Recently, the semiconductor industry has once again been swept up in an antitrust wave.
The first to be hit is the AI chip giant Nvidia, which has been targeted by the US Department of Justice for two antitrust investigations.
The first was in April this year, when Nvidia spent $700 million to acquire Run:ai, an Israeli startup specializing in GPU management software. Although the specific issues of the Run:ai acquisition case have not been disclosed, US and international regulatory authorities have been closely scrutinizing large technology acquisitions in recent times, involving issues of anti-competitive business practices and market monopoly. Acquisitions in the field of artificial intelligence are particularly eye-catching.
The second investigation initiated by the US Department of Justice was in response to complaints from competitors. The Department of Justice will review whether Nvidia has abused its market-leading position to pressure cloud vendors into purchasing its products. The Department of Justice will also investigate allegations that "Nvidia charges excessive network equipment fees to customers who choose to purchase AI chips from competitors such as AMD and Intel."
In a statement to foreign media, Nvidia said, "Our competition is based on decades of investment and innovation, strictly complying with all laws to ensure that customers can choose any solution that best suits them. We will continue to support aspiring innovators in various industries and markets, and are willing to provide any information required by regulatory authorities."
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Misfortunes never come singly, and just before this, Nvidia was reported to be facing antitrust charges in France. Insiders revealed that the charges originated from a raid by French regulatory authorities on the GPU (Graphics Processing Unit) industry in September last year, and the target of this inspection was Nvidia.
According to the provisions of French antitrust law, companies that violate antitrust laws may face fines up to 10% of their global annual turnover, but they can also make concessions to avoid penalties. Based on Nvidia's revenue of $60.9 billion in the fiscal year 2024, the fine could reach up to $60.9 billion (approximately 44.263 billion yuan).
According to a report released by the French regulatory authorities on the competitive situation of the generative AI industry, chip suppliers have the risk of abusing their market-leading position. The report mentioned the industry's dependence on Nvidia's CUDA chip programming software and expressed concern, as this is the only system fully compatible with Nvidia's GPU (Graphics Processing Unit). In addition, Nvidia's recent investment in CoreWeave, a cloud service provider focused on AI, has also exacerbated the unease of regulatory authorities.
In addition to Nvidia, Google has also been found to be a monopoly in recent times. Since the wave of technology antitrust supervision swept Silicon Valley in 2019, companies such as Google, Apple, Meta, and Amazon have faced multiple lawsuits. The judgment against Google this time is not only a microcosm of the challenges faced by global technology giants under antitrust supervision pressure but is also widely regarded by the outside world as an important milestone in the US technology antitrust action.It is not difficult to see that the technology circle, especially the semiconductor circle, is facing great antitrust pressure.
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The Harm of Monopoly
Antitrust, as the name implies, is against monopoly. When a company's operations show signs of monopoly or a tendency towards monopoly, the national government or international organizations intervene based on relevant antitrust laws.
There are several main reasons why countries actively oppose monopolies:
1. Abuse of market position. The most well-known case is the National Development and Reform Commission's order to rectify and fine Qualcomm $6 billion for monopolistic behavior. In November 2013, the National Development and Reform Commission initiated an antitrust investigation into Qualcomm based on a report. During the investigation, the National Development and Reform Commission conducted in-depth investigations into dozens of domestic and foreign mobile phone production companies and baseband chip manufacturing companies.
After investigation, evidence collection, and analysis, Qualcomm was found to have a dominant position in the market for licensing essential patents for CDMA, WCDMA, and LTE wireless communication standards and the baseband chip market, and committed three acts of abuse of market dominance.
First, it charged unfair high patent licensing fees. When licensing patents to Chinese companies, Qualcomm refused to provide a patent list, and expired patents were still included in the patent portfolio and charged for licensing fees. At the same time, Qualcomm required Chinese licensees to grant it free reverse licenses for related patents they held, and refused to deduct the value of the reverse-licensed patents or provide other consideration in the licensing fees. In addition, for Chinese licensees who had been forced to accept a package of non-standard essential patents, Qualcomm insisted on a high licensing fee rate while charging patent licensing fees based on the wholesale net selling price of the entire machine. The combination of these factors led to excessively high licensing fees.
