Nikkei: Arm China's leadership change has hidden dangers

Recently, the leadership change at British design company Arm and its subsidiary Arm China has caused a stir in the industry.

The Nikkei Asian Review believes that the seeds of the dispute between the two sides can be said to have been sown two years ago. At that time, Arm, the world's leading intellectual property provider behind many of the world's mobile devices, made a bold bet to sell a majority stake in the division.

Arm, owned by Japan’s SoftBank Group since 2016, and Arm China have clashed bitterly over the appointment of the chairman and CEO of the Chinese unit since last Wednesday. Arm insists that it has ousted CEO Allen Wu due to “whistleblower evidence of irregularities and conflicts of interest.” However, Arm China argues that the decision was illegal. That is, one of the executives that Arm China believes its parent company assigned to oversee the Chinese subsidiary was actually removed from his position weeks ago.

The spat, which comes amid growing tensions between the U.S. and China, has sparked a debate in the industry about how successfully Arm, whose IP dominates the world's mobile chips, can balance conflicting demands. Arm's IP provides essential IP to chipmakers including Apple, Qualcomm, Samsung, Huawei, MediaTek and others.

The decision to take only a minority stake (49%) in the Chinese joint venture is intended to allow Arm to do more business in the rapidly growing Chinese market. Arm executives told Nikkei Asian Review in previous interviews that a more autonomous local unit would be able to take advantage of business opportunities that Western companies do not have.

Under the terms of the 2018 deal, Arm sold a 51% stake in the local subsidiary to a consortium of Chinese investors for $775 million, which has effectively significantly weakened the parent company's control over its business operations in the country.

According to internal documents obtained by Nikkei Asian Review, Arm China's board of directors consists of nine directors, four of whom are appointed by the British company, four by Chinese investors, and the ninth director is selected from local "ecosystem partners" and appointed by consensus of the board.

Arm China itself argues that it is legally a Chinese entity and that its British parent company has no right to remove its CEO. Industry sources say this identity issue has become a difficult question. An industry source close to Arm said: "Arm China wants greater autonomy. However, amid geopolitical tensions, whether it should be considered a British or Chinese company has become a difficult question to answer." 

Arm told Nikkei Asian Review that geopolitical tensions and export control rules had no bearing on Wu's removal or its investigation of executives.

But Arm’s biggest customer in China is Huawei, and the Chinese tech group is the subject of an increasingly tough U.S. crackdown over security issues, a relationship that has put Arm in an awkward position. Last year, when the U.S. added Huawei to its trade blacklist, Arm had to suspend support for the Chinese company, before later resuming services for non-U.S.-sourced technology. Arm has large R&D centers in the U.S. and at its headquarters in Cambridge.

Against this backdrop, Arm’s China ambitions are unfinished business, industry sources said.

“We hear from time to time that Arm China wants to have closer collaborations with local partners as well as government partners, but its parent company is not always happy with these collaborations,” said a chip industry source with knowledge of the matter.

On Monday, Arm China's official WeChat account published a joint letter from the management team of Arm China, which stated, "We are very shocked and angry about the unwarranted accusations against Wu Xiong'ang in recent media reports. Such an industry veteran who has worked in the Arm system for 16 years, a mentor and helpful friend who has a sincere feeling for the industry and a deep love for Arm and Arm China, has been subjected to those unwarranted accusations. We believe that this has not only hurt the reputation of Wu Xiong'ang and Arm China, but also deeply hurt our feelings."

Arm China's management team emphasized that at present, Arm China is operating normally and the team is stable, and this incident has not affected normal business activities with any customers and partners.

Arm spokesman Phil Hughes told the Nikkei Asian Review on Monday that the company "continues to have confidence in Arm China's progress and vision as an independent company, and in Arm's ongoing commitment to the Chinese market."

According to documents obtained by Nikkei Asian Review, under the terms of the original deal, Arm China could not only fully utilize its parent company's intellectual property, but also take over all of its existing operations, assets and employees in China, and become its exclusive channel for technology licensing and service customers. Experts say such generous terms were unexpected even without the geopolitical context.

Shih Po-jung, senior market technology analyst at the Market Intelligence and Consulting Institute, said: "It is unusual for Arm to set up a unit like Arm China to be responsible for all technology licensing and operations in the country, but not really have full control over the unit. The existence of Arm China makes Arm sandwiched between the world's two major powers. It is difficult for Arm to grasp a good line between the two because it also has a large US R&D team."