Influences on Competitive Landscape

Historically, elimination of duplicate resources often comes after horizontal integration. Most M&A transactions are involved with enormous deal values, so they are funded with additional debts. This causes combined companies are under great pressure to achieve cost synergy instantly. One way to eliminate duplication of resources is to discontinue the overlapped businesses. This approach typically will result in layoffs and reduction of competition. In other words, layoffs could happen to the Qualcomm-NXP acquisition and the Broadcom-Qualcomm case as well if the proposal did come true. IC design strongly relies on expert engineers to develop proprietary innovations and optimize chipset performance. Due to their leadership and scales in the IC design sector, Qualcomm, NXP and Broadcom have always been attracting superior engineers. Once the engineers are released from the overlapped businesses, other IC design companies, as buyers of the labor market, could benefit from the surging supply of high-quality human resources. It would be a great opportunity for other firms to enrich talent pools and enhance product performance.

Reduction of competition in IC design will generate direct impacts on downstream activities of the semiconductor value chain. As the IC design market gets concentrated via these M&As, the companies gain higher market power and locate in a superior position to dominate price of outsourced fabrications and testing processes. Profit

margins of foundries, outsourced semiconductor assembly and test (OSAT) partners, distributors and OEM/ODM might thin due to their diminishing bargaining power.

Especially for foundries, the bottleneck of nanometer technology elevates manufacturing costs, which in turn stimulates M&As of IC design firms. If the bottleneck can’t be resolved efficiently as component devices keep shrinking, the IC design market could get even more concentrated via more M&As.

These M&As might also induce non-core businesses to be separated and divested, so the combined companies can focus on post-merger integration of more profitable core businesses. In addition, selling non-core businesses can bring in incomes to alleviate financial burdens of the additional debts. Even though the non-core businesses are not essential to the combined companies, they could possibly fit other firms’

strategies for development. Therefore, other firms might also launch M&A activities to take over the non-core businesses. This could be one of the reasons why M&As tend to occur in cyclic waves. Once the original equilibrium of competition is disrupted by the first M&A measure, more M&As will be incurred until new equilibrium is achieved. In the Qualcomm-NXP case, Qualcomm operates as a fabless IC design firm, but NXP operates as an IDM. Once the acquisition is finished, NXP’s fabrication facilities might be sold to specialized foundries, so the combined company can avoid capital-intensive in-house fabrication and concentrate on its core IC design businesses. This approach

will disturb the existing balance of competition among foundry firms.

In addition, for IC design companies, M&As consolidate research & development resources and enrich intellectual property portfolios, so the combined companies can create high-end chipsets of more added values. This could raise customers’ willingness to pay for system devices. Higher market power and more valuable products favor the combined companies to increase chipset prices. Therefore, end users of system devices might face price elevation once the combined IC design companies conduct the price increase approach.

The smart city-related industry is young and emerging, and the industry concentration is increasing. In previous academic literatures, some researchers explained specializing in an activity does not pay for a firm in a young industry because the industry size is too small. They concluded a new industry usually starts with the form of vertical integration. The semiconductor industry does start to shift toward integration because of smart city. However, unlike the previous experiences, the key

factor causing this shift is not because the market size is too small, but because an individual’s effort can hardly realize the arduous task.

Qualcomm’s acquisition of NXP and Broadcom’s takeover attempt for Qualcomm belong to horizontal integration of IC design in the semiconductor value chain.

SoftBank’s acquisition of ARM looks like an unrelated diversification from one

industry to another. In other words, according to Porter’s Five-Forces Framework,

smart city stimulates companies to combine with their competitors and new entrants in the semiconductor industry, or substitutors, complementors, and customers if the analysis is conducted via the Value Net Framework. However, if the M&A activities are examined according to the ICT infrastructure of smart city, different understanding can be derived. By merging NXP, Qualcomm simultaneously performs horizontal

integration for data communications and vertical integration toward data acquisition and application. Broadcom’s intention to acquire Qualcomm originates from horizontal

integration for data communications and comprehensive vertical integration of data

acquisition, data communications, data management, and application, after Qualcomm completes the NXP deal. SoftBank’s acquisition of NXP can be viewed as horizontal

integration of data communications and vertical integration of data communications and application. The new understanding indicates one trend—smart city makes boundaries between firms and between industries become blurry, and decomposition of value chain activities needs to be reconsidered with new definitions.

