TAIPEI ARM Holdings, a British chip designer controlled by Japan's SoftBank Group, will launch a joint venture in China "within months" to help companies there develop semiconductor technologies, including products that could have security uses, an executive told the Nikkei Asian Review.
"The intent is for that joint venture to develop products for the Chinese market for China partners, and specifically around the areas of technology that a Western company might not be able to do," Rene Haas, president of ARM's intellectual property products group, said in an interview on May 29.
Haas, giving examples of national security and surveillance, said, "If somebody was building [a system on a chip], the security has to be at a very high clearance in such a way that China wants to have it only inside China. "With this kind of new joint venture, this company can develop that. In the past, this is something we couldn't do," Haas said.
System on a chip, or SoC, refers to a chip that integrates various functions that can include computing and communications. ARM's architecture is used by chipmakers everywhere for their SoC products, and the company has a 90% share of the global market for chips for mobile devices, including smartphones, tablets and other connected gadgets. Global hardware and chip companies -- Apple, Qualcomm and Samsung Electronics among them -- license technologies from ARM.
But according to a December 2016 story in Military & Aerospace Electronics, a U.S. defense trade publication, bigger rival Intel's microprocessors dominate embedded computing systems in the defense sector. ARM, which was purchased by SoftBank in mid-2016, remains a newcomer in that field.
"THE BEST WAY TO GROW" Now, according to Haas, ARM sees a prime opportunity in Beijing's push to build a domestic semiconductor industry and reduce its reliance on foreign products.
To become self-sufficient in key technologies, particularly following the U.S. National Security Agency surveillance scandal blown open by systems analyst Edward Snowden, Beijing has proposed to invest at least 1.2 trillion yuan ($174 billion) over a decade to build its own chip industry. Eventually, China wants to compete with Taiwan's world-class chipmakers and global semiconductor titans like Intel and Qualcomm.
"We think it's a good thing, as China wants to be secure and controllable," Haas said. "They want to grow the market and ultimately they want to have control of their technology that only resides inside China.
"We thought it's the best way to grow there," Haas said of the joint venture, explaining that ARM will provide intellectual property products, technical support and training, while Chinese investors will be responsible for management.
"This hypothetical security thing is the completely new area, and it's the area [in which] China wants to have domestic control and capability," Haas said. "If it's based on the technology that we bring, we could benefit from that."
ROGUE-STATE WORRIES ARM is moving in this new direction at a time when China is pouring money into its defense capabilities, alarming its neighbors and worrying some governments in the West.
The International Institute for Strategic Studies, a think tank in London, says China's overall defense budget for 2016 was $145 billion. That accounted for one-third of the total military spending in Asia and ranked second globally, behind only the $604.5 billion spent by the U.S. The think tank also says China appears to be achieving "near-parity with the West" in terms of air power.
Haas downplayed the sensitivity of the issue.
"Let's say China wants to have something that is very secure and specific to China. ... It could be based on the ARM technology but made specifically for China. That's what is different."
Offering a "simple analogy of cars," he continued: "In the U.S., the steering wheels are on the left, and in England it's on the right -- and let's say the Chinese said, 'I want the steering wheels in the middle.' We said that we will never do that. But Chinese policies said it's steering wheels in the middle. So we give them the tools to build the cars with steering wheels in the middle. That's kind of what it is."
Asked how ARM can ensure that sensitive technologies developed in China will not be leaked to North Korea or countries under a United Nations embargo, Haas said his company is still considering the options. "That's a good question and we have to figure that one out. Those are the kinds of questions that have to be finalized. But one thing is clear -- that the products can be only sold in [China]."
On several occasions, the U.S. has sanctioned Chinese companies for exporting sensitive goods to countries embargoed by the U.N. In March, telecommunications group ZTE pleaded guilty and agreed to pay a $1.19 billion fine to the U.S. authorities for exporting electronics to North Korea and Iran.
A SoftBank spokesman declined to comment on ARM's plans.
Haas said ARM is partnering with Chinese private equity firm Hopu Investments on the joint venture, which was announced on May 14 in China and reported in Chinese-language media. He said the two companies have signed a letter of intent, and added that the Shenzhen government is also involved, as the new entity will be based in the southern Chinese city.
But it is not yet clear how much capital will be injected into the new entity and which other Chinese investors or companies might participate, according to Haas. He said this will be ARM's first experience creating a separate company to transfer technology for doing business.
Hopu is headed by financier Fang Fenglei, the titular chairman and majority shareholder of Goldman Sachs' China operations, according to the Financial Times. The fund has $2.5 billion to $3 billion in assets under management, according to various Chinese media reports.
In January, China's Ministry of Science and Technology said in a statement on its website that Hopu and ARM were setting up a new investment fund with backing from Chinese sovereign wealth fund China Investment Corporation, the Beijing-owned Silk Road Fund, Singaporean sovereign wealth fund Temasek Holdings, and Shenzhen government-owned conglomerate Shum Yip Group.
ARM confirmed the ministry's announcement in February, without naming other investors besides Hopu. ARM said the fund aims to invest in startups in China and beyond, and to work on emerging technologies including the internet of things, autonomous vehicles, cloud computing, big data and artificial intelligence. The fund has $800 million under management.
ARM remains confident about China's growth potential, Haas said, adding that the country will become the chip designer's top market in five to 10 years.