The Biden administration recognizes that semiconductors are critical technologies in which US leadership is an important national strategy. This raises the question of why the administration has put Nvidia—a US company and one of the world’s largest chip developers—in such a tough position by limiting its growth opportunities and then limiting its existing markets. It might be the White House not thinking through the consequences of its actions or the administration’s antitrust regulators not knowing what is happening in chip markets. Neither is good. US companies deserve better, and the national strategy demands it. But how did we get here?
The Federal Trade Commission (FTC) apparently initiated Nvidia’s woes by suing to block its potential merger with Arm, which could have accelerated the companies’ innovation and market expansion at a time when global chip sales are slowing. Among its other computing products, Nvidia develops graphics processing units, which are specialized chips for number crunching in everything from video games to artificial intelligence (AI). Arm licenses intellectual property (IP) to companies such as Intel, Samsung, and NEC for general-purpose chips used in smartphones, cars, and other devices that comprise the Internet of Things.
Nvidia and Arm dropped their attempted merger shortly after the FTC filed its lawsuit. Six months after that, the Biden administration imposed export restrictions on Nvidia that the company projects will decrease its third quarter revenues by $400 million. To add insult to injury, Nvidia had just announced its net income had already dropped 72 percent from a year earlier. As we describe below, the restrictions apply to exports to China and appear justified on a national security basis. But why would the FTC block a US developer of critical technology from growing at such a perilous time for the company? Was the administration unaware of this impending significant change in Nvidia’s markets? Or if it was aware, did it not care?
The FTC claimed the merger “would give one of the largest chip companies control over the computing technology and designs that rival firms rely on to develop their own competing chips.” But “control” is too strong a term, because Nvidia-Arm would not have been free to alter licensing contracts at will. And while it is easy to understand why other chip companies might be concerned about using IP owned by a rival, the Nvidia rivals that supported the merger also had a point: Arm has languished under ownership by SoftBank, which purchased Arm in 2016. Arm’s revenues have been flat and its profits negative since then. Nvidia’s expertise in graphics processing units would have enabled Arm to expand beyond IP for general-purpose chips.
Although the deal faced headwinds from rivals and foreign governments, the FTC’s opposition to the merger appeared to be the fatal blow. Nvidia had been insisting it could overcome regulatory hurdles up until almost immediately after the FTC became involved, but the two companies called off the deal two months after the FTC’s December suit, effectively ceding this path to growth.
Then at the end of August, the Biden administration banned America’s top two semiconductor companies—Nvidia and Advanced Micro Devices (AMD)—from exporting their highest-end AI chips to China. Unlike AMD, Nvidia expects a significant hit to annual revenue as a result of this market constriction.
The administration’s ban appears to have merit: The Department of Commerce is concerned the chips could have a “military end use” or “military end user” in China. There are good reasons to not supply the People’s Liberation Army, especially with growing tensions between the US and China. But the cost to Nvidia appears substantial, with no compensation offered and other business options restricted by Biden’s antitrust regulators expanding their efforts to control large businesses. (Some might point to the CHIPS and Science Act here, but Nvidia rightly emphasizes that the bulk of those benefits will go to manufacturers like Intel.)
The damage to Nvidia is done, to the detriment of America’s strategy to maintain a vibrant chip industry. The course corrections from this should be twofold. First, Biden’s antitrust advisers and regulators should drop their belief that large companies are inherently bad. If the FTC had not held firmly to the assumption that Nvidia’s success implied dominance and control, Nvidia and Arm might have been able to work with the agency regarding any legitimate merger concerns. And if major US tech companies are prevented from leading, they might well be replaced by Chinese tech companies.
Second, the administration should require all its offices and agencies to provide US antitrust regulators with information, in confidence if necessary, on likely actions that will affect markets the regulators are investigating. This could reduce the likelihood of important US companies receiving the kind of one-two punches that Nvidia did this year and truly set the US on course for semiconductor success.
The post Biden Administration’s Actions Needlessly Harm Critical US Chip Company appeared first on American Enterprise Institute – AEI.