Infineon deal scrutiny raises trade threat to Europe tech firms

London

US officials are dragging Europe's technology industry more deeply into a trade war with China, threatening the region's ability to create its own semiconductor giants.

The Committee on Foreign Investment (CFIUS) is urging President Donald Trump to block Infineon Technologies AG's US$8.7 billion acquisition of Cypress Semiconductor Corp., claiming it poses a risk to national security, Bloomberg News first reported on Thursday. Although it wasn't clear what spooked CFIUS, both Infineon and Cypress have Chinese customers including Huawei Technologies Co. CFIUS is sensitive about deals allowing Chinese buyers to get their hands on advanced American technology.

Europe's tech firms have tried to stay neutral in the power struggle. Semiconductor makers said earlier this year that they'd keep supplying Huawei after a Trump's administration order in May demanding US-based companies stop. At the time, a spokesman for Infineon said the majority of products it delivers to Huawei were not subject to US restrictions.

In recent months, European lawmakers have pushed back against Mr Trump's calls to cut Huawei out of European telecom infrastructure. The UK, France, and Germany are all looking to keep the door open to the Chinese telecom giant in some way, nubbing the US view that Huawei could be a security risk. Italy, Croatia, Hungary and Switzerland have signed partnerships with Huawei.

Huawei is Infineon's sixth-largest customer accounting for about 2.4 per cent of sales, according to supply chain data compiled by Bloomberg. Other Chinese buyers of Infineon products include iPhone-assembler Hon Hai Precision Industry Co. and Tencent Holdings Ltd.

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"Obviously national security considerations are very important," said Keily Blair, Partner at law firm Orrick. "It would be good to see an evidence-based approach in the US, similar to what we have seen in the UK with Huawei."

In 2017, CFIUS blocked Infineon's proposed deal for Wolfspeed, a semiconductor unit of US-based Cree Inc. Aixtron SE's planned sale to a Chinese-backed company collapsed in 2016 after US opposition. Mr Trump has also blocked Broadcom Inc.'s hostile takeover of Qualcomm Inc.

"We have always been less sure about the regulatory approvals than Infineon management," said Citigroup Inc. analyst Amit Harchandani, "given the number of recent cross-border deals failing to clear the regulatory hurdle."

The US is also trying to dictate who European firms do business with. Dutch chip gear-maker ASML Holding NV has had difficulty renewing an export licence to China following US political pressure. ASML wants to sell equipment to China that would help the company produce its own next-generation chips and wean itself off foreign imports.

In January, US ambassador to the Netherlands Pete Hoekstra told Dutch newspaper Het Financieele Dagblad that ASML's technology "doesn't belong in certain places", suggesting China. The Chinese ambassador, Xu Hong, had warned days earlier in the same paper that the relationship between the Netherlands and China was at risk if the government blocks EUV machine exports.

Other European tech deals are now in focus. British chip designer Dialog Semiconductor is another key figure in the European tech supply chain with Chinese customers and American acquisition targets. In February, it said it'd agreed to buy Santa Clara, California-based Adesto Technologies Corp. for about US$380 million.

Dialog's biggest customer is Apple Inc., but Huawei is its third-largest with an exposure of about 2.1 per cent. Dialog CEO Jalal Bagherli declined to comment when contacted by Bloomberg on Friday.

Although Cypress's share price has collapsed following the report that CFIUS is interested in the deal, some analysts believe all is not lost. "We believe mitigation conditions might still be an option and it would be premature to assume the deal is off," said Citi's Mr Harchandani.

"We believe worst-case we have a delay until the closing," Vijay Rakesh, analyst at Mizuho Securities, said. A "potential delay or divestiture would be par for the course, but we see the deal as mostly consummated". BLOOMBERG