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

June 11, 2020 //By Peter Clarke
Opinion: ARM's trouble in China was waiting to happen
Back in 2018, when ARM agreed to hold a minority stake in its Chinese subsidiary, we stated that the arrangement was unusual.

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.

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