Jacob Schindler

Softbank’s $32 billion takeover of chip designer ARM in 2016 was pitched as a big bet on the internet of things by Japanese CEO Masayoshi Son. Less discussed was what it might do for the UK company’s business in Asia, specifically in China. The recent indications that the company will break with past practice to form a joint venture in China to develop chip IP is a signal that the country will be a major focus as ARM under Softbank seeks to build on its mobile dominance to pivot into connected car and IoT applications.

ARM is reportedly teaming up again with HOPU, a private equity fund run by prominent Chinese financier Fang Fenglei. In January, the two announced a new $800 million venture fund that would invest in Chinese startups operating in IoT, AI and other promising technology fields. Now, they are set to inaugurate a Chinese subsidiary focused on ARM’s core business – integrated circuit design. According to news reports, the as-yet-unnamed Chinese JV will received access to ARM IP, technical support and knowhow, while the investment fund will manage the new entity.

The president of ARM’s IP products group, Rene Haas, confirmed to Nikkei that the new partnership will focus on developing products for Chinese customers in technology areas that would normally be too sensitive for Western companies to get involved in – he cited national security and surveillance as two potential opportunities for the company’s local Chinese venture.  

As industry analyst Peter Clarke points out, it is hard to see why ARM would enter into a China JV model unless it thinks it has an opportunity to grow its business there significantly down the line. He notes: “ARM has spent many successful years taking its processor IP to market in China in arrangements where it, via a wholly-owned subsidiary, keeps all the monies paid in upfront payments for IP, for engineering consultancy, and for royalties on chips shipped -- presumably less some tax paid locally.”

ARM must feel that the opportunity in sectors more sensitive than mobile chips in China is a big enough one to justify adopting a new business model there. It may also be a bet that local research can produce products that will hold appeal for customers outside the country too. An ARM representative told eeNews that the company "will have exclusive rights for new licensing of ARM-based IP developed by the new JV to serve the rest of world market".

ARM is far from a newcomer to China – the country has been the company’s fastest growing market for the past five years, and will soon overtake the US market as its biggest, an executive stated in March. The Chinese government’s efforts to spur domestic chip development have meant an increase in business for ARM as companies like Huawei’s HiSilicon division and Spreadtrum come out with their own semiconductors based on ARM’s architecture. The company has about 250 employees in China.

These processes were very much in motion already when Softbank bought ARM. And they may have been a significant, though underpublicised, reason for CEO Son’s dogged pursuit of the company. Few outsiders understand China’s technology sector as well as Son – who became Japan’s richest man thanks to a big bet on Alibaba.

Western companies have traditionally been loath to develop IP within China, especially in sensitive fields like semiconductors. But like the recent arrangements entered into by Qualcomm, ARM’s move to localise has made clear that working with domestic partners is increasingly a must for companies that want to do big business there. It’s going to take a long time to know whether the trade-offs Western companies are making in China are smart ones. But how good they are at protecting their IP is likely to be a major determinant of their success.