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Opinion: ARM’s trouble in China was waiting to happen

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By Peter Clarke

Indeed, if that entity was also responsible for collecting royalties in China, the potential for problems was obvious.

Now trouble has arrived in the form of an argument conducted by ARM and ARM China over who is the CEO of the subsidiary, conducted through the means of disclosures to news agencies and social media announcements (see ARM in struggle for control of Chinese subsidiary).

China has become by far the largest geographical market for semiconductor companies to take part in and there has been pressure to make some companies participate in that market through joint ventures. The problem arises when the parent company no longer has a majority share of the ownership. At that point it is possible for the subsidiary to begin acting in it is own or others’ best interests and against the interest of the nominal parent.

For example, it is possible for a subsidiary to come up with all sorts of charges to offset against sales revenues or royalties and minimize, or at least control, how much is passed up the line to the parent. The minority owner may not like the detail of what is happening but may also may not be able to stop it. Up until now it has appeared that ARM was prepared to accept the potential for problems in return for participation in the market.

What was delicate or tricky to manage back in 2018 has become a full-fledged problem with the escalation of US-China tension over the least two years. There are some similarities with the case of fellow UK intellectual property licensor Imagination Technologies Ltd. (see After moves on ARM, China tries Imagination coup and Opinion: China has had its way with Imagination). The major difference is that in the case of Imagination, Chinese funds own almost all of the parent company.

Next: The question now


The question now is whether ARM’s arrangement in China is not only unusual but also unsustainable given the pressure that is being brought to bear by the United States and China.

The US put Huawei and others on its so-called “entity list” in 2019 and ARM said it would comply with all regulations related to this (see Report: ARM complies with US trade ban, cuts off Huawei). At the time Huawei – the world’s largest communications company and a rising star in the smartphone business – sounded a conciliatory note saying it recognised the pressure its suppliers were being put under by “politically-motivated” decisions.

When the invocation of the US entity list did little to prevent the supply of chips – because Huawei gets them made by foundry TSMC – the US increased the pressure (see US tightens restrictions on Huawei’s chip supply). Meanwhile the UK has started to back away from its previous position that it would allow Huawei to participate in a peripheral way in the roll out of 5G cellular communications (see UK prepares to kick Huawei out of 5G by 2023).

And then there was UK Prime Minister Boris Johnson’s offer to allow nearly 3 million people from Hong Kong to come to live in the UK if Beijing imposes a national security law on the former British colony. The Chinese authorities have said they find this provocative.

It is not possible to say that ARM’s problems with its subsidiary are a direct or indirect result of political statements coming out of Whitehall but it should be noted that China’s sovereign wealth fund China Investment Corp. and the Shenzhen government-owned conglomerate Shum Yip Group are investors in ARM China.

Also, the convoluted nature of ARM’s relations in China make it hard to fathom exactly what is going on. It could be that Huawei now receives its ARM license from, and pays ARM royalties to, a China-based entity. If that entity were to continue to cooperate with Huawei against ARM’s instructions it can be understood why ARM might wish to make changes in the ranks of senior management.

But if control was that important then perhaps ARM should not have allowed itself to hold only 49 percent of ARM China.

Next: Why it matters


But ultimately does it matter that much? After all the major part of ARM’s intellectual property creation takes place outside China and outside Chinese control and ARM can surely withhold next-generation IP cores and architectures from any recalcitrant subsidiary?

It matters because many companies looking at processor architecture decisions are wondering whether the more recently developed, open-source RISC-V architecture is the better route to go. I would contend that any inability at ARM to control its subsidiary – and potentially its IP – weakens ARM’s value proposition.

If the situation between ARM and ARM China is unsustainable the question then becomes what happens next?

Does ARM back away from China and 25 percent or more of its business?

Does ARM China rename itself and fly off as a separate ‘fork’ of the ARM instruction set architecture to conduct its own development work and licensing?

And would a patent infringement lawsuit be worth filing?

Having said – or asked – all that, at least one customer is reportedly warming to ARM IP. Apple is expected to announce soon the switch of processors for its Mac computers from Intel devices to its own design of ARM-based processor (see Intel fail foreseen: ARM reportedly wins Mac computer processor design-ins).

Such a development would be significant. It would follow on from ARM design wins in Google Chromebook computers and represent a flagship design win in the personal computer space, previously a market dominated by Intel. Having started in mobile phones ARM-based processors have extended their domain to embedded processing, server computing and personal computing.

Every crisis is also an opportunity. And the situation in China is ARM’s opportunity to sort out its arrangements there. But with two superpowers looking over his shoulders, this job may even be above the pay grade of ARM CEO Simon Segars.

Related links and articles:

www.arm.com

News articles:

After moves on ARM, China tries Imagination coup

Opinion: China has had its way with Imagination

Intel fail foreseen: ARM reportedly wins Mac computer processor design-ins

Report: ARM complies with US trade ban, cuts off Huawei

US tightens restrictions on Huawei’s chip supply


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