China's ARM twist underlines strategic nature of tech

June 12, 2017 // By Peter Clarke
The strategic nature of technology underlies what ARM is doing forming a joint venture company to take IP to market in China

At first glance such a move seems disadvantageous to ARM and its owner SoftBank Group (see Reports: ARM agrees to create Chinese IP firm).

ARM has spent many successful years taking its processor IP to market in China in arrangements where it, via a wholly-owned subsidiary, keeps all the monies paid in upfront payments for IP, for engineering consultancy, and for royalties on chips shipped -- presumably less some tax paid locally. After all ARM is not like some multinationals. So why would it be prepared to set up new arrangements whereby a partially owned subsidiary takes ARM-originated and locally-generated IP to market in China and only passes a proportion of the money up the line.

ARM's success up until now is primarily based on cores for consumer electronics, such as smartphones where ARM has in excess of 90 percent penetration. It is now also making headway in automotive applications and the Internet of Things with cores for microcontrollers. As ARM expands into these and other areas, such as networking and server computing, it clearly becomes interesting to China with an view to its military and cyber infrastructure.

The devil is in the detail, of course. And not much detail about the JV has been revealed as yet, but there is a hint in a Nikkei Asian Review article that quotes Rene Haas, president of ARM's intellectual property products group. And the hint is that this JV is about China's national security and surveillance.

The intent is for it to develop products for the Chinese market for China partners, in areas of technology that a Western company might not be able to do, the article quotes Haas as saying. And by "might not be able to do" Haas means "would not be allowed to do." Haas says in the article that the Hopu-ARM joint venture would be able to help develop system-chips that China might require to have only developed inside China, something that ARM has not been able to do in the past.

The JV deal therefore does make sense if China is saying to SoftBank that there is considerable additional money on the table but only if ARM is prepared to create a China-based company to do the engineering in China.

And there could be any extra perq for ARM. A spokesman for ARM told eeNews Europe: "ARM will have exclusive rights for new licensing of ARM-based IP developed by the new JV to serve the rest of world market."

The Chinese are well aware of the risks of building both civil and defense infrastructure based on chips and cores developed elsewhere, which is a route the Western hemisphere has stumbled down.

In many cases Western defense procurement has migrated over to COTS (commercial off the shelf) sourcing. While defense contractors wanted the latest technology, developing it as custom ICs in lowly defense volumes, was unaffordable. Repurposing and requalifying commercial chips for defense specifications was the easy way to go. But because those COTS chips and IP were developed for other markets, such as PCs and networking, the IP provenance and manufacturing supply chain is lengthy, complex and provides many opportunities for chips and software to have been infiltrated and have had rogue circuitry and back and trap doors added.

It should be no surprise then that China finds it unappealing to base defence infrastructure on Intel-based embedded computing. It wants to have its own leading-edge semiconductor manufacturing and has gone some way towards catching up with TSMC, Samsung and Intel. And it wants its IP developed in China – with a little bit of help from its friends at SoftBank in Japan and ARM in Cambridge.

The joint venture is expected to get going in the next few months and one wonders what the US government will feel about that and how it may react.

Related links and articles:

www.arm.com

Nikkei Asian Review Article

News articles:

Reports: ARM agrees to create Chinese IP firm

ARM VC fund formed for China

ARM-SoftBank: Selling at the top or buying at the bottom?