CTT Forum on SK Hynix Deal: How CFIUS Can Reconsider the Acquisition

Last month China’s anti-trust regulator, the State Administration of Market Regulation (SAMR), granted its approval for SK Hynix to purchase Intel’s NAND memory chip business. Unlike authorizations offered by other countries that had to okay the deal, however, SAMR approved the terms with six stipulations, including that SK Hynix “help a third-party competitor enter the… markets.”

While such conditions are not unheard of, a growing field of experts has called on CFIUS to re-review the transaction, which could now enable technology transfers to the Chinese government. But does CFIUS have the authority to do so?

Nazak Nikakhtar, former Assistant Secretary for Industry and Analysis at the U.S. International Trade Administration, says yes.  “The U.S. government very much has the legal authority, I think, to bring this back into CFIUS review—for two reasons,” Ms. Nikakhtar said during a CTT roundtable forum last week.

The first, she explains, is that the SAMR conditions could cause “the transfer of ownership to result in the Chinese government having some type of leverage over the transaction to benefit or coerce the acquired company to behave in a way that it otherwise wouldn’t.” And, second, the sale could create “access to non-public technologies.”

“China is not entitled to put conditions to force Western companies to transfer valuable IP technology as the price to enter the Chinese market,” said Jeff Ferry, Chief Economist at the Coalition for a Prosperous America, who also participated in the roundtable.

CFIUS “can issue an ‘is-informed letter’ to the parties saying, you are hereby informed that to the extent that there’s U.S.-origin technologies involved, you cannot transfer it until you get an approval from BIS,” Ms. Nikakhtar suggested. “And then they would really need to conduct the full CFIUS review and see what kind of influence has been exerted as part of this transaction to see what they need to address through a mitigation agreement.”

A mitigation agreement would provide guardrails to prevent the Chinese government from stealing U.S.-made technology. It might, for example, require the acquired company to alert U.S. officials “if this goes in the direction of coercion of tech transfer,” Ms. Nikakhtar explained.

SAMR’s conditions on the SK Hynix-Intel sale include prohibitions against “unreasonable prices,” exclusive deals and price-fixing, and a commitment to expand output with principles of fairness, reasonableness and non-discrimination.

In an email, Dylan Patel, Chief Analyst at Semi-Analysis, suggested the deal is likely to supply original development manufacturers for solid state drives for PCs, mobile devices, and servers. He rejects the view that there is no transfer of technology.

“As far as the SK-Intel merger, non-transfer of tech doesn’t really make sense. SK Hynix via the Solidgm subsidiary controls all of Intel’s former NAND fabs. There is tech inside them. One could argue there is no transfer because of the firewall between the subsidiary and SK Hynix, but it was ultimately transferred. The process engineering staff are not transferred until later.”

Taking a step back, Ms. Nikakhtar concluded that U.S. policymakers ought to be “more aggressive” in monitoring and referring transactions for CFIUS’ review, and in applying export controls on sensitive technologies.

“You now have an inherent conflict of laws—where you have an agreement with the U.S. government saying no tech transfer, and you have Chinese national security laws demanding pretty much anything that the central government wants.

“I always sort of caution, multilateral sounds good. But in practice, it’s not actually effective because of our allies’ different levels of risk tolerance… So, we should be mindful and respectful of that, and then move forward with what we believe we need to control.”