The United States' most stringent technology export controls have led China's chip army to turn to Europe

After being blocked from mergers and acquisitions in the United States, Chinese semiconductor companies found a window in Europe: in 2018, Chinese companies acquired European chip companies worth $7.85 billion, while the transaction amount for acquiring American chip companies was only $2.48 billion. However, as European regulatory policies tighten, this window may close at any time. The spotlight turns to Europe.

Last year, China-backed investment fund Canyon Bridge planned to acquire U.S. chip company Lattice Semiconductor for $1.3 billion, one of the most ambitious acquisition plans in China's semiconductor sector.

However, the acquisition was ultimately banned by the Trump administration on the grounds of "national security."

After being blocked, Canyon Bridge quickly turned its attention to a more friendly region: Europe. Less than two weeks after the Lattice deal failed, British chip design company Imagination announced that it had agreed to be acquired by Canyon Bridge for $675 million, and the British government then readily approved the deal.

For Chinese investors and chip industry companies, the Canyon Bridge deal marks a shift in their focus from the United States to Europe , and it is also a helpless choice.

Data from financial data company Dealogic shows that China has acquired $7.85 billion worth of European chip companies so far in 2018, while the transaction value of acquisitions of US chip companies is only $2.48 billion.

With the frequent introduction of policies such as the 14 key technology controls in the United States, tightening the high-tech exports to the outside world, Europe seems to have opened the best "window" for Chinese chip investors. But the worrying thing is about to come: as European governments take a tougher stance on such transactions together with the US government, this trend may not continue, and Chinese semiconductor transactions in Europe are more like a "doomsday carnival."

Where should China's global chip M&A investment go?

Mergers blocked by “national security”

Lattice Semiconductor makes field programmable gate array (FPGA) chips, which allow companies to combine their own software with silicon chips for different purposes. While Lattice does not sell chips to the U.S. military, its two main competitors, Xilinx and Intel's Altera, make chips for military technology.

After Trump decided to ban Canyon Bridge's acquisition of Lattice Semiconductor, the US Treasury Secretary said the move was due to US concerns about the transfer of intellectual property, the role played by China in the transaction, the importance of the integrity of the semiconductor supply chain to the US government, and the fact that the US government also uses Lattice Semiconductor's products.

Canyon Bridge then acquired the British company Imagination, which mainly licenses graphics and video processing technologies to semiconductor companies. The iPhone also used the company's graphics technology.

However, Imagination acquired MIPS, a US chip design company whose clients include the US military, in 2013. If MIPS is not sold, Canyon Bridge's acquisition of Imagination will be subject to review by the US Committee on Foreign Investment (CFIUS).

In the end, in order to clear the way for the deal, Imagination had to hurriedly sell MIPS and complete the acquisition.

Targeting Europe: China's semiconductor trade volume exceeds that of the United States

For Chinese investors and companies in the chip industry, the Canyon Bridge deal marks a shift in focus from the U.S. to Europe.

Data from financial data company Dealogic shows this trend:

As can be seen from the above chart, China's semiconductor investment in the United States and Europe has reversed since 2014: that year, China's chip transactions in Europe were worth US$1.84 billion, and transactions in the United States were worth US$5 billion. This year, China acquired chip companies worth US$7.85 billion in Europe, while acquisitions in the United States were worth only US$2.48 billion.

The biggest deal in Europe this year was Chinese smartphone contract maker Wingtech Technology's $3.63 billion acquisition of Dutch chip company Nexperia in October. The success of the deal is uncertain because Nexperia has operations in the United States and the deal still needs regulatory approval from CFIUS.

Broader trade tensions between the U.S. and China have also had an unintended effect: European chip companies that choose to remain independent are gaining access to more Chinese capital and customers.

Graphcore is one of the well-known AI chip startups in the UK. Behind this company, there are a large number of star investors, including Sequoia China .

Recently, Graphcore, which was founded only three years ago, announced that it had completed a $200 million Series D financing round. According to people familiar with the matter, in this round of financing for Graphcore, one of China's largest cloud computing providers made an undisclosed investment in the company.

14 export controls - a sword hanging over the heads of Chinese companies

In 2014, China established a 100 billion yuan National Integrated Circuit Industry Investment Fund (referred to as the "Big Fund"), which has driven local integrated circuit industry investment funds to exceed 500 billion yuan, with the aim of reducing China's dependence on foreign suppliers in key industries.

Data shows that in 2017 alone, China spent $260 billion importing semiconductors, compared with just $162 billion for crude oil imports.

Regarding overseas mergers and acquisitions, according to semiconductor industry observation data, the regulatory level supports Chinese companies in conducting cross-border mergers and acquisitions transactions, encourages listed companies to merge and reorganize, and has introduced many policies.

However, with Trump taking office, Chinese semiconductor mergers and acquisitions in the United States have increasingly been obstructed.

In August this year, the United States signed the Foreign Investment Risk Review Modernization Act, which gave CFIUS greater supervisory authority to review foreign transactions. As a result, China's chip transactions in the United States were temporarily stagnant in 2018.

Peter Kuo, a partner at Canyon Bridge, said in an interview that changes to U.S. law requiring national security reviews of transactions by foreign entities have "made it impossible for certain government-connected buyers, especially Chinese buyers, to even buy stakes in U.S. companies in sensitive areas such as semiconductors."

In November this year, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce also issued a draft for soliciting opinions, proposing to control the export of 14 key technologies and related products such as AI, chips, robots, and quantum computing. Once the export of certain core technologies, such as GPUs, is restricted, it will be a fatal blow to many companies that rely on the United States.

New Wisdom also pointed out in " Tomorrow's Battle: Will China Become the Next Chip Empire? " that China has also realized that it must rely on itself to solve this dilemma. Chips are no longer an opportunity for startups, and China's technology giants: such as Alibaba, Baidu and Huawei are all concentrating their efforts on making chips.

In addition, with the rise of artificial intelligence, China has an excellent opportunity to overtake others in the processor field.

Short European Window: Regulation Could Come Overnight

According to information reports, China plans to invest more than $150 billion in the chip industry in the next 10 years through overseas acquisitions and investments in local companies, most of which will be invested in companies outside of China. After the cooling of investment and mergers and acquisitions in the United States, Europe has become the second hot spot for investment.

"We think European companies have an advantage," said Siraj Khaliq, a partner at London-based investment firm Atomico, one of Graphcore's investors. "So far, we have remained neutral. Graphcore can sell in both the central and European markets, which may be beneficial to us to some extent."

But how long can this beauty last?

There are signs that the trend of investors turning to Europe may be short-lived as European governments increase investment scrutiny of overseas deals. Just this week, for example, the German government tightened rules on non-European acquisitions of German companies. Now the government can intervene in any deal involving the acquisition of more than 10% of a German company in a strategically important industry such as semiconductors, up from a previous limit of 25%.

In addition, it is difficult for Europe to match the dominance of the United States in the semiconductor industry. There are not as many leading semiconductor companies as in the United States, and it is difficult to compete with the United States. Peter Kuo of Canyon Bridge said, "We have to exclude the United States, but the United States dominates the semiconductor field. It's like, 'I like basketball, but I can't watch the NBA.'"

The CEO of French chip startup GreenWaves said that after the first round of angel investment in 2017, he has received inquiries from many venture capital funds, including those from China. At present, he does not see any problem in raising funds from Chinese investors.

“When we talk about investments, the only risk is a change in the European Foreign Investment Committee. So far we have not seen that risk, but regulation could change overnight.”