NIKKEI ASIAN REVIEW
US intervention in $117bn takeover plan shows tech is a coming trade battleground
March 12, 2018
In the Donald Trump political-industrial complex, all roads lead to China.
But other countries risk getting trampled along the way. Take steel and aluminum exporters suddenly confronting White House tariffs — 25% on steel and 10% on aluminum. China accounts for less than 5% of U.S. steel imports. Trump’s obsession with Beijing trolled him into an action that will do far greater damage to Brazil, the European Union, Japan, South Korea and other allies.
Now it is the new economy’s turn to grapple with the “America First” president’s fear of Chinese dominance. Once again, there is a risk of collateral damage to friendly states, including in Asia.
At issue is whether Broadcom, a semiconductor group based in US-friendly Singapore, will be allowed to buy Qualcomm, a leading U.S. computer-chip maker. The government committee that reviews foreign acquisitions of U.S. companies is looking askance in what would, at $117 billion, be history’s biggest tech acquisition. It is citing vague national-security concerns. The real worry is about Broadcom’s links with its big Chinese customers and their strong position in 5G, the next generation of wireless technology. Could the deal help give Beijing a decisive role in a sector crucial to the world’s technological future?
The most tantalizing thing about this dustup is how it pits Trump against Trump.
Washington wags have come to joke about “Monday Trump” and “Thursday Trump.” The first tends to shoot from the hip and thinks in purely commercial terms. The latter remembers the populist pledges he made to get elected, ones often in direct conflict with traditional profit motives. In this case, Broadcom CEO Hock Tan is left trying to split the difference between the Trump he met in November and today’s.
In November, around the time news of the Qualcomm bid emerged, Tan visited the White House to appeal to Trump’s desire to make America theplace to invest. Citing the huge tax cuts the president was planning, Tan pledged to “redomicile” to Trump’s America — that is, officially move Broadcom’s headquarters back to the U.S., where it was founded and where its operations are still largely based.
A beaming Monday Trump called Broadcom “one of the really, really great companies.” Tan figured his $117 billion Qualcomm deal, touted as a revolutionary step for a key industry touching everything from cars to smartphones, was good to go.
That was until Protectionist Thursday Trump showed up to muddy the debate. Last week, the Committee on Foreign Investment in the U.S., or Cfius, stalled the merger process — a rare intervention by Washington. Broadcom-Qualcomm may become a touchstone for those wondering which Trump will prevail: the one wooing waves of foreign investment or the one who views Beijing as a predator “killing” American prosperity.
Granted, there is more than politics at play here. Broadcom is known more for cost-cutting than inventiveness or fat research-and-development budgets. Qualcomm is a technological innovator that prides itself on its R&D, a priority that may change under Broadcom leadership as Tan’s team looks to reduce costs at Qualcomm. Qualcomm shareholders worry Broadcom is stretching its balance-sheet limits with the Qualcomm bid, which could mean even deeper cuts at Qualcomm to make the transaction work.
But Cfius is intervening much sooner than it usually does, and is turning heads as much for its proactiveness as its aggressiveness. Typically, it weighs in after a deal a completed. In this case, it may be trying to preempt one. Is it really a coincidence this is unfolding under an administration keen on protecting national champions? Qualcomm, after all, has strong U.S. government ties and is expected to play a pivotal role in America’s piece of the global 5G market.
The national security argument, though, is questionable. The crux of the problem: Huawei, China’s telecom equipment powerhouse. It is a customer of both Broadcom and Qualcomm, which supply their chips for Huawei’s handsets and network infrastructure. That, essentially, is what U.S. Treasury Department staffer Aimen Mir means by “risks associated with Broadcom’s relationships with third-party foreign entities and the national security effects of Broadcom’s business intentions with respect to Qualcomm.”
Perhaps, but this could bring a couple of unintended and painful consequences. One is in hitting corporate America’s access to China, its most promising market. When trying to counter Beijing, it is probably best not to emulate the Communist Party’s worst heavy-handed impulses. Trump has done lots of this at home by attacking the media, the judiciary, running a uniquely opaque and transactional White House — the Trump political-industrial complex — and now erecting non-tariff barriers (via Cfius) along with actual ones (in metals).
Qualcomm, remember, has been the target of Beijing’s anti-trust overreach, paying a nearly $1 billion fine in 2015 in a case that was widely seen as an unfair assault on a foreign company. Qualcomm’s sin, it seemed, was making real inroads into China’s chip market. How can U.S. officials avoid charges of hypocrisy if Beijing cracks down anew on, say, Microsoft? Might Silicon Valley’s fintech startups find their mainland access stymied as were the ambitions of Jack Ma’s Ant Financial to purchase U.S. remittance company MoneyGram?
Sometimes there is logic to rebuffing deals. Losing Qualcomm, a crown jewel of U.S. tech, would indeed dent America’s prospects for leading the global artificial-intelligence race. The same goes for driverless cars and advancements that will connect gadgets in years to come. But with Broadcom returning to the U.S, and Qualcomm staying put could the idea of “losing Qualcomm” not be a little exaggerated by the Trump administration?
A balance needs to be struck to remain true to America’s free-market ideals. Besides, a businessman as great as Trump thinks he is would know competition, even from China, is a good thing.
Another point: A rising yuan makes U.S. acquisitions cheaper for Chinese buyers. Admittedly, Broadcom is Singaporean, not Chinese. Yet this tale is really about China Inc., whose fast-increasing acquisitiveness will keep U.S. regulators plenty busy. A geopolitical hothouse, too, if the White House repels most mainland bids.
On the campaign trail, Trump pledged to avenge the “rape” of American workers by forcing China to boost exchange rates. The yuan has risen nearly 8% since Trump’s inauguration in January 2017. Yet that makes America’s corporate jewels cheaper for mainland tycoons. In 2016 and 2017, China’s outbound direct investment was a combined $290 billion, a figure sure to grow exponentially in the years ahead.
The yuan is increasing purchasing power, making Apple, Boeing, Delta, General Motors, Nike and Westinghouse more affordable. Google, Facebook or Snapchat might also come into consideration for mainlanders who could buy them and use them as propaganda tools them for the good of President Xi Jinping’s party? Yes, U.S. regulators would raise red flags about all such transactions. But if the U.S. ends up blocking far more bids than before and for a wider range of stated reasons, that would be a serious threat to capitalism.
Determined to salvage the deal, Broadcom’s Tan is playing the make-America-great-again card. Last week he offered to create a $1.5 billion fund to train American engineers and position the U.S. as a “global leader of 5G.” Tan also waved the U.S. flag a bit, pointing out Broadcom’s California roots. And then there is the ultimate gesture aimed to pull at nationalist Trump’s heartstrings: Broadcom is willing to become American once again.
How this tale ends is anyone’s guess. But Trump’s penchant for trade wars and bluster suggest foreign-acquisition calls will rely more on emotion than economic logic. That seems more a recipe for squandering America’s advantages than making the biggest economy great again.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He has written for Bloomberg and Barron’s.