EU’s microchip dreams face Anglo-American menace

Europe’s aspirations of standing up to America and Asia in the microchip industry face a hurdle in the shape of a $40 billion tie-up between U.S. chipmaker Nvidia and British chip designer Arm.

Brussels is well aware that this potential Anglo-American powerhouse does more than threaten to wreck its semiconductor dreams, one of the core planks of the EU’s industrial strategy. Europe’s response — including the nuclear option of blocking the deal through competition rules — will be a broader test of its claims to be a geostrategic big hitter and of its attempts to reassert its crumbling reputation as regulator.

“I’m looking at this with a lot of attention, I can tell you, and we understand extremely well the strategic dimension of this potential merger,” the EU’s Internal Market Commissioner Thierry Breton told POLITICO in an interview in late April.

It’s easy to see why it’s high on the list of priorities for Breton, who is styling himself as a champion of the chip industry and Europe Inc. more generally. The mega-merger’s “real question,” according to an EU tech company executive, is nothing less than “whether the 27 member states are capable of developing a European semiconductor industry.”

Nvidia’s deal for Arm gives the U.S. an opportunity to increase its leverage over the EU by controlling an even bigger chunk of the tech supply chain, while the bloc is desperately trying to limit its dependence on America and China. It will determine the EU industrial strategy’s chances of success, just as Brussels is struggling to turbocharge its economy amid the COVID-19 crisis. Two EU officials said that Breton was keen to see the deal blocked but that decision will lie in the hands of competition czar Margrethe Vestager, with whom he has sparred over the direction of industrial policy.

Nvidia announced in September it would acquire Arm, a U.K.-based company licensing more than 500 companies with the blueprints of chips embedded in billions of processors. These companies include U.S. tech giants like Intel, Qualcomm, Apple and Nvidia, but also European chipmakers such as STMicroelectronics and NXP Semiconductors. Arm’s intellectual property plays a central role in many areas where Brussels wants to grow giants of its own such as the internet of things, connected transport systems, high-performance computing and artificial intelligence. 

Enter the antitrust police

The deal has prompted calls for a prohibition. Peter Mandelson, a former EU trade commissioner and former U.K. business minister, who now advises Chinese companies in Europe as part of his consulting activities, led the charge. “The only people who have the ability and the political will to stand up against this acquisition on competition grounds are in Europe,” he told POLITICO in October last year.

Businesses such as Qualcomm, Google and Microsoft oppose the deal, fearing that Nvidia could end up preventing other chipmakers from using Arm’s intellectual property. Other companies are worried that Nvidia would stop investing in certain applications using Arm’s blueprints to favor Nvidia’s chips.

According to Nvidia, the merger will help the EU roll out a “local and open ecosystem for the AI era … We’re going to enable and promote competition,” by offering an alternative to companies like Intel or AMD, which historically dominated the chip market for data centers, a spokesperson for the company said.  The company also said it was ready to accept legal commitments to maintain Arm’s open licensing model to alleviate worries and secure clearance from antitrust regulators around the world. 

The tie-up is under review by regulators in the U.S., in China, and in the U.K. after the government instructed the country’s competition regulator, the Competition and Markets Authority (CMA), to start a probe on national security grounds. 

The big question is whether the EU will step into the ring. And whether it’s willing to knock out its rival.

The Commission has not officially started its review of the deal but Nvidia has been holding informal discussions with officials from the Commission’s competition department since the deal was announced in September, according to two EU officials. Its experts are interested in the deal’s impact on the market for servers, the gaming industry and investigating whether it could impair future developments in the automotive industry or the internet of things, according to three customers.

The two officials said that it was unlikely the Commission would block the deal, since it brings together two companies mostly active at different levels in the value chain, what competition experts call a “vertical merger.” A “horizontal merger” would concern a tie-up between immediate competitors.

Competition law professor Pablo Ibáñez Colomo of the London School of Economics noted that such a “vertical” deal made it tough to act.

“Since vertical mergers do not lead, in and of themselves, to an increase in market power, the Commission does not challenge them absent a carefully crafted theory of harm,” he said. “The case law … which emphasizes this very point, acts as a constraint too.”

All about geopolitics

Many fear Nvidia’s takeover of Arm could hamper Brussels’ plan to minimize its dependence on America and China.

Autonomy from the U.S.’s chips is now a top EU priority, supported by Paris and Berlin. Europe is “strongly dependent” on the U.S. for tools to design integrated circuits, which are needed to build chips, according to the Commission’s latest assessment of the EU’s dependencies. EU businesses source all their high-end chips from U.S. companies. 

The timing of the case is also sensitive as it comes just as EU companies face a critical shortage of chips needed to fuel the bloc’s automotive, cloud computing and telecom industries. In parallel, Brussels is trying to avoid being caught in a new Cold War over semiconductors between the U.S. and China.

Under former President Donald Trump, the U.S. imposed export restrictions on products using U.S. intellectual property, posing a threat to EU technology exports to China. 

And if Arm, currently owned by Japanese tech giant Softbank, passes into U.S. control, EU businesses could end up buying key inputs used in smart meters, phones and cars from U.S. companies, reinforcing the U.S. leverage over the EU.

“By getting its hands on Arm, Nvidia is enabling the U.S. government to control the entire value chain [of tomorrow’s industries] from the internet of things to supercomputing and the cloud,” the tech executive said.

For the EU, dealing with this challenge will raise significant reputational issues.

If Vestager prohibits the merger, Brussels could be criticized for sacrificing competition policy to the benefits of its industrial policy. It would also give Breton revenge after the Dane cleared Nvidia’s acquisition of Mellanox, an Israeli company that produces super fast connectors for computers and servers, in November 2019, despite attempts from the Frenchman to block the deal. 

If the competition commissioner clears the merger, Brussels would be expected to force Nvidia to license Arm’s intellectual property to rivals and customers, a solution that is now being heavily criticized in the merger world.

In addition, should a regulator (like the U.K. or China) block the deal, the Commission would once again look soft or ineffective, as it has done in recent attempts to rein in Big Tech. This could benefit Britain’s CMA since more and more regulators across the world are looking to the British regulator as the example to follow, accelerating the descent of the EU’s antitrust enforcers from their once superpower status. 

Laurens Cerulus contributed reporting

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