Second, without a justifiable reason, it bundled non-wireless communication standard essential patent licenses. In patent licensing, Qualcomm did not distinguish between different types of wireless communication standard essential patents and non-wireless communication standard essential patents and license them separately. Instead, it used its dominant position in the market for licensing essential patents for wireless communication standards, and without a justifiable reason, bundled non-wireless communication standard essential patent licenses, forcing some Chinese licensees to obtain non-wireless communication standard essential patent licenses from Qualcomm.Thirdly, unreasonable conditions are attached in the sale of baseband chips. Qualcomm requires the signing and non-challenge of patent licensing agreements as a condition for Chinese licensees to obtain its baseband chip supply. If potential licensees do not sign a patent licensing agreement that includes the above unreasonable terms, or if the licensee has a dispute over the patent licensing agreement and initiates litigation, Qualcomm will refuse to supply baseband chips. Due to Qualcomm's dominant position in the baseband chip market, Chinese licensees are highly dependent on its baseband chips. Qualcomm's attachment of unreasonable conditions in the sale of baseband chips forces Chinese licensees to accept unfair and unreasonable patent licensing terms.
These monopolistic enterprises often use their dominant market position for bundling sales, and even attach unreasonable transaction conditions.
2. Price monopoly. Price monopoly mainly includes the behavior of monopolizing high prices or low prices. In May 2018, Chinese regulatory authorities launched an antitrust investigation into memory chip manufacturers Samsung Electronics, Micron Technology, and Hynix Semiconductor. The raid investigation was mainly due to the continuous and significant increase in the prices of memory chips (DRAM). The reporting companies believe that these three companies use their market advantage to control prices.
In 2017, Samsung Electronics, SK Hynix, and Micron accounted for nearly 96% of the global DRAM market share. The total revenue of the semiconductor business of the three companies in China was $44.68 billion, a 39.16% increase from $32.1 billion in 2016. Data shows that from June 1, 2016, to February 1, 2018, the price of 4GB DRAM memory increased by 130%. In 2017 alone, the price of DRAM memory increased by 47%, setting the largest increase in nearly 30 years.
In the first quarter of 2018, the market share of the three major memory manufacturers, Samsung, Hynix, and Micron, in the DRAM industry was 44.9%, 27.9%, and 22.6%, respectively, accounting for a total of 95.4% of the market share. Due to the crazy growth of memory in 2017, Samsung not only did not see a decline in revenue due to the mobile phone spontaneous combustion incident but also made a fortune in 2017. According to China's Anti-Monopoly Law, if the regulatory authorities ultimately determine that the three giants have engaged in price monopoly behavior, and impose penalties based on the sales volume of 2016-2017, the three companies will face fines ranging from $800 million to $8 billion.
The price monopoly severely infringes on consumer rights and brings excessive profits to monopolistic enterprises. Fortunately, in recent years, domestic storage chips have made significant progress, and the prices of related chips have been stabilized.
3. Hindering innovation. When a company reaches a certain scale, innovation and monopoly are contradictory. At first, enterprises with a monopolistic position reap huge profits and are willing to take risks to promote innovation. However, once the monopoly reaches a certain level, the company will allocate more funds to maintaining the monopolistic position and eliminating potential competitors, rather than promoting innovation. This is because the profits obtained by maintaining the monopoly are greater, while innovation is risky.
For example, in recent years, the semiconductor field has continuously set off a wave of mergers and acquisitions, one of the reasons being to eliminate potential competitors. In 2022, the largest deal in the history of the chip industry, the acquisition of ARM by Nvidia, was declared a failure. If the transaction had been successful, it would have allowed Nvidia to control a company that holds the core of most global mobile devices. Large technology companies that rely on Arm chip designs, including Qualcomm and Microsoft, opposed the acquisition.
The sale of Arm was subject to strict scrutiny because its chip designs are used in all areas from mobile phones to cars and factory equipment, making neutrality the foundation of its business model. The world's largest technology companies rely on Arm's technology, and they are worried that under Nvidia's leadership, technology companies may lose unrestricted access.
