Arm – Balancing Act

Arm will need a major charm offensive.

• It turns out that Arm may be looking to make its own chips after all in a move that needs to be carefully balanced to ensure that it does not enrage its customers and accelerate the shift away from Arm to RISC-V.
• The Financial Times (see here) and Reuters (see here) are citing unnamed sources (not very reliable) that claim that Arm intends to launch its chip offering, is recruiting staff from its customers and may have already won business from Meta that otherwise could have gone to Qualcomm.
• This is not the first time I have heard this as Qualcomm made similar, but less specific, allegations as part of the court case that concluded at the end of last year.
• As this possibility is coming from multiple sources and given that the FT is generally reliable, I think it is likely that Arm will launch a chip this year as the FT claims.
• From Arm’s perspective, this strategy makes complete sense because the company has flown high on AI wings and now needs more revenues and profits to sustain this altitude.
• Making its own chips will greatly increase the revenue per chip but it will bring margins down.
• However, overall, I would expect to see a significant increase in long-term financial performance assuming that this strategy goes well.
• For Arm, chipmaking is a high-risk strategy as:
  • First, customers: where Arm will now be directly competing with its customers which will both anger them and compromise Arm’s independence in their eyes.
  • According to the FT, Arm has secured Meta as a customer for a data centre CPU in what I would guess is a fully customised implementation based on Meta’s requirements.
  • Qualcomm is likely to have offered Meta something similar but I suspect that the Arm offering could well have a greater level of customisation as it has no off-the-shelf designs to use and as the first customer, Meta probably got an excellent price.
  • I suspect that Meta will be dual sourcing as Reuters sources claim that the talks with Qualcomm are still ongoing which makes sense given that this is Arm’s first foray into chipmaking.
  • There is currently no love lost between Arm and Qualcomm at the moment but this will also concern all of Arm’s other customers with the exception perhaps of Apple who I don’t think will care very much one way or the other.
  • Competition with clients could intensify further if SoftBank acquires Ampere which could greatly accelerate Arms migration to becoming a chipmaker.
  • If Arm ends up offering only highly customised chipsets which are co-designed with customers, then the competitive issue will be significantly lessened but it is not clear at this stage which route Arm will be taking.
  • Second, RISC-V: which will receive another boost if Arm begins selling complete chipsets rather than just IP and processor designs.
  • This is because Arm’s customers will see a loss of independence and have concerns about whether they will be treated fairly given that there is an in-house competitor.
  • Samsung has proven for years that it can keep its memory business independent from its handset business but convincing chip customers of this will not be easy especially when its relationship with one of its largest customers is in such a bad state.
  • Hence, this is likely to push Qualcomm, Nvidia, Samsung, MediaTek and so on to look more closely at RISC-V which already has a lot of traction but only at the very low end of the market.
  • RISC-V is great for the low end because chipmakers don’t have to add very much to get a working product, but at the high end, Arm’s economies of scale make it not cost-effective to do RISC-V.
  • However, this is slowly changing because just as Arm is eating into the high-end market, RISC-V is eating into the bottom end of Arm’s addressable market.
  • Google is already migrating wearables that use Android to RISC-V and a move like this will encourage chipmakers to accelerate the migration to RISC-V meaning that smartphones may migrate sooner than expected.
  • This is not a big problem for Arm for as long as it can take share from x86 and proprietary processors in the vehicle, data centre and so on but at some point, it will run out of road.
  • I am also pretty sure that Qualcomm is already working out what it would need to do to build an Oryon CPU on RISC-V and this move will only increase this incentive for all of Arm’s customers.
• The net result is that if Arm is going to build its own chips (which seems likely given the number of sources) it needs to go on a charm offensive and make the case to its customers that its independence will be maintained.
• Failure to succeed will see customers accelerate their RISC-V programs and give the overall RISC-V ecosystem far more air to breathe than it currently has.
• If RISC-V hits critical mass and standards for higher chip functions begin to form and an ecosystem is created, this will greatly increase RISC-V’s ability to compete with Arm.
• Arm currently has complete dominance in many verticals and is growing share but for this to continue with Arm as a chipmaker, it needs to strike a delicate balance between maximising its revenue opportunity, keeping its customers happy and ensuring that RISC-V stays in its box.
• Making its own chips is a high-reward but high-risk proposition.