MOFCOM Announcement No.46 of 2017 on Decisions from Anti-monopoly Review of the Concentration of Undertakings on Conditional Approval of Proposed Acquisition of Equity in Brocade by Broadcom

Date: 2017-09-07 10:45:09, Source: MOFCOM, Today/Total Visits : 2/2947

The Ministry of Commerce of the People's Republic of China (hereinafter referred to as the "Ministry of Commerce") received the anti-monopoly declaration of the concentration of undertakings on the case of the acquisition of equity in Brocade Communications Systems, Inc. (hereinafter referred to as "Brocade") by Broadcom Limited (hereinafter referred to as "Broadcom") (hereinafter referred to as the "Case"). Upon review, the Ministry of Commerce decided to approve the concentration of undertakings with additional restrictive conditions. In accordance with Article 30 of the Anti-monopoly Law of the People's Republic of China (hereinafter referred to as the "Anti-monopoly Law"), relevant matters are hereby announced as follows:

I. Case-filing and review procedures

On January 13, 2017, the Ministry of Commerce received the anti-monopoly declaration for the concentration of undertakings concerning the Case. Upon review, the Ministry of Commerce considered that the documents for declaration were incomplete, and required the declarer to conduct supplementation. On March 6, after further supplementation, the Ministry of Commerce confirmed that the documents for declaration complied with Article 23 of the Anti-monopoly Law, and therefore the anti-monopoly declaration for the concentration of undertakings was admitted to be filed, and the preliminary investigation was launched. On March 31, the Ministry of Commerce decided to further review this concentration of undertakings. Upon review, the Ministry of Commerce considered that the concentration might have the effects of eliminating and restricting competition in the markets of fiber channel storage area network switches (hereinafter referred to as "FC SAN switches" and fiber channel host bus adapters (hereinafter referred to as "FC HBAs") in the world and China. On June 29 and with the consent of the declarer, the Ministry of Commerce decided to extend the review period, for which the deadline is August 28.

In the course of the review, the Ministry of Commerce solicited opinions from relevant government departments, trade associations and relevant enterprises, knew relevant market definition, market structure, industry characteristics and prospects, and reviewed the authenticity, completeness and accuracy of the documents and materials submitted by the declarer.

II. General information of the Case

Broadcom, the acquirer, which was incorporated in Singapore, is a company listed on NASDAQ in the United States. Broadcom designs, develops and supplies a wide range of semiconductor devices, and divides its business into four sectors: wireless communication, wired infrastructure, enterprise-class storage, and industry and others.

Brocade, the acquiree, which was incorporated in the United States, is a company listed on NASDAQ in the United States. Brocade, a network hardware, software and service supplier, is mainly engaged in fiber channel storage area network and IP network products (including Ethernet switches and Ethernet routers).

On November 2, 2016, Broadcom and Brocade concluded the Merger Agreement and Plan, specifying that Broadcom will purchase all the equity in Brocade. Upon the transaction, Broadcom will control Brocade.

III. Relevant markets

(I) Relevant commodity markets.
Application-specific integrated circuits for Broadcom's FC SAN switches are vertically associated with Brocade's FC SAN switches. Application-specific standard commodities for Broadcom's Ethernet switches are vertically associated with Brocade's Ethernet switches. Broadcom's FC HBAs keep neighboring relations with Brocade's FC SAN switches. Based on the analysis from supply and demand substitutions of commodities such as functions, characteristic and prices, relevant commodity markets involved in the Case are the markets of application-specific integrated circuits for FC SAN switches, application-specific standard commodities for Ethernet switches, FC SAN switches, Ethernet switches and FC HBAs.

1. Application-specific integrated circuits for FC SAN switches and application-specific standard commodities for Ethernet switches.

Semiconductors are a kind of crystalline solids (usually referring to silicon) electrically conductive between conductors and insulators, and can transmit and control electric currents after the chemical treatment. Semiconductor devices include integrated circuits comprised of a single discrete device and multiple discrete devices respectively. Based on the terminal application, semiconductor products can be further subdivided into six fields: data processing (including calculation and storage functions), consumables, automobile, industry and medical treatment, military and aerospace, and communication, of which, communication is divided into wired communication and wireless communication.

Integrated circuits of switches belong to semiconductor products applied in wired communication, and specifically, they are divided into two kinds: one is application-specific integrated circuits for wired communication customized for specific buyers (also known as custom chips, hereinafter referred to as "ASICs"), and the other is universal integrated circuits for wired communication (also known as application-specific standard products or application-specific standard chips, hereinafter referred to as "application-specific standard commodities").In particular, ASICs can be further subdivided into ASICs for Ethernet switches and ASICs for FC SAN switches; application-specific standard commodities can be further subdivided into application-specific standard commodities for Ethernet switches and application-specific standard commodities for FC SAN switches.

