China: MOFCOM cleared Joint Venture between ARM, Giesecke & Devrient and Gemalto, with Conditions

On December 6th, 2012, the Ministry of Commerce ("MOFCOM") cleared the proposed establishment of a joint venture ("JV") by ARM Holdings plc ("ARM"), a UK semiconductor intellectual property ("IP") supplier, Giesecke & Devrient GmbH ("G&D") and Gemalto NV ("Gemalto"), both providers of security solutions, with behavioral conditions. This marks the third conditional clearance of JVs issued by MOFCOM. The JV will be engaged in providing security solutions named trusted execution environments ("TEE") for consumer electronic devices.

Review Timeline.

According to MOFCOM's announcement1 , the first submission was made on May 4th, 2012, and was officially accepted almost two month later on June 28th. This case entered into the Phase II period, and the clearance was obtained towards the end of the extended Phase II period.

Relevant Markets.

MOFCOM found that the transaction involves a pair of vertically-related products, namely TEE, the product to be offered by the JV and IP licensing service for application processors for consumer electronics devices, which is provided by one of the JV's parent company, ARM. TEE is a security solution that offers enhanced security services for applications running on mobile devices, such as smartphones and tablets. A TEE solution creates a separate secure operating environment for consumer electronic devices and runs alongside the main operating system such as Android, Symbian, iOS or Windows Phone. It allows applications running on these operating systems to offer enhanced security services. Examples of such trusted applications include banking applications, mobile payments, delivery of premium content and enterprise data solutions.

The other relevant product involved is the IP licensing service for application processors for consumer electronics devices provided by ARM. MOFCOM noted that ARM holds a strong position in the market for IP licensing service for application processors for consumer electronics devices, which is an upstream business of TEE. TEE solutions of the JV and its competitors solutions are mainly based on the so-called TrustZone technology of ARM.

Competitive Assessment.

MOFCOM explored the TEE market structure, market power of ARM in the upstream market, market entry, as well as the negative impact on the competitors, before it came to the conclusion that the transaction would restrict or eliminate competition on the TEE market.

MOFCOM found that a number of competitors will remain active on the TEE market after the transaction. However, ARM currently holds a very strong position in the upstream business as a supplier of IP licensing service for application processors for consumer electronics devices, in particular the ARM TrustZone technology on which the JV's and its competitors'TEE solutions would be based. The transaction could therefore enable ARM to use its market power to discriminate the JV's competitors of TEE solution, or degrade the performance of competing TEE solutions by special design of its IP, so that other competitors could not fairly compete with the JV, leading to the restriction or elimination of competition on the TEE market.

Remedies.

MOFCOM imposed behavioral remedies in this deal, which are in line with the EU decision. ARM is required:

• to abide by the non-discrimination rule and release in the future the security monitoring code as well as other information of its TrustZone technology that is necessary to develop TEE solutions, including relevant licenses, licensing standards and conditions.
• not to design its IP in a way to degrade the performance of third-party TEEs. ARM can only apply for release of the above remedies after the elapse of 8 years from the date of the decision. ARM shall report to MOFCOM of performance of its obligation every year.

Comments.

Similarly as in most other conditional clearances in respect of vertically-related markets, such as the GM/Delphi deal, Henkel/Tiande deal and Google/Motorola deal, remedies imposed by MOFCOM in this case also followed the Non-discrimination Rule, requiring the upstream business operators with strong market power to treat the downstream competitors on "fair, reasonable and non-discriminatory" basis. This deal marks the third conditional clearance involving technology market issued by MOFCOM, the other two being the GE/Shenhua deal and Google/Motorola deal, and shows that MOFCOM is getting more confident in the technology related cases.

In addition, it is interesting to note that the review clause included in this case, i.e. ARM can apply for release of the conditions after the elapse of 8 years from the date of the decision, which is the same as the EU decision, marks the longest review period compared with previous cases where review clauses were applied. Such a review clause was first introduced in the Seagate/Samsung Deal (12 months), and was also used in the Western Digital/Hitachi deal (24 months) as well as the Google/Motorola deal (5 years).

Footnotes

¹A copy of MOFCOM's Announcement [2012] No. 87 could be found here (in Chinese): http://fldj.mofcom.gov.cn/aarticle/ztxx/201212/20121208469841.html

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