With the further deepening of Sino-US trade negotiations, chips are becoming chips.
A number of media reports said that the Chinese side proposed that if the two sides reached an agreement to promote the development of trade relations, then it can consider increasing the proportion of semiconductor chips purchased from US manufacturers, replacing the share of Korean and Taiwanese manufacturers.
The purpose of this proposal is to reduce the trade deficit between China and the United States by replacing the purchaser. At present, this deficit has reached an all-time high of $375 billion. China is the world‘s largest consumer of semiconductors, so China’s trade decisions have a huge impact on the industry and its manufacturers.
The background of the negotiations is that Trump announced on Thursday that it will impose tariffs on about $60 billion of Chinese goods, and high-tech products will become the mainstay. In response to the steel and aluminum tariffs announced earlier in the United States, China just announced on Friday that it is taxing US$3 billion worth of US goods, including pork, apples and steel pipes.
The tax on steel pipes from the United States is to counter the US tax on Chinese steel, so why did the pigs and apples appear in the decision? The origin of these two commodities is precisely the key state of the US election. Iowa‘s pork production is leading the United States, and this is the first state in which the US presidential nominee competes. The same is true for Apple, where the top ten US apples include Michigan, Pennsylvania, Virginia, and Ohio, all of which are critical to Trump’s re-election campaign.
This is smart, but it is too obvious. However, in the complicated negotiations, China has an interesting card to play, which is Qualcomm‘s acquisition of NXP Semiconductors. I have written many articles about Qualcomm and the company‘s complex strategic position. Qualcomm’s strategy has always been to invest in high-growth markets other than smartphones, as the smartphone market has become saturated and there is limited room for growth in the future.
NXP is a market leader in hot areas such as automotive electronics, and the growth of these markets will bring huge benefits to the acquirer. If you want to succeed in the future, especially after repelling the hostile takeover of Broadcom, then Qualcomm must acquire NXP.
However, there is still a problem here. Qualcomm’s acquisition of NXP’s transaction has been approved by almost all countries except China.
According to Bloomberg News, the Chinese Ministry of Commerce, which is responsible for approving Qualcomm’s acquisition of NXP, is under tremendous pressure. They are required to strengthen the protection of domestic semiconductor manufacturers and even more directly veto the deal.
There have been rumors in the past that the Chinese government may make such a decision. Therefore, Qualcomm was forced to postpone the offer period until April 2 to match the Chinese government’s timetable.
This situation is not without precedent. The Chinese government has previously targeted Qualcomm. In early 2015, Qualcomm and China’s anti-monopoly regulatory authorities reached an agreement to settle the anti-monopoly investigation with a fine of 975 million US dollars, while reducing the patent fees for Chinese manufacturers.
Patent revenue is one of Qualcomm’s key revenue sources. Considering that China is the world’s largest semiconductor market, the agreement shows that Qualcomm is facing challenges as the Chinese government wants to protect the domestic semiconductor industry.
The Chinese government has taken the development of a world-class semiconductor industry as the country‘s development focus, investing tens of billions of dollars and using various policy instruments including competition policy to protect, nurture and develop the domestic chip industry.
If the acquisition of NXP’s transaction fails, Qualcomm will face a major blow. This means that Qualcomm’s two-year preparations for the deal will be lost, and the company will be forced to rethink its future.
This also brings about the question of how Qualcomm should develop in the future. After all, NXP is one of the few companies that can create value for Qualcomm shareholders. Even with other potential acquisition targets, the Chinese government can theoretically intervene in these transactions.
In China, Qualcomm’s situation in the negotiations is very unfavorable. Therefore, at last week‘s Qualcomm shareholders’ meeting, the support rate for Qualcomm’s board members was very low.
Qualcomm’s current CEO, Steve Mollenkopf, failed to gain the support of most shareholders. This is unusual given that Qualcomm board members are usually elected with an absolute majority of votes.
Many shareholders voted against the board they had firmly supported in the past, protesting Qualcomm’s performance in responding to Broadcom’s acquisition, and other issues.
Purchasing more semiconductor chips from the United States and hitting Qualcomm at the same time, it seems that this is a practice of two birds for China. The total number of semiconductor chips imported from China has not changed, but American products have been used to replace Asian suppliers‘ products. At the same time, the decision of Qualcomm will hit the only company in the United States that can compete with Huawei in 5G mobile communication technology.
I estimate that the acquisition of NXP will eventually be approved. Although China and the United States are still engaged in trade negotiations, the situation is complicated, but at least China needs to show its attitude of opening doors to do business. At present, China’s trade behavior is becoming the focus of attention. However, this does not mean that Qualcomm will not make huge concessions. If so, it will have a further negative impact on the company’s income and its position in the Chinese market.
When Trump came to power, he said that the United States should use more wisdom in the negotiations. In the face of Trump, how the Chinese government responds is worthy of attention. Not only does China play a good hand, but it can always take good cards from other players. Therefore, the chips are slowly running to China.