Intel's Stalled Ambitions: The US-China Tech Rivalry Intensifies
From Regulatory Hurdles to Geopolitical Maneuvering: How the Failed Acquisition of Tower Semiconductor Reveals the Complex Dynamics of Global Technology Competition
The recent collapse of Intel's planned acquisition of Israeli chipmaker Tower Semiconductor marks the latest chapter in the escalating U.S.-China tech competition. As Intel aimed to enhance its position against industry leaders like Samsung and Taiwan Semiconductor Manufacturing Company (TSMC), China's regulatory intervention under its Anti-Monopoly Law halted the deal in its tracks. This event, far from an isolated business transaction, serves as a vivid illustration of the broader geopolitical struggle between the U.S. and China in the technology sector. With new regulations, executive orders, and strategic corporate moves, the Intel-Tower deal's failure is emblematic of the complex and often contentious landscape that defines the ongoing tech war between the world's two largest economies.
While this may appear to be a relatively small event, it has larger implications for Intel's competitive positioning. To compete with successful semiconductor foundries like Samsung and TSMC, Intel sought to purchase a smaller foundry with the expertise needed to further its goals. Tower was essentially its only option, especially after Intel's past failure to acquire GlobalFoundries. Given that Intel is an American company and Tower Semiconductors is an Israeli firm, the situation raises a compelling question: What does China have to do with this?
In June of 2022, China amended its Anti-Monopoly Law, introducing new requirements with far-reaching implications for international business transactions. Under this law, parties must submit transactions that involve a change of "control" for approval. China's competition authority, the State Administration for Market Regulation (SAMR), interprets this term broadly. It encompasses not only mergers and acquisitions but also joint venture transactions and certain minority investments. This applies even when no party involved is based in China, as was the case with the Intel-Tower deal.
The SAMR's interpretation of "control" is expansive and extends to various situations. Even the acquisition of a minority stake may require filing if it includes certain rights. These rights can range from board representation, and significant veto powers, control over key decisions such as the appointment or removal of the CEO, to approval of the annual budget or business plan.
The revenue thresholds for these regulations, when converted to U.S. dollars, are as follows:
At least two parties to the transaction must each have revenue of $55 million or more in mainland China.
The parties' combined annual group revenues globally must be at least $1.4 billion, or they must have combined revenue of at least $277 million in mainland China.
Just one week prior, the Biden administration issued a new Executive Order (EO) focusing on regulating U.S. outbound investments to China in specific technology areas, including semiconductors and Artificial Intelligence (AI). This EO mandates that U.S. individuals notify the government about transactions with Chinese entities involving certain technologies, and it includes prohibitions and notification requirements to control investment flows. This follows the October 2022 export controls, which aimed to restrict China's access to high-end semiconductor devices with potential military applications. Beijing's apprehension over Intel's purchase of Tower can be understood in this context, as China feared the acquisition might hinder its firms' collaboration with Tower, given the growing U.S. limitations on China's tech sector.
China's slow-rolling of the Intel-Tower deal is not an isolated incident. In November of 2022, DuPont's planned purchase of Rogers Corporation encountered a similar obstacle, with Chinese regulators withholding approval. This led to a breakup fee of $162.5 million. Intriguingly, neither the Intel-Tower deal nor the DuPont-Rogers deal involved Chinese companies.
Intel CEO Patrick Gelsinger traveled to China multiple times this year. “Intel’s presence in China is very important because the country is one of the world’s largest markets, and also one of Intel’s most important markets,” he said during a visit in April. He also visited in July, where he met with New H3C Group, a prominent Chinese IT firm, and with xFusion Technologies on environmentally friendly data center innovations. The visit also celebrated two decades of Intel's presence in Chengdu where it has an assembly and testing facility. China stands as the chip company's biggest market beyond the U.S., contributing to 27 percent of the company's worldwide revenue in fiscal year 2022.
During his July visit to China, Gelsinger announced the launch of the Gaudi 2 processor, designed specifically for AI deep-learning applications. This move aligns with strategies by other American firms, such as NVIDIA, to release specialized chips for the Chinese market, navigating around the U.S. export controls implemented in October 2022. An Intel spokesperson emphasized at the launch, “The availability of Gaudi2 in China continues Intel’s nearly 40-year history of delivering innovative yet legally-compliant products to this key growth market."
Washington is closely monitoring the measures taken by companies like Intel and NVIDIA to circumvent export controls, prompting the Biden administration to consider further tightening regulations on chip exports to China. This potential action would build upon the export controls introduced in October 2022, reflecting growing concerns over technology transfer. In a related move, the Commerce Department has blacklisted one of Intel's largest clients, Inspur. Reuters reported that “Inspur's Chinese-listed subsidiary had nearly $10 billion in sales in 2021, and Inspur Group is the world's third-largest supplier of the servers used in data centers that power cloud computing.”
Intel's financial challenges began to surface even before its unsuccessful attempt to acquire Tower Semiconductor. In 2022, the company's profits took a sharp dive, plummeting by 60 percent, while revenue declined by 20 percent. Amidst this financial turbulence, the collapse of the planned $5.4 billion purchase of Tower might have unexpectedly worked in Intel's favor.
The halted deal potentially spared Intel from the complex task of integrating Tower's outdated technology and grappling with its weaker profit margins. This unexpected turn of events may have aligned more closely with Intel's renewed emphasis on cutting-edge fabrication, a core aspect of its strategic vision.
Additionally, the anticipated 15% drop in Tower's revenue for the year, coupled with extended scrutiny by Chinese authorities, provided Intel with a potentially timely exit from an agreement that was becoming increasingly questionable. This escape route may have helped Intel avert further negative impacts on its share value and maintain its strategic alignment with key clients, such as the U.S. Department of Defense and Qualcomm.
Ultimately, the termination of Intel's acquisition of Tower Semiconductor is more than a business decision; it's another episode in the ongoing U.S.-China tech war. While the collapse of the deal may have spared Intel from potential challenges, it also shows the pervasive influence of geopolitical tensions on global commerce. As companies like Intel navigate this complex landscape, the strategic implications of the U.S.-China rivalry continue to shape the future of the technology sector.
The views and information contained in this article are the author’s own and do not necessarily represent those of The Asia Cable.
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