In what one analyst calls the “tech heist of the century,” Arm China, the Chinese branch of the British chip designer Arm Ltd., announced on Aug. 26 it is now an “independently operated and Chinese-controlled” company.
It’s the latest chapter in the saga of how the world’s largest owner of semiconductor intellectual property (IP) quickly lost control of its Chinese joint venture (JV). Acquired by Tokyo-based SoftBank Group in 2016, Arm set up Anmou Technologies, better known in China as Arm China, in 2018. Arm did so by selling a 51% share to a consortium of Chinese investors for a bargain price of $775 million.
In June 2020, the board of Arm China voted overwhelmingly to remove CEO Allen Wu following an investigation that concluded that he had failed to disclose conflicts of interest, notably his creation of a rival to Arm China’s own investment firm. One day later, Wu’s supporters within Arm China refuted the findings and refused to replace Wu. In practice, Wu remains the chairman and CEO of Arm China. He has been able to retain control of the Chinese unit because he holds the company seals, or “chops.” It could take years of lawsuits to resolve the dispute.
Further complicating matters, SoftBank in September 2020 announced that it would sell Arm Ltd. to US chipmaker Nvidia Corp. The deal, now valued at $54 billion, must be approved by British and European Union competition watchdogs by March 2022.
While the Chinese joint JV was founded three years ago as the sole vehicle for licensing Arm IP to Chinese customers and remains so, Wu said at the Aug. 26 company event that Arm China is “Chinese controlled” and is marketing its own in-house IP and services.
Here is TechNode contributor Stewart Randall’s take on the latest twist.
Let’s be clear: Arm China was created by SoftBank and Arm to make more money out of China by presenting itself as a local company as much as possible. It was always SoftBank’s plan to have Arm China create intellectual property (IP) for the Chinese market. It wasn’t in the plan for Arm to lose the power to choose who runs Arm China or for Arm China CEO Allen Wu, 53, to run investment companies competing with Arm’s own, or for the renegade CEO to set up an “Open NPU Innovation Alliance” (ONIA) that potentially competes with Arm globally.
Given the geopolitical nature of the semiconductor industry right now, whether or not Wu had taken over the joint venture, Arm China would still have attempted to market itself as a Chinese company. With Arm’s architecture facing stiff competition from the open-source RISC-V architecture, marketing in China would not have been very different.
Arm China doesn’t go so far as to say it is independent now, but it claims it is “independently operated and Chinese controlled.” No matter what it calls itself, Arm’s company in China is nonetheless still 49% owned by Arm Ltd. One Chinese investor in Arm China, Ningbo Meishan Bonded Port Area ARM Investment Management Partnership, has sued the company in a Shenzhen court over the standoff with Wu, but cases like this may take years to be resolved.
Stewart Randall is Head of Electronics and Embedded Software at Intralink, an international business development consultancy which helps western tech businesses expand in East Asia.
This whole situation is a red flag for any foreign tech company considering a JV in China. There are other ways of entering the market that might be more suitable for some companies. You should explore these before going the JV route, and safeguard your company chops!
Perhaps most important of all, the conflict in China threatens the entire Nvidia-Arm acquisition deal. What can Nvidia offer China in order to get the deal through? Can Arm China still get access to its UK parent’s IP, notably the next-generation Arm v9 architecture?
With a Chinese face
Around 27% of Arm’s revenue originated from the Chinese market in 2020. From its launch in 2017, Arm China was intended by Arm and SoftBank to appear more Chinese and to allay any fears of its large Chinese customers that supplies from a foreign company could be abruptly cut off.
Seeing the threat of RISC-V and self-developed instruction set architectures (ISAs) combined with sanctions on ZTE taking effect only months before, Arm in 2017 was making a move to cast itself as a local option and continue the China gravy train. At the time, it seemed like a shrewd move to maintain sales growth in China. So was appointing Wu, a China-born US citizen, educated at Michigan and Berkeley, who had worked for Arm in China since 2014.
June 2020: Boardroom showdown
Arm discovered in 2019 that Wu had been attracting investments to Alphatecture, his own fund for investing in tech startups, when he should have been bringing them to the Hopu-Arm Innovation Fund. (Not surprisingly, Hopu Investment Management Company, one of the Chinese investors in Arm China, has been siding with the mother company). In June 2020 Arm China’s board of directors, four of whom were appointed by Arm Ltd., voted seven-to-one to oust Wu. He refused to leave, kept the registration documents and all-important company chops, and is alleged to be paying his own legal expenses from Arm China’s bank account. Over a year later, he remains in charge at Arm China, despite attempts by both foreign and Chinese owners to remove him and to appoint new executives.
As long as Wu controls the company chops, the board members can’t get rid of him because company decisions need the chops to become official. Over a year ago, SoftBank and Hopu asked Shenzhen regulators for a replacement seal. Some observers have speculated that Wu has backing from high-level Chinese officials, but that cannot be verified. Arm China’s Chinese state investors include sovereign wealth fund Chinese Investment Corp. (CIC) and Shenzhen government-owned Shum Yip Group.
