Opinion: ARM's trouble in China was waiting to happen: Page 2 of 3

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.

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.

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