Opinion: China has had its way with Imagination
A few weeks ago, the then CEO of IP licensor Imagination Technologies Ltd., Ron Black, was blowing a whistle indicating that Imagination’s owner Canyon Bridge – and the Chinese money behind it – were planning to move Imagination’s headquarters and IP to China. It was clearly something with which he and other C-level executives were not happy (see Imagination’s senior executives quit over potential Chinese coup).
When contacted by the press a few UK politicians blustered about how it was unacceptable and demanded answers to questions. Canyon Bridge partner and Imagination chairman Ray Bingham took up the CEO post on an interim basis and promised Imagination would remain headquartered in the UK (see Imagination to stay based in UK, owner promises).
And now, a month later, we find Imagination has agreed to invest in a joint venture with BAIC Group Industrial Investment Co. Ltd., the investment arm of Beijing Automotive Group (see Imagination forms Chinese automotive joint venture). With the latest news it appears that the vehicle by which Imagination will go to market in the automotive sector is going to be headquartered not in Kings Langley, England, but in a technology hub in the Haidian district of Beijing, China.
Imagination’s share in the JV or even whether it is major or minor has not been revealed
[Imagination has subsequently revealed it is a minority shareholder in the joint venture and given its own perspective here Imagination: We’re engaged with China, as we should be — PDC]
“Part of the deal structure is essentially like an IP license and of course that’s an area where we tend to be careful about what we reveal, as it’s commercially sensitive,” an Imagination spokesperson told eeNews Europe. But as well as being commercially sensitive, whether that stake is major or minor is key.
Next: invest in kind
The idea that Imagination will invest “in kind” by providing access to IP and assigning a commercial value to that, makes some sense as Imagination is not flush with cash at the moment. Imagination has been kept alive with money from China that has come through Canyon Bridge in the form of $50 million in interest-free loans. But the devil will be in the commercially-sensitive detail of the joint venture. It will also be fraught with danger.
“No smoking gun here,” you may say.
True. But consider this.
Imagination is on the back foot in the smartphone space and is now looking to leverage its GPU capabilities in the automotive sector and other consumer and embedded application spaces. In the automotive space, at least, this unnamed joint venture would appear to be one way forward. It may or may not be Imagination’s only way forward.
Imagination’s smartphone aspirations were impaired a few years ago by rejection from lead customer and backer Apple and the news that Apple’s royalty payments to Imagination would end as it brings up its own GPU cores. Indeed, Apple may have made, and could easily afford, a one-time settlement to Imagination to cover its own IP position (see How much did Apple pay to settle with Imagination? and Apple able to use more Imagination IP under renewed deal).
But Imagination has also been hurt by ARM. For years it’s Cambridge rival has been successful at licensing Mali GPUs alongside its Cortex processor cores. And finally Advanced Micro Devices has entered the market by licensing its graphics technology to Samsung (see ARM gets a rival as AMD licenses graphics IP to Samsung).
So, the automotive cockpit is the obvious place for Imagination to go and the company claims it holds 50 percent market share by volume for automotive application processors.
Next: Take note
Note this sentence from the press release announcing the deal: “The new JV will licence IPs and software of graphics processing units (GPU), and neural network acceleration (NNA) from Imagination in the way of general IP licensing model.” That is my underline for emphasis. Bingham said in the same statement that Imagination will support the JV and Chinese automotive chip makers to provide advanced chips for intelligent connected vehicles worldwide.
One interpretation could be that the JV will license – and take royalties for – the use of Imagination’s IP by Chinese automotive chip companies. Now you may argue that those royalties would ordinarily be passed up the line to the joint venture’s parents. But, of course, there are numerous ways to account for inter-company costs. And some of those ways could result in charges to be offset against royalties and a net result of “nothing to pay.” And if Imagination is a minority shareholder it is not in a position to object.
Also, note that Imagination expects other investors to be brought in to the venture during further rounds of funding. If things are not out of Imagination’s control now, they soon could be.
China has form
And significantly China has form in the area. It performed a similar coup against processor IP licensor ARM back in 2017 and 2018 (see Report: Control of ARM’s Chinese business passes to JV).
ARM was persuaded, presumably in return for continued access to the Chinese market, to enter into a series of joint ventures in China. The end result was a joint venture which took control of collecting ARM’s royalties in China but in which ARM only had a minority stake. That was according to a Nikkei Asian Review report at the time that went unchallenged. There were also plans for this JV ‘ARM Mini China’, in which ARM held 49 percent, to stage an initial public offering of shares. The creation of the joint venture appeared to be the fulfilment of a plan first mooted a year before (see Reports: ARM agrees to create Chinese IP firm).
Next: Chinese tail
There is nothing to say that the as yet unnamed joint venture between Imagination and Beijing Automotive will be exclusive, prevent Imagination operating elsewhere, or become the Chinese tail that wags the Imagination dog.
But it is remarkable that Imagination, which has spent years licensing its IP cores and collecting royalties around the world will now use a Chinese joint-venture to do the job for it.
There are those who are calling out for the protection of vital UK and European assets now deemed to be of strategic significance. The time to have objected to Imagination’s fate was when the bottom was falling out of its public share price on the news that its lead customer was hiring Imagination engineers as fast as it could to design its own GPUs: a story we broke in March 2017 (see Apple hires group of UK GPU engineers).
At that time, western interests or nations could have bought Imagination for a song and – guess what – China did. Once that happened the company’s fate was effectively sealed.
I fully expect Imagination to keep its promises, remain headquartered in the UK and to continue employing hundreds of engineers in the UK. But I also expect the commercial centre of gravity to move towards China and the Chinese stock markets where an IPO will be staged.
And there is a business model that has been repeated the world over, where the engineering takes place in one location, or many locations, and the headquarters and C-level executives are located elsewhere, alongside the money.
Related links and articles:
Imagination: We’re engaged with China, as we should be
Imagination’s senior executives quit over potential Chinese coup
Imagination to stay based in UK, owner promises
Imagination forms Chinese automotive joint venture
UK MP calls for western buyer to thwart Imagination coup
Management threat stalls China’s Imagination coup
Imagination’s senior executives quit over potential Chinese coup
After moves on ARM, China tries Imagination coup
How much did Apple pay to settle with Imagination?
Apple able to use more Imagination IP under renewed deal
Report: Control of ARM’s Chinese business passes to JV
Apple hires group of UK GPU engineers