NVIDIA Corporation's (NASDAQ:TSLA) $40 billion acquisition of British chip design house Arm Ltd. revolves around regulatory approval all over the world. Given the nature of Arm's business, which is ubiquitous in the low power processing industry and NVIDIA's products for data centers, the deal will come under serious regulatory scrutiny. This scrutiny will consider whether the acquisition hurts existing companies in several markets. Additionally, NVIDIA will have an excellent opportunity to bundle its graphics processing units (GPUs) with central processing units (CPUs) that are designed using ARM's frameworks in case the deal goes through.
One major source of concern for the deal is regulatory approval from China. Following slow approval processes in the country, combined with Qualcomm's hesitancy to move forward resulted in the company's acquisition of NXP Semiconductor being scrubbed two years back. Now, NVIDIA might also face difficulty in securing Chinese approval according to statements made by Ni Guangan, a Chinese academic.
NVIDIA's Arm Acquisition Will Be Detrimental To China States Academic
Mr. Ni was speaking at the fourth Information Security Industry Development Forum that was held today. He is a member of the Chinese Academy of Engineering, and his viewpoints paint a bleak picture for Arm's acquisition. As reported by SeekAdvice, the academician believes that Chinese officials will reject the deal. According to him, this will be due to the new ownership structure of Arm once the deal follows through.
To quote Mr. Ni,
ARM used to be a British company, and later Japan took a controlling stake. Now the United States has 70% of the control rights and is initiating mergers and acquisitions. If the merger is successful, it will definitely be very detrimental to us, so I believe that the Ministry of Commerce may reject the merger. In short, we will not be able to use ARM in the future.
Importantly, his statement also clarifies concerns that some had regarding NVIDIA's future in China following regulatory rejection. As is evident above, Mr. Ni believes that in such a scenario, ARM will stop operating in China. Unlike the Qualcomm-NXP deal which fell through, the academic believes that NVIDIA will choose to lose access to the Chinese market instead of canceling the acquisition.
Potential Rejection Will Carry Important Consequences For All Parties Involved
Naturally, these statements carry significant repercussions for NVIDIA, Arm and China. For NVIDIA and Arm, they imply a loss of access to one of the biggest tech markets in the world. On the other hand, for China, they suggest a slowing down of computing innovation. Following U.S. sanctions in 2015 that prevented Intel Corporation from selling its Xeon CPUs to China, the country chose to rely on Arm-based processors for supercomputing applications.
Since then, the country has developed several such platforms and now it faces a double-edged sword. If Chinese regulators give approval to the Arm deal, the new entity will have an ownership interest based in the U.S. Unquestionably this will put Chinese officials at unease given the recent American sanctions against Huawei Technologies Ltd. These have stripped the company of its ability to secure leading-edge chips due to the semiconductors being built using technologies originating inside the United States.
On the other hand, the alternative will not be attractive to the Chinee officials either. If they do not approve the deal, NVIDIA+Arm might stop operating in China. This is a possibility that Mr. Ni also highlighted today. If it occurs, then China will lose access to yet another crucial technological resource.
The academic admitted that China's biggest weakness is its ability to manufacture chips. However, he expressed optimism in the company's ability to catch up internationally soon. At this front, the academic believes that his country's large ecosystem will pay a crucial role. It will do this by allowing quick adoption of new technologies, a process that might enable quick testing and deployment of future technologies.
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