13 months in MediaTek/MStar, approximately 15 months in ASE/Silicon Precision, approximately nine-and-a-half months in KLA-Tencor/Orbotech, approximately seven-and-a-half months in NXP/Freescale and approximately seven months in Broadcom/Brocade. Except for Broadcom/Brocade and Infineon/Cypress, all of these cases involved pull and refile procedures.
Neighbouring relationships between filing parties in semiconductor mergers have attracted increased scrutiny and competition concerns
In Infineon/Cypress and Nvidia/Mellanox, the SAMR had competition concerns relating to markets with neighbouring relationships, rather than horizontal overlap or vertical relationship markets. The focus of the SAMR's antitrust scrutiny is whether the party after a transaction will try products or refuse to deal or decrease interoperability between products. Whether the party will have access to a competitor's sensitive information is also a primary concern (eg, as in Broadcom/Brocade and Nvidia/Mellanox).
Remedies depend on competition concerns
Current antitrust enforcement in China suggests that competition concerns relating to horizontal overlaps between filing parties are more likely to incur structural or quasi-structural remedies (eg, hold separate orders). When competition concerns relate to vertical or neighbouring relationships, the SAMR typically imposes only behavioural remedies. Further, when competition concerns relate to complementary synergies caused by neighbouring relationships, the remedies often involve a prohibition on trying the products with neighbouring relationships.
For instance, the remedies in MediaTek/MStar and ASE/Silicon Precision were hold-separate and NXP/Freescale involved structural divestiture because competition concerns in those cases related to horizontal overlaps. On the other hand, Broadcom/Brocade, KLA-Tencor/Orbotech, Infineon/Cypress and Nvidia/Mellanox incurred only behavioural remedies because the competition concerns related to vertical or neighbouring markets.
Relevant stakeholders are solicited for opinions in various ways
The Chinese antitrust authorities usually solicit opinions from competent industry authorities industry associations, key competitors and downstream customers. In all of the abovementioned semiconductor mergers, as well as in Infineon/Cypress and Nvidia/Mallenox, these four types of stakeholder were solicited for comments. In NXP/Freescale, opinions were also solicited from industry experts.
When soliciting opinions, those of competent authorities and trade associations are considered more important. The two main competent authorities in the semiconductor sector are:
The China Semiconductor Industry Association is a significant industry association.
In summary, China's past and recent merger review practice in the semiconductor sector suggests that antitrust scrutiny is continuously rigorous and cautious. Companies in this industry preparing merger filings in China must take competition concerns seriously. Antitrust lawyers should always be involved at an early stage of a transaction negotiation to allow for favourable transaction terms and a comprehensive assessment of antitrust risks, which could shorten the review period in advance.
For further information on this topic please contact Hao Zhan or Ying Song at AnJie Law Firm by telephone (+86 10 8567 5988) or email (email@example.com or firstname.lastname@example.org). The AnJie Law Firm website can be accessed at www.anjielaw.com.
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