In keeping with analysts, the $ 40 billion acquisition of Nvidia by Chinese language regulators may very well be focused
Jensen Huang, CEO of Nvidia, wears his usual leather jacket.
LONDON – Regulators in China could be a major obstacle to Nvidia's attempt to buy SoftBank's UK chipmaker arm for $ 40 billion, analysts said.
The mega-deal that would create the largest chip company in the west by market value and global reach was announced in early September. But it is far from being home and dry as multiple regulators can weigh up the Chinese Ministry of Commerce (MOFCOM) and the Chinese State Administration for Market Regulation (SAMR).
"Technically, Beijing can block the deal," Abishur Prakash, a geopolitical specialist at the Center for Innovating the Future, a Toronto-based consulting firm, told CNBC via email.
It wouldn't be the first time Chinese regulators have prevented a US chip company from buying a European player. In 2018, SAMR blocked Qualcomm's attempt to buy Dutch chip maker NXP.
Bill Ray, senior director analyst at research firm Gartner, emailed CNBC that Chinese regulators "will attempt to extract certain guarantees before granting approval."
He added that "some of these warranties may not be provided by Nvidia," specifically noted Arm's continued provision of intellectual property (IP) to Chinese companies.
Ray believes Nvidia will likely try to reassure Chinese regulators by saying Arm's technology is British and that future investments in the UK will ensure it stays that way. But it's not that easy.
"Supplying China shouldn't be an issue." he said. "However, this neglects the US influence over the UK and the US government's ability to influence businesses outside of its overt jurisdiction."
Geoff Blaber, vice president of research at analyst firm CCS Insight, said, "It should come as no surprise that China is a high hurdle for regulatory approval."
"China's tech industry has been built on arm so that it has a vested interest in the status quo, especially if the proposed scenario is owned by a US company," added Blaber. "Regulatory scrutiny is inevitable, and Arm Technology China's ownership structure adds complexity."
MOFCOM, SAMR and the Chinese Embassy in London did not immediately respond to CNBC's request for comment. Nvidia declined to make a fresh statement on the matter when contacted by CNBC, but cited previous comments from CEO Jensen Huang, who is confident the deal will go through.
A spokesperson for Arm said, "Nvidia, Arm and SoftBank are confident that all regulatory approvals are secured."
Britain's tech hero
Arm is widely considered to be the jewel in the crown of the UK tech industry. The energy efficient chip architectures are used in 95% of smartphones in the world and in 95% of chips developed in China.
Headquartered in Cambridge, the company has a joint venture called Arm China with Chinese private equity firm Hopu Investments. Arm China is headquartered in Shanghai, which means China's regulators will have the right to review the proposed Nvidia deal.
China's chip industry has urged Beijing to investigate the deal and warns that the US will take control of a key technology used in almost every phone in the world.
Zhu Jing, vice chairman of the Beijing Semiconductor Association, said a US company could not be trusted with ownership of Arm.
"Look at how the US is treating Huawei," he told The Paper, a Chinese state digital publication, in September. "When Arm is acquired by a US company, everyone is concerned."
Washington lawmakers have been pressuring Huawei for years, claiming the company poses a threat to national security. In May, the US introduced new export controls for Huawei that are designed to restrict the company's access to chips from US devices. The following month, the US put Huawei on a list of 20 Chinese companies that are allegedly owned or controlled by the Chinese military.
The Global Times, another state newspaper, also called on Beijing to intervene. "The possibility that Arm could be politicized as a US tech weapon against China's tech companies must be taken seriously," an editorial warned around the same time.
Chinese chip designers, including Huawei's HiSilicon chip design division, are concerned about losing access to Arm's IP following the Nvidia deal, according to The Financial Times. "Will it find a way to provide us with IP after the takeover? I have to say that I'm a little concerned," said a HiSilicon chip designer, who asked not to be named. Huawei declined to comment.
Not just China
The deal is also under scrutiny by governments and regulators in Europe, the US and the UK. Earlier this month, two UK tech investors said they expected the deal to be blocked by someone.
Opposition to the agreement was particularly strong in Great Britain. Arm co-founder Hermann Hauser led the attack and called it an "absolute catastrophe" for Cambridge, Great Britain and Europe. Its main concern, shared by a handful of UK lawmakers, is that at some point in the future Nvidia could move Arm's headquarters or reduce Arm's workforce.
He also said Nvidia will "destroy" Arm's business model, which involves licensing chip designs to around 500 other companies, including several that compete directly with Nvidia, and that the deal will create a monopoly.
The directors of Nvidia and Arm spoke about the deal at Arm DevSummit earlier this month.
"As soon as we explain the reasons for the transaction and our plans, regulators around the world will see that these are two complementary companies," said Huang of Nvidia on October 6th.
"We will protect the business model, create and maintain this neutral, committed, consistent and trustworthy platform so that our ecosystem can continue to thrive and even grow."
Simon Segars, CEO of Arm, said, "There is a process that must be followed. It is absolutely right that the process be carried out thoroughly. But I think we will reach the end. Everyone will realize that this is good Thing for expansion and that we get approval. "