How Arm is Navigating US Export Restrictions and China’s Semiconductor Industry Push
Technology conglomerate SoftBank’s subsidiary Arm is a leading chip designer that provides core designs for the majority of processors made worldwide. With US export restrictions and China pushing for semiconductor self-sufficiency, Arm is caught between two key markets. Deputy Minister of Science and Technology Zhang Guangjun has urged Arm to deepen its cooperation with Chinese universities, research institutes, and companies in a bid to align with President Xi Jinping’s plans for technological innovation. This article delves into what is at stake for Arm, how it is navigating these tensions, and what the future could look like for the semiconductor industry.
Background: US Export Restrictions and China’s Push for Self-Sufficiency
The semiconductor industry is facing a global crisis. The COVID-19 pandemic has caused a shortage of chips, which has affected several industries, and geopolitical tensions have made things worse. The US-China trade war resulted in the US government placing restrictions on Chinese tech giant Huawei, preventing it from buying US components. Similarly, the US Commerce Department added Chinese semiconductor manufacturer SMIC to its Entity List in December 2020, effectively barring US companies from exporting to it.
China views the semiconductor industry as key to its economic future. It has invested heavily in building its homegrown industry and has put incentives in place to attract foreign companies to set up base in China. In 2020, the Chinese government announced plans to spend $1.4tn over the next six years to develop its technology sector further. China accounts for around a third of Arm’s revenue, which highlights the importance of this market for the company.
Arm’s Joint Venture Woes in China
Arm’s Chinese joint venture has been a sticking point on its road to the stock market. A joint venture with Beijing-based Hopu Investments and the Chinese state-owned company Beijing Haoyue Group was created in 2018 to license Arm’s technology in China. Hopu exited the partnership and sold its shares to Arm for $1 in 2020, making Arm the sole owner of the venture. However, Chinese officials have refused to sign the British company out of its Chinese unit, citing national security, including concerns about the flow of technology from China to the UK.
Investors have been anticipating the stock market debut of Arm’s China unit for some time, with the company filing paperwork for a Hong Kong listing back in 2018. More recently, SoftBank chose New York as the planned venue for taking Arm public, with the IPO expected to happen as soon as this year, although this remains subject to regulatory approval. The importance of the stock market debut of Arm to SoftBank is significant, as it is central to the investment company’s efforts to recover from recent setbacks, including a poorly performing Vision Fund.
Arm’s Ties with China
Arm is firmly rooted in China and has worked with local businesses for over two decades. A few years ago, Arm opened an AI research lab in Shenzhen, and in 2018, the company signed an agreement with China’s Guizhou province to develop a new semiconductor unit. Arm has also worked with leading Chinese technology companies, including Tencent and Huawei, and has partnerships with Chinese smartphone makers, including Xiaomi.
Arm’s CEO Rene Haas recently visited Beijing to show support for the Chinese market and pledge commitment to its future. Haas emphasized the company’s willingness to “actively integrate [the company] in China’s scientific and technological innovation system,” according to the Ministry of Science and Technology. However, as tensions continue to heighten, it may become increasingly challenging for Arm to continue doing business in China.
Conclusion
The global semiconductor industry is in a state of flux, with geopolitical debates threatening the industry’s growth. Arm is facing competing pressures from China and the US, with its precarious joint venture situation in China adding additional complexities. While Arm’s revenue is heavily dependent on China, restrictions on exports to the country could limit its growth. The company is unique in that it is not a semiconductor manufacturer but provides core designs for most of the processors made around the world. For now, Arm is attempting to balance these pressures while continuing to work with key players in the industry, in China and beyond.
Summary:
SoftBank subsidiary Arm, a leading chip designer providing core designs for most processors made worldwide, faces a difficult decision amid the geopolitical tensions between the US and China. The semiconductor industry is facing several crises globally, and China views self-sufficient semiconductors as key to its economic future. Arm’s Chinese joint venture has also faced several hurdles, with officials refusing to sign the British company out of its Chinese unit. This move has notably been a sticking point in Arm’s bid to go public in the stock market. However, Arm recently emphasized its commitment to China and willingness to integrate into its scientific and technological system. As the semiconductor industry’s future remains uncertain, Arm seeks to balance these competing pressures while continuing to work with key players in the industry.
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Beijing has urged chip designer Arm to work more closely with Chinese firms, demonstrating the crucial role the SoftBank ownership group plays in a semiconductor industry under severe pressure from US export restrictions .
Deputy Minister of Science and Technology Zhang Guangjun urged Arm to deepen its cooperation with Chinese universities, research institutes and companies in a meeting with its chief executive officer Rene Haas in Beijing on Tuesday.
Zhang said his “ministry will continue to provide services and support for high-tech enterprises such as ARM to be developed in China,” according to a ministry statement on Thursday.
Arm provides the core designs for most of the processors made by chip manufacturers around the world. Any moves to limit Chinaaccess to them could severely hamper its industry and further distance President Xi Jinping’s goal of semiconductor self-sufficiency.
The Haas meeting also comes at a critical time for Arm, with unresolved issues in China potentially complicating SoftBank’s plans for an initial public offering of Arm stock in New York.
For more than a year, China has blocked Arm’s plan to unload its troubled joint venture in the country, with officials reluctant to sign the British group out of its Chinese unit.
Arm moved last year to transfer shares of its Chinese joint venture to SoftBank after spending nearly two years battling his local boss Allen Wu for unit control. While Arm and SoftBank claim the share transfer has been completed, China has refused to process documents confirming the transfer, according to current Chinese corporate documents.
Despite Beijing’s efforts to keep Arm engaged in the country, US and UK export controls have already done so prevented the group from supplying some of its most advanced designs to Chinese customers. Restrictions are likely to tighten as Washington rallies allies to work hand in hand to hamper the development of China’s semiconductor industry.
Haas’ trip to Beijing is the first since the outbreak of the Covid-19 pandemic in 2020. The CEO stressed China’s importance to Arm and pledged to “strengthen exchanges and dialogues in the future” as well as ” actively integrate [the company] in China’s scientific and technological innovation system,” according to the ministry.
Arm China reported a profit of $49 million on sales of nearly $700 million in the year to March 28, 2022. The unit directly passes some of the money it receives from Chinese customers to Arm through a licensing agreement, and Arm acknowledges a part of the profits of the unit. Arm reported total revenue of $2.7 billion for the year.
In its annual report, the group said the transfer was completed but not registered in China, adding that it “has been informed and understands that the registration status does not affect the validity of the transfer of ownership stake in Arm China.”
A successful Arm listing is central to SoftBank chief Masayoshi Son’s efforts to turn around the Japanese investment group, which has seen its fortunes sink as investor enthusiasm for tech stocks waning.
Son recently stepped back from frontline roles at SoftBank to focus on Arm’s debut. The group announced in April that it had confidentially filed a draft filing statement with the US Securities and Exchange Commission.
Arm did not respond to a request for comment about Haas’ trip to China.
https://www.ft.com/content/c72f4ebd-3b98-4677-b688-6631a6b1cb5a
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