Hong Kong CNN Business  — 

The battle between the United States and China for control of critical technology could doom a record-breaking deal for British chip designer Arm.

The proposal from Nvidia (NVDA) to buy SoftBank-owned Arm for $40 billion requires regulatory approval from the United Kingdom, the European Union, the United States and China.

But universal approval isn’t guaranteed. And there’s already an indication that China might not be happy about an American firm owning an important and strategic player in the semiconductor industry.

An op-ed published this week in The Global Times, a state-run Chinese tabloid, characterized California-based Nvidia’s deal for Arm as “disturbing” for the Chinese and European tech companies that rely on the company’s advanced chip designs.

“If Arm falls into US hands, Chinese technology companies would certainly be placed at a big disadvantage in the market,” read the op-ed.

Chinese regulators haven’t spoken publicly about the deal, but state-run media is often viewed as a barometer of sentiment among senior officials. And China’s influence is key: The last time a semiconductor deal of this size was attempted, it failed. In 2018, Beijing declined to approve American chip company Qualcomm (QCOM)’s proposed $44 billion takeover Dutch counterpart NXP.

Given the ongoing trade tensions between the United States and China, “we believe that obtaining all necessary global regulatory approvals will be challenging,” Citi analysts Atif Malik and Amanda Scarnati wrote in a note on Monday.

Nvidia and Arm said they expect that the deal will take 18 months to close, “which we believe signals that they expect a protracted and detailed review by [the Ministry of Commerce] in China,” the analysts added.

Tightening US restrictions

Semiconductors power everything from smartphones to self-driving cars. The industry has consolidated over the years because designing and manufacturing cutting edge computer chips requires huge amounts of cash for research and development.

Arm, which is based in Cambridge and is known as one of Britain’s most successful tech companies, designs chips used by Samsung, Apple (AAPL) and other major smartphone makers. Many leading Chinese semiconductor design firms — such as Huawei subsidiary HiSilicon — use Arm intellectual property for their cutting edge designs, too.

“Arm has been really useful for China because UK [export] rules are a bit more lax,” said James Lewis, senior vice president and director of the Technology Policy Program at the Center for Strategic and International Studies (CSIS).

Nvidia and Arm have offered reassurances that the British firm will remain neutral.

As part of Nvidia, Arm will continue “maintaining the global customer neutrality that has been foundational to its success,” the companies said in a statement announcing the deal on Sunday.

But if Arm is acquired by an American company, it would likely be subject to US regulations — and Washington has been increasingly using export controls to cut Chinese tech firms off from key technology.

“If they moved to Nvidia they would fall under American export rules which have significantly tightened over the last few years,” Lewis said.

Earlier this year the United States issued fresh sanctions against Huawei that restricted the Chinese tech company from buying chips from semiconductor manufacturers that use American machinery, software or technology. Analysts called the move a “lethal blow” and a “death sentence” for Huawei, which needs leading edge chips to power its smartphone and telecommunications gear.

The US Department of Defense and other government agencies are also reportedly considering banning exports to SMIC, China’s biggest chipmaker, which would significantly hamper Beijing’s efforts to build an advanced domestic semiconductor industry.

“Control over Arm by a US company could mean potentially more restrictions on use of Arm technology by Chinese firms that come under new export controls or other US regulatory action,” said Paul Triolo, head of geo-technology at Eurasia Group.

He added that Chinese regulatory officials will likely “be looking for some conditions to place on the deal” to preserve access to that intellectual property.

Arm has a joint venture in China, which is developing its own capacity for semiconductor intellectual property design, and Chinese regulators could “require Arm China to be spun off” to ensure it doesn’t come under US regulatory action, he said.

Winning over China

Analysts at brokerage firm Morningstar point out that Nvidia received the green light from Chinese regulators earlier this year for its $7 billion acquisition of US-firm Mellanox, which sells networking and storage equipment.

But “the magnitude and significance of this potential deal [to acquire Arm] will undergo heightened scrutiny, in our view,” Abhinav Davuluri, sector strategist with Morningstar, wrote in a note on Tuesday.

The Global Times op-ed asked regulators to “extensively investigate and study the potential implications behind the deal,” adding that the “stakes behind the deal are high.”

The “possibility that Arm could be politicized as a US technology weapon against China’s technology companies must be taken seriously,” the op-ed said.

Being mentioned in such a manner by the Global Times “is not a good sign” for Nvidia, said Lewis, of CSIS. He called the paper an “excitable mouthpiece” for the Chinese government.

And even if the Nvidia-Arm deal gets the go-ahead from China, it may not be entirely out of the clear.

Some politicians in the United Kingdom have expressed concern about preserving jobs at Arm, which could come up as the deal is reviewed there. And Nvidia’s rivals — which purchase chip designs from Arm — are likely to object.

— Michelle Toh contributed to this report.