Why Arm’s Chip Technology Endangers SoftBank Deal: QuickTake
(Bloomberg) -- One of the most influential companies in the tech industry is unknown to most consumers. U.K.-based Arm Ltd. designs key parts of the chips that power almost every smartphone on the planet. Its status has brought a potential windfall for its Japanese owner, SoftBank Group Corp. -- and a big problem. The predicament shows how vital a company founded as a 12-person venture three decades ago has become to the digital economy.
1. What’s the problem?
SoftBank, which acquired Arm for $31 billion in 2016, announced in September 2020 that it was selling the business to U.S.-based Nvidia Corp., the world’s largest chipmaker by market value. The announcement drew an outcry from the $400 billion semiconductor industry, which complained that the deal threatens a cornerstone of Arm’s success: its neutrality. Arm’s technology has been used across the industry on the understanding that no one would get privileged access. Apple Inc., Samsung Electronics Co. and others had an incentive to use it as the basis for their innovation because of Arm’s ecosystem of compatible software and the legions of engineers who know and use it. The transfer of ownership to a single Arm customer has sent a shockwave through the industry, despite Nvidia’s pledge to uphold Arm’s independence. After more than a year of intense scrutiny by antitrust bodies and security agencies, the deal is in trouble.
2. What does Arm do?
Arm doesn’t own factories or produce its own chips. The company designs core semiconductor components and licenses the blueprints to other firms to produce them in exchange for a fee based on how many are made. The arrangement brings it around $700 million in revenue every quarter, making it one of the U.K.’s largest tech businesses. That’s still a fraction of the revenue of other tech giants like Nvidia and Intel Corp., and Arm has a relatively small workforce of 6,000. Yet few companies reach so far across the tech ecosystem: Arm estimates that 70% of the world’s population uses its products on a daily basis, and that more than 200 billion chips have been made using its technology.
3. Where would I find Arm’s products?
They’re used for everything from the tiniest sensor to the most powerful data center. Amazon.com Inc., Samsung and Apple are important customers, among many others. Arm’s instruction set -- the basic code used by software to communicate with semiconductors -- is in billions of devices, and the effort required to switch to another company’s code would be enormous. Devices that work on batteries need chips that that can get by with relatively little power. Arm’s designs prioritized that from the outset. And when smartphones came along and started to demand more processing horsepower, the technology evolved into more computer-like chips. There are about 1.4 billion of these pocket computers sold every year, with more than 90% using Arm. More recently, major tech names such as Apple and Amazon have been seeking to supply their own chips. Many of those new components rely on Arm, and that’s beginning to threaten Intel’s lucrative hold on high-end computing processors.
4. Why does Nvidia want to buy it?
Co-founder Jensen Huang has made his company a hit with investors by parlaying its strength in graphics processors into a presence in data centers and artificial intelligence processing. A $40 billion deal for Arm would increase that reach and allow Huang to push faster into new areas such as automotive chips.
5. What’s the status of the proposed deal?
After an outcry from companies such as Intel and Qualcomm Inc., the U.S. Federal Trade Commission sued to block the purchase in December, saying it would hobble innovation and undermine Nvidia’s rivals. The European Union and the U.K. are also investigating the deal, with authorities in London highlighting Arm’s role in critical national infrastructure and military equipment. And the acquisition can’t happen without the approval of regulators in China, the largest market for semiconductors and home to much of the world’s electronics manufacturing.
6. What is China’s position?
The Beijing government is pushing to reduce dependence on U.S. semiconductor technology, so it may not welcome a transfer of Arm to American ownership. Chinese technology companies that rely on Arm, including communications giant Huawei Technologies Co., have complained to local regulators about the deal, concerned that Nvidia, under pressure from the U.S. government, may force Arm to cut off Chinese clients. What’s more, a dispute between Arm and the head of its China business could complicate things further. It tried to dismiss the local chief executive officer, Allen Wu, for alleged conflicts of interest but he refused to leave. Arm China’s board, which is mostly made up of local investors, is in talks with authorities to get their help to remove Wu. So far, they haven’t taken any action.
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