If the acquisition had been successful, the ecosystem of ARM architecture would have suffered a significant blow at that time.The Development of Antitrust Law
The concept of monopoly and its fundamental economic implications have been proposed since the era of classical economics. However, Chamberlin's "Monopolistic Competition Theory" in the last century greatly expanded the economic research on the issue of monopoly. This theory believes that there are a large number of intermediate forms between pure competition and pure monopoly, that is, the state of monopolistic competition caused by product differentiation. Product differentiation refers to the differences between similar products in terms of quality, performance, appearance, brand, service, etc., each meeting the different needs of different consumers, and they cannot completely replace each other, and these differences will lead to a certain sense of monopoly.
It is understood that more than 80 countries around the world have formulated antitrust laws. Among them, the model represented by the "United States" and the model represented by the "European Union" are the two main models in the world's antitrust system today.
1. United States: The antitrust law in the United States is called the "Antitrust Law", which is composed of multiple laws. At the end of the 1880s, trusts emerged in the oil, coal mining, sugar manufacturing, and other industries. The formation of trusts, although bringing excessive profits to monopolistic capitalists, has disrupted market structure, leading to a large number of farmers and small and medium-sized enterprises going bankrupt, and the antitrust movement surged. To alleviate social contradictions, the U.S. government decided to intervene through legal means. In 1890, the United States enacted the world's first "Antitrust Law" - the "Act to Protect Trade and Commerce from Illegal Restraints and Monopolies," commonly known as the "Sherman Antitrust Act." Subsequently, in 1914, the Federal Congress passed the "Clayton Antitrust Act" as a supplement to the "Sherman Antitrust Act." This law clearly stipulates 17 illegal monopolistic behaviors, including price discrimination, tie-in contracts, and purchasing and controlling the stocks of other manufacturers in situations that can lead to the weakening of competition.
2. European Union: The EU antitrust law is called the "EU Competition Law," which has become one of the most influential antitrust laws in the world today. It is a system composed of rules determined by Article 81 and Article 82 of the Treaty on the Functioning of the European Union and the "Council Regulation on the Control of Concentrations between Undertakings." Looking at the EU Competition Law, we will find that an important feature of its value goal is the pursuit of economic equality and competition freedom, which is mainly reflected in the protection of the rights of small and medium-sized enterprises.
3. China: The "Anti-Monopoly Law of the People's Republic of China" was passed on August 30, 2007, and was not truly implemented until August 1, 2008. The law stipulates that if an operator violates the provisions of this law and reaches and implements a monopoly agreement, the antitrust enforcement agency shall order to stop the illegal act, confiscate the illegal income, and impose a fine of 1% to 10% of the sales amount of the previous year.
In fact, the monopoly position or market advantage position itself is not illegal, and the law only controls it when the actor abuses the monopoly position or market advantage position to destroy the competitive environment. The purpose of antitrust is to promote healthy market competition and innovation.Monopoly Pressure on TSMC, NVIDIA, and Other Giants Highlights
In recent years, with the development of trade wars and technology wars, the pressure of antitrust in the semiconductor industry has become prominent. It is under various antitrust regulations that many mergers and acquisitions, especially cross-border ones, have been declared unsuccessful.
On August 16 last year, Intel announced the termination of its acquisition plan for Tower Semiconductor due to the transaction's inability to obtain regulatory approval in time. According to the terms of the merger agreement and its termination, Intel will pay a termination fee of $353 million to Tower.
In 2021, due to the failure to obtain regulatory approval in time, the transaction of Applied Materials to acquire Japan International Electric from private equity firm KKR for $3.5 billion failed. According to the previous agreement, Applied Materials will compensate Japan International Electric with a penalty of $154 million.
In addition, NVIDIA has also terminated several mergers and acquisitions in recent years due to antitrust issues.
Recently, TSMC proposed "Foundry 2.0". Regarding TSMC's new definition, there are many speculations from all walks of life, believing that it may be related to antitrust. Under the framework of this new definition, the industry scale of wafer manufacturing 2.0 will be nearly $250 billion in 2023, while it was $115 billion before the new definition. TSMC's market share in wafer manufacturing 2.0 in 2023 is 28%, and under the new definition, TSMC's market share has obviously decreased.
The semiconductor industry is the core of the development of the new generation of information technology industry and has a crucial impact on the development of the global economy. It is known that in the semiconductor field, industry mergers and acquisitions have gradually become one of the important means for major companies to obtain innovative technology and talents, as well as to enhance market status. Under the wave of antitrust, semiconductor giant companies have successively failed, and how to avoid the antitrust stick will become an important research topic for corporate strategy.
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