Moreover, comprehensive intellectual property portfolios differentiate the combined companies with further technical advancement. Leadership of technologies promotes the combined companies to dominant specification developments of the smart city market. Therefore, via these M&As, the companies can instantly build up higher

entry barriers and block others to share the economic pie. In other words, other IC design competitors are endangered with the preemptive M&As. If they remain still, they could encounter tougher competitions.

If other IC design companies would also like to pursue the high-end smart city market, they will inevitably need to extend their intellectual property portfolios. No matter this task is achieved by acquiring external efforts or growing internally, financial capital is required for realization. Therefore, funding will be the critical element for other firms to develop the high-end market. If the chance to enter the high-end market is minimal, there could be two alternative options for other IC design companies. The first one is to grow with the lower-end sectors. While billions of connected things are needed to realize smart city, companies can try to catch up with the unprecedented volumes of demand by providing chipsets of low power consumption and low costs.

The other approach is to identify niche opportunities while the boundaries between industries and between value chain activities for smart city are still ambiguous. By repositioning themselves as total solution integrators, companies can also create unanticipated values. Implementation of this approach would start with redefinition of corporate strategies.

All of the three cases are cross-border M&As. This commonality corresponds to the fact that the semiconductor industry has been evolved to a global market during the

past few decades. Because semiconductor companies usually can create significant streams to a country’s gross domestic product (GDP) and contribute to high-income employment, companies with unique intellectual property of the industry are regarded as valuable assets of their home country. In contrast, they can also be viewed as

dangerous threats in the eyes of competitors’ home countries. Therefore, M&A activities in the semiconductor industry frequently raise governments’ attention.

In the Qualcomm-NXP acquisition, the European Commission expressed concerns that the combined entity could bundle Qualcomm’s baseband processor with NXP’s

near field communication (NFC) and security technologies to forbid rivals and increase royalty fees for mobile payment systems. To make the acquisition approved by the EU, Qualcomm had to commit to exclude certain NFC patents from the transaction. In contrast, the SoftBank-ARM acquisition was very welcomed by the United Kingdom

because SoftBank promised to enhance its investment in the UK and doubled the number of employees locally. SoftBank’s actions were beneficial for the government to gain investors’ confidence, especially when the country’s future looked gloomy because of Brexit. Broadcom’s acquisition proposal for Qualcomm was blocked by the

U.S. government due to impairment of national security. The U.S. government clearly stated that the U.S. position in the 5G market could be intentionally weaken by this deal.

This will allow Huawei, a giant manufacturer of telecommunications equipment, to

replace Qualcomm to dominate the standardization of 5G. The U.S. government’s intervention exhibits its belief that Qualcomm’s leadership in setting 5G standards is a

special asset which should be cherished and well protected by the country. Furthermore, the emerging smart city market will be an important battlefield for future international competition.

Figure 20: Influenced on Competitive Landscape

Figure 20 summarizes the causality to address the Research Question 2. As IC design of the semiconductor value chain is getting concentrated, the downstream activities of manufacturing, assembling, testing & packaging, and distribution will relatively locate in an inferior position for bargaining. Especially for semiconductor

foundries, the bottleneck of nanometer fabrication technologies is one of the major factors provoking M&A activities of IC design companies. If fabrication costs can’t be

efficiently controlled, the industry consolidation might continue and profit margins of semiconductor fabrication can shrink unavoidably. As for other IC design companies, smart city will be a crucial trial for their intellectual property, financial capital, and abilities to integrate distinct skills into amazing total solutions. If intellectual property and financial capital are extremely challenging to get secured immediately, these companies might have to emphasize cost leadership or thoroughly search for any opportunity to become an excellent total solution integrator while industry boundaries are still ambiguous and have not been clearly reconfigured with new definitions.