China Scuttles a $5.4 Billion Microchip Deal Led by U.S. Giant Intel

China has effectively scuttled a $5.4 billion deal by Intel, the Silicon Valley semiconductor giant, in the latest sign of the frayed business ties between China and the United States.

Intel, which has long had operations in China, said Wednesday that it had “mutually agreed” to terminate a planned merger with Tower Semiconductor, an Israeli chip manufacturer. The announcement came after China’s antitrust regulators failed to rule on the transaction before a deadline set by the companies.

The failure of Intel to complete the acquisition of Tower could send a further chill through American companies with deep ties in China, where it is becoming increasingly difficult to do business amid tensions between the two countries.

The planned merger, announced in February 2022, passed antitrust reviews in the United States and Europe. But it ran into a lengthy delay in China, where regulators review mergers of companies that earn a certain amount of revenue in the country.

Technology is the prime battlefield in the tense economic relations between China and the United States.

Beijing is deeply upset by an American-led set of international restrictions on the sale to China of the most advanced computer chips, which have military applications, and of the factory equipment to make such chips. Those restrictions were put in place in October. In a separate action, President Biden last week ordered a ban on certain new investments in sensitive Chinese technology.

China has condemned the moves as an effort by Washington to throttle its tech development and slow its economic growth.

Despite the raw tensions between the countries, their economies remain highly interconnected, dependent on one another’s supply chains, technology and investment money.

For Intel, China is both a major marketplace and place of business: In 2022, the company employed more than 12,000 people there, and made more than $17 billion in revenue, about 27 percent of its global total. It started doing business in China in the mid-1980s, with operations that include assembling and testing chips manufactured elsewhere.

Intel, which is struggling to regain a lead in chip production technology, hoped the merger with Tower would help accelerate a shift to become a major manufacturer for other designers of chips. Intel has previously mainly used its factories to produce chips it both designs and sells.

Tower, which has an office in Shanghai, was founded in 1993 and operates a relatively small chip manufacturing service compared with giants like Taiwan Semiconductor Manufacturing Company. Intel will pay Tower $353 million for failing to close the deal, according to a statement by Intel.

Intel’s inability to get the merger approved in China underlines what could become an increasingly hard choice for multinationals: They may need to choose between having operations in China or carrying out mergers and acquisitions around the globe. Such concerns could produce a further chill on foreign investment in China, which has already plunged this year because of geopolitical concerns.

The Chinese government agency that decides whether to approve global mergers, the State Administration for Market Regulation, is now “in an uncomfortable spotlight as a proxy for China’s commitment to market access for foreign investors,” said Han Shen Lin, the China country director for The Asia Group, an advisory firm in Washington.

Before the agency was established in 2018, global mergers were reviewed in China mainly by a unit of the Ministry of Commerce, which is dominated by civil servants with extensive international experience and contact with foreign businesses and governments.

The State Administration for Market Regulation, by contrast, is categorized within the Chinese bureaucracy as primarily a domestic agency, and its officials have shunned most contact with foreign governments, embassies or businesses.

Patrick Gelsinger, who became Intel’s chief executive in early 2021, has pushed to add what the industry calls chip foundry services, in part to attract U.S. government subsidies under legislation passed a year ago. He recently traveled to China to help get the Tower deal approved.

“We continue to drive forward on all facets of our strategy,” Mr. Gelsinger said in a statement on Wednesday.

Intel’s fabrication plants, or fabs, tend to specialize in advanced production processes used to make microprocessors and other digital chips. Tower, by contrast, is best-known for older technology that produces analog chips, which are used for jobs like amplifying signals and managing power in cellphones and other products.

The company now owns two fabs in Israel, two in the United States, three in Japan and is participating in a joint manufacturing venture in Italy.