Arm China – No Armed robbery

Very little to see here.

• The notion that Arm China has pilfered Arm’s IP and is selling it to Chinese customers makes no sense because even if it were true, those customers would be unable to sell a device outside of China without being hit with a large stack of lawsuits.
• It is not difficult to draw this conclusion when one looks at Arm China in the context of the ongoing dispute between Arm and Arm China over the governance of the joint venture and its rogue CEO who refuses to step down despite being voted out by the board.
• However, I think that the reality is much more boring.
• Arm China has been independent of Arm since 2018 when Arm sold a 51% stake to a series of Chinese investors and it became a joint venture.
• Arm China has been working on its own IP for a long time and announced an NPU in 2018 as well as the Star processor which is based on Cortex M.
• Arm is continuing to share its IP with Arm China and, according to Arm, there is a lot of interest in licensing its latest v9 architecture which will be sold via Arm China.
• This has come to light because Arm China held a rebranding event in the middle of August when news flow is typically very slow.
• At this event, it highlighted that it is an independent Chinese company (technically true as Arm only owns 49%) and is developing its own IP in China which again is nothing new.
• None of this is new but given how the message was delivered it is not difficult to see how it could be perceived as a defiant declaration of independence.
• Consequently, I expect that any noise and chatter surrounding an escalation of hostilities between Arm and Arm China to quickly die away as there is very little to see here.
• However, the situation with Arm China remains a difficult one which has the potential to hold up the sale of Arm to NVIDIA as there seems to be no progress on finding a resolution.
• The issue is that under China’s antiquated corporate system the holder of the company stamp has full executive authority and Allen Wu still has the stamp and is refusing to give it up.
• The board voted to remove him by 7 to 1 but as he still has the stamp not much can be done without a lengthy legal proceeding to force him to relinquish the stamp.
• Time is on Allen Wu’s side as SoftBank, Arm, and NVIDIA need to close the transaction and the current situation at Arm China may continue to be a stumbling block.
• This gives Allen Wu leverage, but at the end of the day, I suspect that SoftBank will end up paying him a lot of money to relinquish the stamp and leave the company.
• Hence, I think the deal still has a good probability of closing, but it will almost certainly close later than the 18-month forecast at the time that the deal was announced.
• This will leave NVIDIA with some big promises to keep and the skepticism with regard to the transaction is not going to go away until a long time after closing and NVIDIA has emphatically proved all of the critics wrong.
• The regulators remain by far the biggest hurdle to getting the deal done as the CMA has clearly demonstrated (see here).