Chinese Regulators Revisit Nvidia’s Mellanox Acquisition — Response to US Chip Export Restrictions?

Key Takeaways

• China’s competition regulator has opened a probe into Nvidia.
• The investigation follows the escalation of ongoing tensions centered on semiconductors
• From batteries to raw materials, China has plenty of levers to apply pressure in its trade war with the U.S.

While the rest of the world is preoccupied with the prospect of a more extensive U.S.-China trade war when Donald Trump takes office, the global semiconductor industry has been dealing with escalating tensions between the two superpowers for years.

Now, in a sign that Beijing is prepared to respond forcefully to escalating U.S. sanctions, the State Administration for Market Regulation (SAMR) has launched an investigation into Nvidia over suspected antitrust violations.

China Opens Nvidia Probe

Four years after conditionally approving Nvidia’s acquisition of Israeli-American hardware manufacturer Mellanox Technologies, China’s antitrust regulator cited the deal as a “suspected violation” of the country’s anti-monopoly law, suggesting that Nvidia had reneged on commitments it made at the time of the takeover.

A leading supplier of computer networking equipment, Mellanox’s acquisition by Nvidia was closely scrutinized by the Chinese competition authority, which was one of the last global regulators to green-light the takeover.

After protracted negotiations, SAMR accepted commitments from Nvidia. For instance, the firm agreed not to bundle or tie products together, to supply Chinese customers without discrimination and to maintain interoperability with other suppliers’ products. It also committed to keeping certain Mellanox software products open-source.

While SAMR said it suspected violations of Nvidia’s commitments, the timing of the new probe raises the prospect that it could be a retaliatory measure against U.S. export restrictions.

U.S.-China Chip War

Although U.S. export restrictions already prohibited firms from shipping powerful AI chips and semiconductor manufacturing equipment to China, the Department of Commerce recently unveiled more sanctions.

The new rules include controls on 24 types of semiconductor manufacturing equipment and 3 types of software tools for developing or producing semiconductors. The expanded restrictions also incorporate High Bandwidth Memory (HBM) chips among the restricted goods for the first time.

With consequences that reach far beyond the semiconductor industry, the move represents a major expansion of the U.S. sanctions regime. American export controls also apply to major chipmakers in Taiwan and South Korea, the latter of which produces most of the world’s HBM chips.

Asked about the anticipated new restrictions at a news conference on Thursday, Nov. 28, Foreign Ministry spokesperson Lin Jian said China “strongly opposes” the measures, which he said could “destabilize global industrial security.”

“If the U.S. insists on escalating control measures, China will take necessary actions to resolutely protect the legitimate rights of Chinese enterprises,” he added.

China Retaliates

During the previous Trump-era trade war, China and the U.S. exchanged tit-for-tat blows in the form of tariffs, with China generally responding to each new levy in like.

However, Biden’s more targeted strategy based on export restrictions didn’t initially prompt a reaction.

At the end of October, however, China made a move that could escalate into a full-blown supply chain war when it sanctioned the California-based drone manufacturer Skydio.

In a blog post at the time, Skydio CEO Adam Bry said that although the company had already moved to reduce its reliance on Chinese goods, “batteries are one of the few components we have not yet moved out of China.”

As a result of the sanctions, he said the company would have to ration batteries “for the next few months” while it onboarded alternative suppliers.

Now, with SAMR singling out Nvidia for investigation, Beijing appears to have opened up yet another front in the conflict. Meanwhile, China still has plenty of leverage to upend global supply chains by further restricting exports.

China’s Supply Chain Leverage

With the Biden administration ramping up semiconductor sanctions and Trump likely to escalate things even further with tariffs, batteries could be one of China’s most powerful levers to retaliate.

Not only are over 80% of the world’s lithium-ion batteries made in China, but the country is also a major supplier of the raw materials needed to produce them.

Aside from batteries and electronics, other areas where China could exert significant pressure on the U.S. include industrial chemicals and pharmaceutical ingredients, where specific, targeted sanctions like the one used against Skydio could significantly disrupt supply chains for American firms.