Arm, One Of Most Important Semiconductor Chip Firms, Flags Geopolitical And Market Risks In China Ahead Of Its Upcoming IPO

Ahead of its upcoming initial public offering (IPO), British chip architecture firm Arm has flagged its risks in China, a critical market that accounts for about 25 per cent of its revenue.

Arm, owned by Japan's SoftBank, filed for IPO on the New York Stock Exchange earlier this week. Masayoshi Son-led SoftBank acquired Arm for $32 billion in 2016 in its largest-ever purchase.

Arm's listing is expected to be one of the biggest IPOs in nearly two years.

In the prospectus filed as part of the IPO regulatory requirement, Arm detailed what it viewed as "political and commercial risks" in China.

Arm said it was "particularly susceptible to economic and political risks affecting the PRC, which could be exacerbated by tensions between the U.S. or the U.K. and the PRC with respect to trade and national security".

Arm also highlighted China's semiconductor self-sufficiency ambition as another potential risk for its business in China, citing Beijing's goal of having up to 70 per cent of chips produced in local fabs by 2025.

"The US and UK have trade and national security policies regarding exports to the PRC of technology with potential military uses that would require us to obtain export licenses for certain processors," the the company's filing stated.

"For example, the highest performance processor in our Neoverse series of processors meets or exceeds performance thresholds under US and UK export control regimes." it added.

The U.S administration has imposed a series of restrictions on the sale of semiconductor technologies in a bid to stifle China's domestic chip ambitions.

Arm currently operates in China via Arm China, a joint venture founded in 2018 when SoftBank sold a 51 per cent stake in the British firm's mainland subsidiary to a Chinese consortium for $775.2 million.

In 209-20, a protracted dispute between the British parent company and the CEO of its China business, Allen Wu, threatened to derail the UK-based chip designer's growth prospects. Arm was finally able to oust Allen Wu and appoint Liu Renchen and Eric Chen as Arm China's co-CEOs.

Most widely used chip architecture, especially in mobile applications

One of the most important companies in the chip industry, Arm primarily supplies I.P. relating to central processing units (CPU IP) to semiconductor suppliers and systems-on-chip (SoC) developers globally.

It supplies the chip technology for nearly all mobile devices, such as phones and tablets. It also is into processors for cars, data-centre services and personal computers, including Apple's iMac.

Arm has enjoyed a reputation of operating as a 'neutral firm' in the chip industry landscape by offering designs to everyone without privileging any one company. The company charges license fees for devices that use its designs and technology.

CPUs are built on proprietary instruction set architectures (ISAs). Arm ISA, developed and licensed by Arm, dominates the market, especially by carving out its niche in the Internet of Things (IoT) and mobile applications, thanks to its low power consumption and high performance.

Failed acquisition attempt by Nvidia

In Sep 2020, Nvidia announced its intention to buy Arm for $40 billion in what was touted as the largest-ever acquisition in the semiconductor industry. The cash-and-stock deal was expected to take 18 months to complete but faced regulatory hurdles in the E.U., U.K. and U.S.

In February 2022, Softbank and Nividia finally decided to abandon the deal because of "significant regulatory challenges preventing the consummation of the transaction, despite good faith efforts by the parties".

In Dec 2021, the U.S. Federal Trade Commission filed a suit to block Nvidia's acquisition of Arm on the grounds that the proposed deal would "stifle innovative next-generation technologies."

The FTC argued that Arm licensees -- including rivals to Nvidia like Qualcomm, Samsung and Apple -- "routinely share competitively sensitive information with Arm.

"The deal is likely to decrease the incentive for Arm to pursue innovations it sees as conflicting with the company's own business interests, the commission said.

Competition and Markets Authority (CMA) of the U.K., in its report, observed that the merged business entity would have the ability and incentive to harm the competitiveness of Nvidia's rivals by restricting access to Arm's I.P., which is used by companies that produce semiconductor chips and related products, in competition with Nvidia.

After the acquisition was called off, SoftBank announced that Arm would prepare for a stock market flotation.