US-China chip war reaches Europe

Two European chip deals have run into trouble over ties to China, a sign of concern spreading in the West over potential Chinese control of critical infrastructure.

Last week, the new owner of the UK’s biggest chipmaker was forced to scrap its takeover, just days after another chip factory sale was blocked in Germany. Both transactions were affected by national security concerns and involved takeovers of Chinese companies.

In the UK, Nexperia, the Dutch subsidiary of Shanghai-listed semiconductor maker Wingtech, has been instructed by the government to sell at least 86% of its stake in Newport Wafer Fab, more than a year after taking control of the factory. Employees have since protested the decision, saying it put nearly 600 jobs at risk.

In Germany, the Economy Ministry prohibited Elmos Semiconductor, maker of automotive chips, from selling its factory in the city of Dortmund to Silex, a Swedish subsidiary of China’s Sai Microelectronics.

Chip manufacturing was already emerging as a new front in US-China tensions. Now the two troubled deals illustrate how pressure is mounting in Europe too, particularly as Western officials face calls for key sectors to be kept out of Chinese control.

“These decisions mark a shift towards tougher stances towards Chinese investment in critical industries in Europe,” said Xiaomeng Lu, head of geotechnology at Eurasia Group.

“U.S. pressure definitely contributed to these decisions. [Um] growing sense of technological sovereignty probably also motivated these movements – governments around the world are increasingly [vendo a] semiconductor industry as a strategic resource and seek to protect them from foreign takeovers”.

Two new flashpoints

Legal experts said the two rulings were notable because each deal was initially considered closed.

The Newport Wafer case is “the first completed acquisition” that needs to be undone under a UK national security and investment (NSI) act, which took effect in January, according to Ian Giles, head of antitrust and competition for the Europe, Middle East and Asia for Norton Rose.

The company said last week that it was “shocked” by the decision and that “the UK government has chosen not to enter into a meaningful dialogue with Nexperia or even visit the Newport site”.

The company added that it had offered to avoid “activities of potential concern and provide the UK government with direct control and participation in the management of Newport”, a 28-acre site in south Wales.

The factory produces silicon wafers, the basis for manufacturing computer chips. Many of its products end up powering cars and medical equipment. Nexperia indicated that workers at the facility now face an uncertain future.

In an open letter to the UK government last Thursday, the Nexperia Newport Staff Association said it was “discrediting” that staff livelihoods were “put at risk on Christmas Eve”.

“This is clearly a deeply political decision,” the group wrote, rejecting the idea that the deal would undermine British security. “You must exercise common sense and protect our jobs by allowing Nexperia to keep its Newport factory.”

For Elmos, German authorities initially indicated they would issue a conditional approval and even shared a draft approval after an intense review process that lasted about 10 months, the company said in a statement following the injunction.

Tim Schaper, head of antitrust and competition for Germany at Norton Rose, said the government’s intervention was also significant, as “the Elmos technology is considered quite old, state-of-the-art in the 1990s and supposedly of no great importance. industrial”.

“The transaction became the subject of a public debate about acquiring Chinese investors’ stakes in key German technologies,” he said.

It is possible that regulators were concerned about an outflow of technical know-how, according to Alexander Rinne, head of the European antitrust practice at Munich-based international law firm Milbank.

“Elmos is known for making chips for the automotive sector, which is Germany’s main industry and the country’s pride,” he said in an interview.

Elmos and Nexperia declined interview requests. A spokesperson for Nexperia told CNN Business on Tuesday that it was “considering its options regarding the UK government’s decision”.

a growing debate

Chips are a growing source of tension between the United States and China. Washington declared material shortages a national security issue and highlighted the importance of remaining competitive in advanced technology capabilities.

This year, the United States has tightened its own restrictions and pressured allies to enact their own, according to Lu. In August, the US government ordered two major chip makers, Nvidia and AMD, to stop exporting some high-performance chips to China.

Two months later, the Biden administration unveiled sweeping export controls that prohibited Chinese companies from buying advanced chips and chip-making equipment without a license.

The rules also restricted the ability of US citizens or US green card holders to support the development or production of chips at certain manufacturing facilities in China.

The pressure is building. On Monday, NATO Secretary General Jens Stoltenberg urged the West to “be careful not to create new dependencies” on China.

Speaking at a NATO parliamentary assembly in Madrid, Stoltenberg said he was seeing “increasing Chinese efforts” to control critical Western infrastructure, supply chains and key industrial sectors.

“We cannot give authoritarian regimes any chance to exploit our vulnerabilities and harm us,” he said.

China backtracked on its handling of the two European semiconductor cases.

“We strongly oppose the UK’s action and call on the UK to respect the legitimate rights and interests of Chinese companies and provide a fair, equitable and non-discriminatory business environment,” a foreign ministry spokesman told reporters. from China, Mao Ning at a briefing last Friday when asked about the Newport Wafer order. “The UK has overextended the concept of national security and abused the power of the state.”

Zhao Lijian, another spokesman for China’s Ministry of Foreign Affairs, called on Germany and other countries to “refrain from politicizing normal economic and trade cooperation” at a press conference earlier this month, without specifically addressing helmets.

Germany has shown increased scrutiny from Chinese buyers this year. Last month, a bid by Chinese state-owned shipping giant Cosco for a stake in a Hamburg port terminal operator sparked similar controversy.

Under pressure from some members of the government, the size of the investment was subsequently limited.

The next battlefield

Lawyers say that if the chip makers appeal, they could face an uncertain battle that could drag on for years.

In each case, they would need to file a court challenge within approximately one month of the regulators’ decisions, except in exceptional circumstances, according to Norton Rose.

Both the UK and Germany have recently added rules that increase government oversight over such decisions, making outcomes harder to predict.

In Germany, a change in foreign direct investment rules in 2020 means the government can intervene in prospective deals “if there is a ‘probable compromise of public order and security,'” Schaper said.

Previously, on the other hand, it could only impose restrictions “if there was a ‘real and sufficiently serious threat to public order and safety,'” he told CNN Business.

In the UK, the government’s ability to retroactively review agreements under the NSI Act “was really something that was considered surprising and far-reaching,” said Andrea Hamilton, partner at Milbank in London.

“If challenged, as Nexperia apparently intends, it will also become a test case as to extending the boundaries of the NSI Act,” she said.

Elsewhere, attention is turning to the Netherlands.

The Dutch government is currently facing pressure from the United States to limit exports to China, particularly from ASML, a semiconductor equipment maker that holds a dominant position in the lithography machine market, according to Lu of Eurasia Group.

“It will be the next case study,” she told CNN Business.

The Netherlands has made it clear that it will form its own position.

Asked about the issue this month, Dutch Foreign Trade Minister Liesje Schreinemacher said the country “would not copy US export restrictions to China individually”.

“We make our own assessment”, he said in an interview with the Dutch newspaper NRC.