Why the Chinese Government Blocked the Merger of Qualcomm and NXP

The Qualcomm-NXP meger would have been the biggest merger in history for the semiconductor industry. (Image:  Maurizio Pesce  via  wikimedia  CC BY 2.0 )
The Qualcomm-NXP meger would have been the biggest merger in history for the semiconductor industry. (Image: Maurizio Pesce via wikimedia CC BY 2.0 )

U.S. semiconductor giant Qualcomm was in the process of taking over Dutch semiconductor company NXP in July. Valued at US$44 billion, it would have been the biggest merger in history for the semiconductor industry. However, the deal did not get through because of one major reason — the Chinese government.

Blocking the deal

Qualcomm had to get approval from the competition agencies of several countries in order to seal the deal. The company had been working hard at this task for the past two years. They were able to get approval from the competition agencies of eight nations.

But when it came to China, Beijing displayed a complete apathy toward the deal and let the clock run out. And once the merger was canceled, Qualcomm was forced to provide NXP with a breakup fee of US$2 billion and buy back stock worth US$30 billion.

“Our core strategy of driving Qualcomm technologies into higher growth industries remains unchanged,” Bloomberg quotes a statement by Qualcomm CEO Steve Mollenkopf. Meanwhile, NXP CEO Richard Clemmer stated that it was “unfortunate” that the proposed merger fell through.

China’s fear of the deal

One of the major reasons cited as the cause for China wanting to prevent the merger of the two companies is that Beijing was afraid of the power the U.S. would have over it because of the deal.

China is largely reliant on foreign companies to supply semiconductor chips. And even though the country has set up ambitious targets that aim to make China the biggest producer of chips, experts estimate that China will continue to be dependent on foreign chip suppliers for a long time. International Business Strategies predicted that even by 2027, about 60 percent of China’s semiconductor needs will be met through foreign companies.

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China is largely reliant on foreign companies to supply semiconductor chips. (Image via pixabay / CC0 1.0)

But what irked the Chinese most about the Qualcomm-NXP merger was that Qualcomm would have eventually made the U.S. stronger. The deal would have enabled the United States to widen its influence on the global semiconductor industry, which would have posed serious threats to China’s plans for being a major international semiconductor player.

And anything that would make the U.S. stronger is a strict no-no for the Chinese government. Experts believe that this is primarily why China dragged out the Qualcomm-NXP merger and made it fail.

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The U.S. blocked Broadcom’s hostile takeover bid for Qualcomm in March this year. (Image: Coolcaesar via wikimedia CC BY-SA 3.0)

U.S. concerns

The United States is also very wary of China becoming a major semiconductor manufacturer and supplier, since it could have serious negative consequences for the U.S. It is because of this that the U.S. blocked Broadcom’s hostile takeover bid for Qualcomm in March this year.

Though Broadcom is headquartered in California, it had recently reincorporated in Singapore. U.S. security agencies had reportedly warned Trump that Broadcom was making connections to Chinese companies. If the deal had gone through, Broadcom and its affiliates would have committed actions that would have threatened U.S. national security.

In addition, Qualcomm was heavily investing in 5G technologies. The merger would have made such advancements within the reach of the Chinese companies, who would have used it to become the world’s leading 5G technology developer, eroding America’s technological supremacy in the world.

Foreseeing such consequences, President Trump blocked the US$117 billion deal. And though the U.S. would have benefited greatly had the Qualcomm-NXP merger pulled through, the country still remains at an advantage to win the race for developing the 5G technology.

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