Intel [NASDAQ:INTC] and MaxLinear [NASDAQ:MXL] appear to have been making serious efforts with Chinese authorities in the past few weeks to get their respective acquisitions of Israel-based Tower Semiconductor [NASDAQ:TSEM] and Taiwan-based Silicon Motion [NASDAQ:SIMO] across the line. These efforts, which involve each party presenting Chinese officials with various solutions, will likely have been welcomed by China’s semiconductor stakeholders.
But it’s far from certain whether they will be enough to gain approval from China’s merger control regulator, the State Administration for Market Regulation (SAMR). As the deal deadlines approach – Monday 7 August for Silicon Motion/MaxLinear and Tuesday 15 August for Tower Semiconductor/Intel - shares in both targets are trading at huge discounts to their respective offer prices due to risks around their protracted Chinese merger reviews.
The reviews have been problematic largely because of US export control restrictions on China’s semiconductor sector that have escalated since both deals were announced in 1H22. These restrictions have contributed to US-Sino relations reaching new lows over the past six months although there have been signs of a thaw in recent weeks.
SAMR has hesitated to accept Intel and MaxLinear’s supply-guarantee commitments as remedies over fears that Washington DC will impose regulation in future that makes the bidders’ unable to keep their promises.
Chengdu Can Do
Last week Intel’s Chief Executive Officer Patrick Gelsinger made his second trip to China this year starting with visit to Chengdu on Monday (10 July). There he attended the 20th Anniversary of Intel’s Chengdu Investment and took a photograph with Chengdu staff behind a banner reading “20th Anniversary Chengdu Can Do”. On the same day, he met with the Governor of Sichuan Province Huang Qiang, Chengdu city’s Party Secretary Shi Xiaolin and mayor Wang Chaofeng, according to government public social media announcements.
A source familiar with the matter told Asia Desk that Gelsinger’s Chengdu visit may have included an attempt to finalize remedies with the local government. Intel’s Chengdu operation has become the company’s largest base globally for chip assembling and testing as well as wafer preconditioning and high-end testing, according to Intel’s official WeChat account.
Intel’s two growth points in future are chip foundry and artificial intelligence (AI) portfolio businesses, explained a second source familiar. The proposed acquisition of Tower Semiconductor is a part of its plan to build up its foundry business.
In January, Intel rejected a rumour that it was seeking US government approval to invest around USD 1.5bn in a shuttered Chengdu, China based fabrication plant to boost production of legacy 28 nanometer chips specifically for the Chinese market.
Intel then announced on Tuesday (11 July) in Beijing that it has developed and released Habana Gaudi 2 AI accelerator which is specifically designed for China sales. Several Chinese AI giants including Inspur, H3C and xFusion have cooperation with Intel.
Later in the week Gelsinger visited H3C, a subsidiary of Unigroup; and xFusion, a digital infrastructure service provider initially established by Huawei with its x86 server business in 2021 and then completely divested in 2022.
Gelsinger also attended the 14th Annual US-China CEO and Former Senior Officials Dialogue on 12 July. On the same day, Chinese Vice President Han Zheng met with the US representatives who presented at the dialogue and said that China welcomes companies from all over the world, including the United States, to deepen their presence in the Chinese market.
A third source familiar with the matter told Asia Desk that Gelsinger met, around this time, with multiple senior officials from ministries and agencies during his Beijing visit. However, it’s unclear who exactly he met with or what was discussed as a consensus was reached that none of these meetings would be made public.
The first source and a fourth source familiar told Asia Desk that Gelsinger did meet with SAMR officials at some point during the week. However, people should not expect too much to emerge from this meeting, said the fourth source. Intel confirmed Gelsinger was in China last week, as this publication previously reported and declined further comment.
SAMR does not comment on ongoing issues.
According to the first source, Intel’s strategy in China will continue no matter with or without Tower. This is consistent with what Gelsinger said on the 11 May AGM “with or without Tower our IDM2.0 strategy is unchanged”.
Gelsinger and Intel’s efforts over the past week have been well received by senior figures, such as economists and business leaders, on Chinese social media and are seen as real attempts to work around the US government’s export restrictions by providing alternative products.
News that US chip company executives from Intel, Nvidia and Qualcomm have this week met with top Biden administration officials in Washington DC to discuss the America’s China policy around the same time as the US semiconductor lobby group urged the government to halt the introduction of more export curbs has also been welcomed in China.
Indeed, the fourth source said Chinese central and local level governments are making efforts to attract foreign companies including US companies to invest in China. Soon, new policies designed to encourage foreign investment into the country will be announced, the source said.
Despite all this, however, there remains little evidence to suggest that any of the meetings and developments to date will result in the Tower deal getting approved, the source added. For that to happen the deal needs specific support from very high-level decision makers and government agencies such as the Ministry of Industry and Information Technology (MIIT) and the National Development and Reform Commission (NDRC).
It also needs the green light from the Ministry of Science and Technology (MOST).
Ministry of Science and Technology
The relatively low-profile agency has emerged in recent months as an influential third party alongside the MIIT and the NDRC during SAMR’s reviews of semiconductor deals, said two legal practitioners.
The agency has long provided comments for SAMR’s merger reviews when deals have standard essential patent (SEPs) related issues. But its role has been expanded. In March, China’s State Council and the Central Committee of the Communist Party of China (CPC) announced the "Party and State Institutional Reform Plan" - a wide ranging restructuring that included the establishment of the Central Science and Technology Committee (CSTC), which is housed in the MOST. This enhanced the ministry’s role in coordinating the construction of the “national innovation system” and reform of the country’s science and technology systems.
China’s semiconductor industry is seen as a bottleneck for China’s science and technology development strategies and therefore faces ever increasing scrutiny. Following the state restructuring, deals involving semiconductor companies important to China can now expect to also face stiff examination by the MOST as the functional representative of CSTC, which oversees the country’s innovation and scientific system. As the standing agency for the CSTC, the MOST’s attitude may represent the central government decision makers’ thinking.
Analysts for Trivium Neopol, a China policy watch service, in March noted that “Beijing is counting on MoST to provide answers to US export controls”.
As reported by this news service, whilst the NDRC and MIIT have given the Silicon Motion/MaxLinear deal the greenlight their view of the Tower/Intel deal is not known.
What the MOST thinks about either deal too remains a mystery.
Silicon Motion/MaxLinear attempts JV
For its part, Silicon Motion and MaxLinear appear to be trying a different tack to that of Intel. According to a Taiwan media report Silicon Motion is looking at separating its consumer business in China and forming a joint venture with Chinese memory module manufacturers such as Longsys and Biwin Storage. Whether the JV structure idea, which could facilitate technological transfer, will really help solve the supply guarantee concerns caused by MaxLinear’s proposed acquisition and can be accepted by Chinese regulators as a side deal to gain Chinese approval is uncertain. It’s encouraging though that the US bidder, MaxLinear, is seemingly onboard with a plan to find another supply continuity solution whilst restricted by US export controls.
Whether either of these different workaround solutions to US export control restrictions will be rewarded with deal approval may become clear in the coming weeks.
Tower Semiconductor, MaxLinear, and Silicon Motion did not respond to requests for comment.