In fact, Wu is suing the three executives the board tried to reinstate. In July 2020, Wu even wrote an open letter on Arm China’s WeChat account, asking the Chinese government to help him fight Arm. A year on, they still haven’t publicly come to the rescue. Arm China owners last year offered Wu tens of millions of dollars to leave but he still occupies Arm China’s head office in Shenzhen.
The chops are still in Wu’s hands, and he isn’t budging. I’ve witnessed first-hand the entourage of bodyguards he has at events. Could the mysterious chops actually be on his person at all times?
August 2021: From Arm China to Anmou Technologies
On Aug. 26, Arm China officially launched a new brand, Core Power (Hexin Dongli), to promote self-developed IP (CPU, GPU, XPU, SPU, VPU, ISP, NPU) and services. It vowed to continue the localization of Arm’s CPU architecture and to create products suitable for the Chinese market. Much emphasis was placed on self-development, how Arm China is “independently operated and Chinese controlled”. Wu said at the event, “Since it was established in 2018, Anmou Technologies has not only inherited Arm’s CPU business in China, but also deployed new businesses for the digital age”. Rumor has it that Arm China employees used the words “peace and love” to describe the relationship between Arm China and Arm, but I can’t confirm this. The company was described, however, as “China’s largest CPU IP supplier.”
So, it is claiming to be Chinese: Chinese controlled, Chinese run, with Chinese IP and, even now, is not just licensing Arm IP but developing its own. From a marketing standpoint, its press releases no longer say “Arm China” but “Anmou Technologies,” the legal name in China. It is clearly trying to erase any indication it has foreign connections.
Arm China may now be an Arm rival
The most startling announcement at the Aug. 26 event concerned self-developed IP, especially the neural processing unit (NPU) microprocessor.
Another interesting bit of news was that Arm China had created an “Open NPU Innovation Alliance” (ONIA) in June, with Wu as the alliance’s chairman. The alliance’s website says the NPU’s ISA is open source and will be promoted globally, following a business model that seems similar to RISC-V Alliance’s. While intended for worldwide participation, so far all alliance members are Chinese entities. Besides Arm China, the 54 members include AllWinner, Changan Auto, Rockchips, Sword7, Sanechips (ZTE), TCL, and Tsinghua University.
This alliance has the potential to compete directly with Arm’s own NPU cores. Surely, this was never the vision of Arm executives in Cambridge or of Arm’s owners in Tokyo. Having said this, the whole endeavour feels like a difficult undertaking, different NPUs may be good at different applications. I guess this group will need to decide on what their applications are rather than trying to have a solution for everything.
A cautionary tale
As stated above, this situation seriously puts in doubt the viability of any tech JV between Chinese and foreign partners. It isn’t a good look for China if Beijing wants to attract future foreign investment in this sector.
Arm and SoftBank wanted to find ways to make more money out of China. Yes, China is a different kind of market. In other markets it is unlikely a JV would be considered by a chipmaker or designer, but Arm executives wanted as much access as possible, so pretended to be as Chinese as they could to curry favor. The strategy backfired in a spectacular way.
JVs are often touted as the best way to deal with the Chinese market but, all too often, the foreign partner is left with a husk of a company while local management runs off to set up a competitor, taking all the well-trained staff with them. By not even bothering to set up a new company, Wu can be credited with an innovation in the decades-old scheme. Keep the chops and it’s all yours, baby. There are many other ways to be successful in China, don’t let anyone talk you into a JV without doing some homework on other options! Even if you have the most shares of any single party and on paper have control like Arm, you may find out the hard way how little you may have.
How will this affect the Nvidia-Arm acquisition? Arm’s ownership shifting from Japan to the US will make it be subject to US sanctions. It certainly could erode the value of the deal. In my opinion, Nvidia, the world’s biggest maker of graphics and AI chips, will have to offer the Chinese government something big in order to get the deal through.
As of now, Arm China can license Arm’s v9 architecture if it wants to, but it has so far chosen not to. It essentially acts as a distributor of the IP to Chinese companies but does not touch the IP, which goes directly from Arm to the Chinese licensee. Indeed there are several Chinese licensees of the v9 IP, including at least one architectural licensee. It is unclear why Arm China doesn’t want to license v9 and make modifications like what it does with v8. Either way, Arm, being a British firm, faces no restrictions on licensing to Chinese companies right now. But this could change with an Nvidia acquisition. With v9 already being in China, including architectural licensees, it is hard to see what Nvidia can offer to convince China to let the acquisition go ahead.
Correction: The last two paragraphs of this article have been updated to reflect the fact that Arm Ltd is still licensing the Arm v9 IP to Chinese companies. A previous version of the article incorrectly states that Chinese companies have no access to the IP.