The markets of ASICs for FC SAN switches and application-specific standard commodities for Ethernet switches constitute separate relevant commodity markets respectively.

2. FC SAN switches.

FC SAN switches are important building blocks of storage area networks. The storage area network is a high-speed data communication network, and its function is to connect the server to the storage device. Currently, about 70% of storage area networks adopt the fiber channel technology. Fiber channels usually run on fiber-optic cables. The optical fiber is a lean medium and has a lower level of data wastage or loss compared to other media (such as copper). Therefore, fiber channels are applicable to industries with the large amount of data and high requirement for security, and end users of fiber channels include the financial service industry, government departments, telecommunication and media industries. FC SAN switches are trunk equipment used for data transmission of storage area networks and connect servers with storage devices by FC HBAs, and their function is to transmit data in fiber channel networks to storage devices in the form of frame / group. Considering the factors including that FC SAN switches can only connect fiber channel devices but cannot connect other devices such as Ethernet, that fiber channel storage area networks cannot use other non-FC SAN switches, and technical characteristics of FC SAN switches, FC SAN switches constitute the separate relevant commodity market.

3. Ethernet switches.

Ethernet is a network technology, and usually runs on copper cables. The stability and security of data transmission by the Ethernet technology was lower than that by fiber channels. Ethernet switches and routers form "nodes" of networks, and their function is to connect different parts of networks, especially to transport and exchange data packets among sub-networks. Considering the factors including that Ethernet switches can only connect Ethernet devices, that Ethernet cannot use other non-Ethernet switches, and technical characteristics of Ethernet switches, Ethernet switches constitute the separate relevant commodity market.

4. FC HBAs.

FC HBAs are important building blocks of storage area networks, and they are installed on servers and storage devices for providing data input and output processing and physical connection between servers and storage devices. FC HBAs and FC SAN switches work together to connect servers with storage devices. Considering the factors including that FC HBAs can only connect fiber channel devices but cannot connect other devices such as Ethernet, that fiber channel storage area networks cannot use other non-FC HBAs, and technical characteristics of FC HBAs, FC HBAs constitute the separate relevant commodity market.

(II) Relevant geographic market.

Considering the parties to the concentration and main competitors that carry out operating activities around the world, the transportation cost that is not significant, the average freight accounting for about less than 1% of the total production cost, the global price level that is similar, the most-favored-nation tariff that is zero, and the absence of other trade barriers or restrictions, the relevant geographic market of ASICs for FC SAN switches, application-special standard commodities for Ethernet switches, FC SAN switches, FC HBAs and Ethernet switches is global, and influences of the transaction on the Chinese market are investigated at the same time.

IV. Competitive analysis

The Ministry of Commerce reviewed the concentration of undertakings in terms of the market share and market control force of the undertakings participating in concentration on the relevant market, the level of difficulty in market entry, the impact on consumers and other operators and other factors based on those required in Article 27 of the Anti-monopoly Law, deeply analyzed the impacts of the concentration of undertakings on market competition and thereby came to believe that the concentration of undertakings might have effects of eliminating and restricting competition in the global and Chinese markets of FC SAN switches and FC HBAs.

(I) After the concentration, Broadcom may improperly use confidential information of third-party FC SAN switch suppliers, producing effects of eliminating and restricting competition in the market of FC SAN switches.

ASICs for FC SAN switches are "brains" of FC SAN switches, and building blocks of FC SAN switches with the higher cost and more complex technology. In the market of upstream ASICs for FC SAN switches, Broadcom has a global market share of [30-40]%, while its main competitor IBM / GLOBALFOUNDRIES has a global market share of [60-70]%. In the market of downstream FC SAN switches, Brocade has market shares of [70-80]% in the world and [40-50]% in China respectively, while its main competitor Cisco has market shares of [20-30]% in the world and [40-50]% in China respectively.

As ASICs for FC SAN switches are customized as required by switch suppliers, at stages of research and development, production and after-sale service, FC SAN switch suppliers need to cooperate closely with suppliers of ASICs for FC SAN switches, which, accordingly, need to obtain the licensing of intellectual property rights from FC SAN switch suppliers, and will access confidential information of FC SAN switch suppliers, such as product design drawings, technical specifications, time for market entry, cost and sales volume. In practice, the parties concerned will generally enter into a license agreement and a confidentiality agreement to achieve the design and manufacture of ASICs for FC SAN switches.

