SILICON | Why China might block Nvidia-Arm deal

Arm is barely out of the news these days. When the UK-based semiconductor IP company was acquired by Softbank in 2016, the whole industry wondered what it meant for the company and how it would change. At the time, many Chinese licensees weren’t too happy about having to license key technology from a Japanese corporate overnight. But in the end, Softbank was rather hands off and things went on as normal.

Finally, this week, the US’s Nvidia announced plans to acquire Arm from SoftBank. The deal would combine Nvidia’s world leading GPU and AI capabilities with Arm’s dominance in mobile and edge chipsets, potentially creating a world leading semiconductor company capable of servicing from the cloud all the way to the edge.

But the deal needs approval from the US, UK, and Chinese governments, and China could be the toughest hurdle. The country let Nvidia’s Mellanox acquisition go through, but also famously blocked Qualcomm’s acquisition of NXP. My bet in this case is that they will not allow the Nvidia-Arm deal to go through. Arm architecture is critical to China’s emerging chip design industry, and there’s no upside to China if they’re owned by a US company—and a competitor.

It may take some time before we know for sure—the company says it may be over a year—but if it is approved would it be a success for Nvidia and Arm? What might it mean for the industry? And what will China focus on as it evaluates the deal?

A good deal for Nvidia

It’s easy to see why Nvidia is interested in Arm.

Nvidia’s focus has been on AI in the cloud. Its GPUs are market leaders in this space, with the global top four cloud services using Nvidia GPUs for 97% of their accelerators. This includes Alicloud, which although more diversified, still uses Nvidia for over 80% of its accelerators. Tencent’s gaming as a service offering uses Nvidia GPUs, and even Chinese server manufacturers like market leading Inspur are releasing ever more AI servers based on Nvidia GPUs. However, Nvidia’s business does not cover the edge market: its products are not suitable for handsets, internet of things (IoT) devices, among others. This is the area where Arm is dominant.

Essentially all handsets and the vast majority of IoT devices are based on Arm architecture. Arm licenses its processor cores to companies like Qualcomm, Mediatek, Unisoc, and Hisilicon. The cores are then used as the foundation of the companies’ system on chip (SoC) products like Snapdragon, Helio, S500, and Kirin, not to mention all the IoT chips out there. Through this acquisition Nvidia would gain access to a part of the market it had previously had no presence in.

This isn’t all though. Arm-based CPUs like those from Huawei (Kunpeng), Ampere, Marvell, and Phytium have been attempting to mount a challenge to Intel in high-performance computing (HPC). Intel is currently dominant, with over 90% market share, in HPC CPUs, while Intel’s x86 architecture holds over 98% of the market. But it is feasible a Nvidia + Arm CPU solution could begin to eat into Intel’s HPC market share. Nvidia would have the whole stack—even the networking side, via its acquisition of Mellanox last year.

So, it makes sense for Nvidia, at least if it is playing the long game. Arm’s profits are something like $300 to 400 million per year, meaning if nothing changes it would take over 100 years to make back its reported $40 billion price tag . Not all things can be measured in such a way though, and I expect Nvidia CEO Jensen Huang thinks he can grow this profit and build an all-encompassing ecosystem.

A farewell to Arm?

Arm’s founders certainly aren’t happy about the deal, as they made clear in an open letter/petition called “savearm.co.uk,” asking the British government to block it.

To be a successful silicon IP company, in general, it is expected you aren’t also a competitor.  With Nvidia, Arm would lose its independence.

Nvidia has promised that Arm’s business won’t change, that it will remain independent, continue its open licensing model, and maintain customer neutrality. But other than trust what is there guaranteeing this? Softbank was rather hands off with Arm, but Nvidia is a deep tech company, and it’s my opinion that its management will want to put their own spin on things. Will server chip licensees now see Nvidia as a competitor—and what about automotive chip giants like Qualcomm or NXP? Fabless companies around the world will be having discussions right now about how they plan for this.

One option, as I have written on a few occasions, is RISC-V. I don’t see RISC-V replacing Arm as the core general purpose processor in handset chips just yet, and I also don’t see IoT companies being as concerned about this acquisition as others as Nvidia doesn’t compete in this space.

What I do expect to see happening now is Arm licensees—many of whom are also RISC-V members—stepping up their investment in the open instruction set, and perhaps using it more often in complex heterogenous designs where RISC-V cores may act as accelerators on a chip that has Arm as its main processor. Indeed, I have seen this kind of chip quite often in China already. In the IoT space, I already see companies moving to RISC-V who previously used Arm M-series cores, but this is something that was already happening, and I don’t see the Nvidia acquisition making much difference.

Overall, in the handset, server, and automotive chip markets Arm licensees will be worried, and I expect them to come up with medium-to-long-term contingency plans. There is potential in this time frame—perhaps five to 10 years—for RISC-V to become more feasible in these chips as the main processor, and that could cause Arm/Nvidia problems. I should add RISC-V’s limitation isn’t technical, but more related to building an ecosystem to match Arm’s. It would be wise for Nvidia’s Huang to stick to his word, keep Arm independent or it may be the case we have already reached peak Arm.

China

China is going to “love this deal.”

That’s what Huang told the EE Times, promising that the structure of Arm’s China JV won’t change. I can’t say I agree though, unless he knows something the rest of us mortals don’t.

Chinese media have reported that Arm may be able to resolve the crisis with its China JV before the sale. According to The Paper, they’ve reached a compromise under which Arm will drop charges against Wu and he will step down soon. But this was contradicted by recent news showing that an outgoing investment company owned by Allen Wu “Ningbo Meishan Bonded Port Area ARM Investment Management Partnership” is suing Arm China.

So the JV stays how it is and Arm gets rid of the CEO it doesn’t like. It doesn’t sound like Nvidia or Arm is giving much to China. Huang hasn’t addressed the elephant in the room—if the deal goes through, China’s AI chips companies will be dependent on a competitor for key IP, and Arm will be US owned!

The merged company would threaten some of China’s star AI companies. AI, and especially AI semiconductors, are a key part of China’s self-development strategy, and China has some strong companies in the inference space like Horizon Robotics, Intellifusion, Iluvatar, Sensetime, Artosyn, and others all using Arm architecture.

Nvidia will have strong AI training capabilities with its GPU but now also strong inference capabilities, giving it an advantage over these companies. Perhaps this will force some firms to move to RISC-V for future designs. AI companies like Canaan have already done so.

READ MORE: China’s AI chip startups: how many will survive?

Worse from China’s point of view, the deal would make Arm’s IP US-owned, as Washington is cutting off Chinese companies like Huawei from American-owned technology. Along with fab equipment and electronic design automation (EDA) tools , semiconductor IP is an area where the US is strong and China is weak, and Arm is the world’s largest silicon IP company. More than 40% global IP sales are from Arm, and 95% of chips designed in China use its IP. In short, it adds another weapon for the US to use against China.

As mentioned in the savearm.co.uk letter, Arm would become subject to US Treasury Department regulations. This could mean that any device in the world using Arm architecture will have to comply with these regulations, potentially giving the US government the ability to cut off Chinese companies it doesn’t like not only from designing chips using Arm IP, but also from buying semiconductors with these chips in (e.g., Oppo buying Snapdragons), or buying a device that uses Arm chips (e.g. a Chinese IoT company buying Telit IoT modules). It could all be blocked if the US government choses—at least, there is risk of this.

Does this sound like a deal the Chinese government will like? I don’t think so, and I struggle to think what it would want in return for letting such a deal through.