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In October 2020, the South Korean chipmaker SK Hynix and its American counterpart Intel came to an agreement whereby SK Hynix would acquire Intel’s NAND flash memory chip and solid-state disk (SSD) business for $9 billion. NAND and SSDs are widely used memory products found in many electronic devices including smartphones, TVs, and servers. Many companies make NAND and SSDs. Competitors to SK Hynix and Intel in these memory products include, among others, Korea’s Samsung, Japan’s Kioxia, and America’s Western Digital and Micron.
NAND and SSDs are designed, produced, and sold on a worldwide basis. This means SK Hynix and Intel required approval from multiple national competition authorities to close their deal. Over the past year, SK Hynix and Intel received unconditional approvals from competition authorities in the United States, the European Union, the United Kingdom, South Korea, Taiwan, Singapore, and Brazil. Notably absent from this list is China.
We should not be surprised most competition authorities appear unconcerned about this acquisition. The global NAND and SSD markets are highly competitive. Customers are, “constantly demanding lower prices with larger memory.” Suppliers are continuously innovating to gain an advantage over their competitors. Samsung, the largest NAND and SSD producer, only has a 35 percent share of the global market and the acquisition increases SK Hynix’s share to about 20 percent for NAND and to about 30 percent for SSDs. A slight increase in concentration in a highly competitive market with many producers generally does not give competition authorities pause. The transaction may even make markets more competitive by improving SK Hynix’s ability “to invest in innovation and compete more aggressively.”
China’s State Administration for Market Regulation (SAMR) is not persuaded the deal is benign. SAMR’s public order states that SK Hynix must, among other things, “help a third-party competitor enter the … solid-state drive market” as a condition for approving the acquisition. Competition authorities commonly require divestitures to remedy competitive concerns about merger transactions. In retail gasoline mergers, for example, the parties may be required to sell gasoline stations in cities where both companies operate or in pharmaceutical mergers the parties may be required to sell assets related to one company’s drug when both companies sell or are developing treatments for a particular medical condition.
Given China’s “rule-by-law” approach to legal matters, including competition, we cannot know whether SAMR’s order reflects the actual commitments made by SK Hynix and Intel. Nor can we know what more onerous or troubling conditions the parties were able to resist in light of China’s more aggressive antitrust enforcement in the semiconductor industry. But the remedy in SAMR’s order is quite different from a typical antitrust remedy. Instead of requiring the parties to divest assets to preserve competition, SAMR appears to be asking the parties to help a new competitor enter the market—a market in which every other competition authority has concluded there will be no harm to competition from the acquisition. Oh, and it just happens that the new competitor will be a Chinese company in an industry China has targeted for global leadership. The goal of antitrust enforcement is not to remake markets through unfair means, as SAMR apparently seeks to do, but to preserve the competition that already exists.
The approval conditions in SAMR’s order are alarming because, to the extent they reflect the actual commitments made, they seem to be a pretext for stealing Intel’s patented intellectual property. There is no credible antitrust harm here which necessitates the remedy SAMR’s order appears to require. SAMR’s order supports China’s stated goal of “establishing a world-leading semiconductor industry in all areas of the integrated circuit supply chain by 2030.” An essential element of the SSD supply chain is product design. The SSD market is, “dynamic and highly competitive characterized by significant leapfrog innovation with competitors constantly attempting to differentiate their offerings through the development and release of new products and technologies.”
The remedy in SAMR’s order would allow a new Chinese firm to bypass the competitive innovation process and free ride on Intel’s prior innovations. China’s leading NAND and SSD producer, YMTC, is “considered to be a weak competitor, concentrating mainly on low-end products and still developing its business.” This purported antitrust remedy allows a new Chinese firm to leapfrog competitors who rely on SSD sales revenue to compensate for the costs of prior innovation and to fund the next innovation cycle. SAMR’s order will harm American innovation by depriving companies, such as Western Digital and Micron, of an important source of R&D funding. We are already familiar with the routine forced technology transfers via foreign investments in China. Now, the clearance conditions found in the SAMR’s order reveal an intent to force technology transfers via mergers. Taking innovative firms hostage, SAMR’s order announces a new strategy for intellectual property theft.
As is typical in acquisitions of American assets by foreign firms, this acquisition underwent review by the Committee on Foreign Investment in the United States (CFIUS). CFIUS reviews foreign acquisitions to assess their impact on U.S. national security. CFIUS review and approval of this deal took place before SAMR’s order was made public. It is imperative CFIUS ensure that SAMR’s order does not allow China to steal American intellectual property under the guise of antitrust enforcement. At the same time, global antitrust authorities, led by the United States, need to collectively push back against this mercantilist weaponizing of antitrust by China.
Protecting American innovation is especially critical in an environment in which the military increasingly depends on dual-use technologies such as the memory products at issue in this transaction. We should not allow China to weaponize antitrust for theft of American intellectual property.