Broadcom manufactures ASICs for FC SAN switches for Brocade and third-party FC SAN switch suppliers, so Broadcom is able to access a large number of confidential information of third-party FC SAN switch suppliers. After the transaction, if third-party FC SAN switch suppliers do not change suppliers of ASICs for FC SAN switches, Broadcom may enlarge the share (of current Brocade's products) in the market of downstream FC SAN switches by improper use of confidential information of third-party FC SAN switch suppliers. The market survey shows that changing suppliers of ASICs for FC SAN switches requires the time of 2-3 years for technical adaptation and the huge economic cost, and also may lead to a significant delay in market entry of new products, so it is not commercially viable for third-party FC SAN switch suppliers to change suppliers in the short term. Although Broadcom has concluded a series of confidentiality agreements with third-party FC SAN switch suppliers, after the completion of the concentration, third-party FC SAN switch suppliers are particularly vulnerable to whether Broadcom can comply with the confidentiality obligation, and it is difficult to identify whether Broadcom's commercial behaviors benefit from confidential information of third-party FC SAN switch suppliers and to supervise Broadcom's behaviors by virtue of commercial confidentiality agreements.

The anti-monopoly review concludes that whereas, in global and Chinese markets of FC SAN switches, there is an extremely limited number of third-party FC SAN switch suppliers that can compete effectively with Broadcom after the concentration, the existing confidentiality agreements between third-party FC SAN switch suppliers and Broadcom can hardly ensure that Broadcom will not eliminate or restrict competition in the market of FC SAN switches by making use of confidential information of third-party FC SAN switch suppliers.

(II) The concentration may have effects of eliminating and restricting competition in the market of FC HBAs.

End users may establish and operate fiber channel storage area networks only by having FC HBAs and FC SAN switches simultaneously. Since the above two kinds of products are functionally interdependent, the anti-monopoly review concludes that they have neighboring relations. As mentioned above, in the market of FC SAN switches, Brocade has a global market share of [70-80]% in 2016 and is a market leader, while its only and main competitor Cisco has a global market share of [20-30]% in 2016. In the market of FC HBAs, Broadcom has market shares of [40-50]% in the world and [40-50]% in China respectively in 2016, while its main competitor Cavium has market shares of about [50-60]% in the world and [50-60]% in China respectively.

In consideration of such factors as the relevant market structure and respective market forces and market operation modes, after the concentration, Broadcom may eliminate and restrict competition in the market of FC HBAs by the following three ways:

1. Damaging the interoperability.

Only FC HBAs and FC SAN switches are interconnected and work together, can the operation of fiber channel storage area networks be guaranteed. To ensure the smooth connection (interoperability) between FC HBAs and FC SAN switches from different suppliers, there are specific technical standards within the industry. However, the market survey indicates that meeting the above standards only is not sufficient to ensure that the combination of FC HBAs and FC SAN switches from different suppliers have the best interoperability so as to guarantee the quality stability and service life of FC HBAs. In fact, in order to achieve the interoperability between FC HBAs and FC SAN switches, the cooperation and coordination of FC SAN switch suppliers are required at stages of research and development and operation of FC HBAs. For example, in the course of developing the new-generation FC HBAs that transmit data faster, FC HBA suppliers need to provide FC SAN switch suppliers with the information including simulation packages, product plans, logs and track records, to complete the test for ensuring the normal operation of FC HBAs when they are connected with FC SAN switches. This course is called "certification" process. The design cycle of FC HBAs is usually two years, and the certification process starts six months before products are put on the market finally. After FC HBAs are put on the market, FC SAN switch suppliers also need to provide technical support for after-sale services related to products, and the cooperation between the parties concerned plays an important role in maintaining customer satisfaction.

After the concentration, Broadcom may reduce the technical cooperation with FC HBA suppliers that compete with Broadcom at different stages in the cycle of FC HBAs, or take other measures, causing the decline in the interoperability between new-generation FC HBAs that compete with Broadcom's products and Broadcom's FC SAN switches and in the reliability of products, and the delay in product release. In addition, Broadcom may improve the interoperability between its own FC SAN switches and FC HBAs, and meanwhile, refuse to improve the interoperability with third-party FC HBAs synchronously, or extend different treatment to third-party FC HBAs by other means, so as to produce effects of eliminating and restricting competition in the market of FC HBAs.
2. Improperly using confidential information of third-party FC HBA suppliers.

Suppliers usually enter into a confidentiality agreement to ensure the interoperability between FC SAN switches and FC HBAs. Brocade, as the world's largest FC SAN switch supplier (with the global share of [70-80]%), has concluded confidentiality agreements with FC HBA suppliers, namely, Broadcom (with the global share of [40-50]%) and Cavium (with the global share of [50-60]%). The anti-monopoly review concludes that the existing confidentiality agreements between Brocade and third-party FC HBA suppliers can hardly supervise Broadcom's commercial behaviors effectively after the transaction, and Broadcom may improperly use confidential information of third-party FC HBA suppliers for the purpose of enlarging the market share of its own FC HBAs.

3. Bundling-sale or tie-in sale.

Brocade has important market forces in the market of FC SAN switches and is a leading competitor in global and Chinese markets. In the world and China, Brocade only has one effective competitor, namely, Cisco. In addition to having the larger market share, Brocade has been the first propeller for each generation of FC SAN switches in history, averagely ahead of Cisco by 15-18 months. Brocade's main downstream clients in the world are large original equipment manufacturers, which are able to form the buyer's restriction on Brocade and Broadcom after the transaction to some extent. However, unlike the global market, there are numerous but relatively dispersed downstream users in China, of which the largest buyer only occupies [1-10]% of Broadcom's sales volume, and they have no countervailing power to contend with Broadcom. If, after the transaction, Broadcom carries out the tie-in sale or bundling-sale by providing the discount on joint purchase of its own FC SAN switches and FC HBAs, on the one hand, downstream buyers in China have no ability to contend with Broadcom, and on the other hand, considering the trend of increasing demand in the Chinese market and from the perspective of reducing costs and increasing profits, downstream buyers in China are likely to purchase products involved in the tie-in sale or bundling-sale, thus producing effects of eliminating and restricting competition in the Chinese market of FC HBAs.

(III) In the short term, it is difficult to have effective competitors as access to the relevant market is very hard.

The Ministry of Commerce noted that as the access to the market of ASICs for FC SAN switches, FC SAN switches or FC HBAs requires a lot of capital and technology investment and has high barriers, it will be difficult to have new competitive market participants in the short term, causing a situation in which it is impossible to form workable competition constraints over Broadcom, and eliminate the competition problem generated by such concentration.

V. Discussion with additional restrictive conditions

In the course of review, the Ministry of Commerce notified Broadcom in good time of the review opinion that the Case might eliminate and restrict competition, and held several rounds of negotiations with Broadcom with respect to matters concerning how additional restrictive conditions may reduce the detrimental effects of this concentration of undertakings on market competition. With respect to the proposal on restrictive conditions submitted by Broadcom, the Ministry of Commerce mainly made evaluations in terms of the effectiveness, feasibility and timeliness in accordance with the Provisions on Additional Restrictive Conditions for the Concentration of Undertakings (Trial for Implementation).

Upon evaluation, the Ministry of Commerce believes that the final proposal on additional restrictive conditions submitted by Broadcom to the Ministry of Commerce on July 24, 2017 can reduce the adverse effects of the concentration of undertakings on market competition.

VI. Decisions

Given that the concentration of undertakings may have the effects of eliminating and restricting competition in global and Chinese markets of FC SAN switches and FC HBAs, according to the final proposal on additional restrictive conditions submitted by Broadcom to the Ministry of Commerce, the Ministry of Commerce has decided to approve the concentration with the additional restrictive conditions, and requires Broadcom to perform the following obligations:

(I) To maintain the interoperability between its own FC SAN switches and third-party FC HBAs not lower than that between its own FC SAN switches and FC HBAs, and never discriminate against third-party FC HBAs.

(II) To take firewall measures for confidential information on third-party FC HBAs.

(III) To take firewall measures for confidential information on third-party FC SAN switches.

(IV) To maintain the transaction conditions in the Chinese market of FC SAN switches, and never engage in the tie-in sale or bundling-sale in any form.

The above restrictive conditions shall be valid for ten years as of the effective date and terminate automatically upon expiration.

Besides the supervision and execution of such restrictive conditions subject to the announcement, the final proposal on additional restrictive conditions submitted by Broadcom to the Ministry of Commerce on July 24, 2017 shall be legally binding upon Broadcom.

The Ministry of Commerce has the power to supervise Broadcom on its own or through a supervision trustee concerning the fulfillment of the above obligations. Where Broadcom fails to fulfill the above obligations, the Ministry of Commerce will handle the matter according to the Anti-monopoly Law.

This Decision shall come into force as of the date of announcement.


Ministry of Commerce
August 22, 2017

Approved by: Department of Commerce of Shandong Province Tel: +86-531-89013333

Supported by:Jinan Maocheng Information Technology Co., Ltd.

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