TAIPEI -- Softbank's $40 billion sale of Arm Ltd. to Nvidia is a generational transaction for the semiconductor industry -- the world's most important mobile chip IP provider, being delivered into the hands of America's most valuable chipmaker, in the sector's biggest ever deal.
Described by Nvidia CEO Jensen Huang as a "once in a lifetime opportunity" for his 27-year-old chip developer, the deal is set to strengthen Nvidia's position as the emerging leader in next-generation artificial intelligence computing and reshape the tech industry competitive landscape.
But the tie-up still has a long way to go before it clears regulatory approvals in key markets such as China and the U.S. An op-ed in China's state-backed Global Times on Wednesday described the planned acquisition as "disturbing" and urged global regulators to exercise caution in approving it. The U.K., where Arm is based, has already promised close scrutiny of the deal.
The takeover bid has also raised concerns about Arm's longtime position as a neutral provider of key mobile chip blueprints. U.S. ownership, moreover, could further place Arm in an awkward position as the U.S.-China tech war heats up and Beijing aims to cut reliance on foreign chip suppliers.
What is the rationale behind the acquisition?
Cambridge-based Arm provides the fundamental blueprints used in more than 90% of smartphone chips. Almost all of the world's chip designers, from Apple to Samsung to Huawei, need its technology to design mobile-related chips. About 22 billion Arm-based mobile chips were shipped in 2019.
But the company is also moving aggressively to expand into the data center server and PC market, two areas long dominated by Intel, the biggest U.S. semiconductor company by revenue. Currently, Arm-based server CPUs have a market share of less than 1-2%, compared to more than 95% for Intel's X-86 architecture. Combining the energy efficiency of Arm's server CPUs with the capability of Nvidia's graphic processing units could create a competitive alternative to Intel's offerings.
"One of the areas of course we are very interested in is to accelerate the development of server CPUs that Arm has seen exciting progress and success already," Huang said.
The $40 billion deal could also be a great win for Nvidia and its supply ecosystem by strengthening the company's lead in AI computing, powered by its signature graphic processing chips. Combining Nvidia's engineering capabilities with those of Arm could even help build more advanced supercomputers.
The deal also opens up business opportunities for Asian chipmakers that produce for Nvidia, such as Taiwan Semiconductor Manufacturing Co. and Samsung Electronics. These suppliers have found it difficult to make significant inroads into data center server and PC chip production because Intel manufactures most of its CPUs itself.
What are the potential downsides to the deal?
While Nvidia talks up the possibilities of an acquisition, its rivals are wary of Arm losing its vaunted neutrality.
The U.K. company has long played the role of an impartial technology enabler that licenses foundational chip blueprints to chip developers, charging an initial fee and then collecting royalties on a per-chip basis if clients successfully develop chip products based on Arm's intellectual property.
As an IP licenser, Arm has access to licensees' chip development roadmaps and their confidential chip shipment data -- all of which is extremely sensitive information for chip developers.
SoftBank's acquisition of Arm in 2016 received quick regulatory approval and was accepted by Arm's clients because the Japanese conglomerate did not compete directly with any of those customers.
Nvidia, on the other hand, is the world's leading graphic processing chipmaker and recently became a leader in AI computing, where graphic processing is becoming more important for applications such as facial recognition.
Even though the company dropped out of smartphone chip development back in 2014, its strong chip design capabilities means it could introduce products that would compete with those of Arm's current customers, such as AI accelerators and server chips, which Qualcomm, MediaTek and others have expressed an interest in developing.
"Arm's neutrality would be challenged by clients if Nvidia takes control of the British company. Unlike SoftBank, which acts as an independent party that has no links to the semiconductor industry, Nvidia still has some competition with many of Arm's licensees," Jonah Cheng, chief investment officer at J&J Investment and a former semiconductor analyst at UBS, told the Nikkei Asian Review. "Many of Arm's clients would not want their confidential chip data to be available for Nvidia, either."
Pricing is another potential area of concern.
"Arm's royalties are charged based on the average sale price of its customers' chip products," a source close to MediaTek, the world's second-largest mobile chip developer after Qualcomm, told Nikkei Asian Review. "If another chipmaker such as Nvidia takes over Arm, that means it could have access to all of Arm's customers' chip shipment volume and pricing information. ... That is extremely sensitive information for business practices."
Arm CEO Simon Segars said on Monday the chipmaker will be able to maintain its independence. "Independence is part of the value of Arm. ... We may have a different parent company, but we will continue to keep the level of independence without changing the business model."
Nvidia's Huang made a similar vow: "We will protect its business model, keep its openness, keep it neutral and let people keep building on Arm with benefits from our technologies as well."
Despite such assurances, Alex Capri, a visiting senior fellow in the Business School at the National University of Singapore, said there are still potential conflicts of interest due to competition between Nvidia and some of Arm's clients. "The development might move the likes of Broadcom and Qualcomm to move more chip design in-house, which Apple is already doing."
There could also be regulatory pushback in the U.S. or U.K., Capri said. "It will be interesting to see whether the U.S. government overlooks the conflicts of interest issue in order to pursue its broader strategic and techno-nationalist agenda regarding China."
Would coming under U.S. ownership be a problem for Arm in its dealing with China?
It could be. The semiconductor industry has been one of the key battlegrounds for tech supremacy between the U.S. and China, as chips function as the brains powering advanced electronics products ranging from smartphones and data centers to drones and advanced military technology.
The Global Times op-ed spelled out Beijing's concerns on the issue: "Given the U.S.-China tensions and U.S. suppression on a range of Chinese technology enterprises, if Arm falls into U.S. hands, Chinese technology companies would certainly be placed at a big disadvantage in the market."
For its part, Arm has long viewed China, which accounted for some 25% of the company's revenue, as a strong catalyst for future growth. It even set up a unique joint-venture -- Arm China -- to tap the market, ceding a majority stake in the company to local investors in order to so.
However, Arm's Chinese dream turned into a nightmare when the U.S. placed its biggest Chinese client, Huawei Technologies, on a trade blacklist last May. Arm had to temporarily suspend relations with Huawei and resume them from its non-U.S.-based businesses.
Nvidia's acquisition of Arm could further complicate matters and accelerate China's turn to alternative chip architectures.
That opens a chance for the emerging RISC-V platform, a free, open-source architecture endorsed by many Chinese chip developers who see it as being beyond the reach of the U.S. export controls.
In July 2019 -- two months after Huawei was added on the Washington's blacklist -- Chinese internet giant Alibaba Group Holding chose RISC-V over Arm's infrastructure to design its first-ever microprocessor for smart speakers, self-driving cars and other internet-connected devices. China's UNISOC, the country's second-largest mobile chip developer after Huawei, has also adopted the RISC-V infrastructure to develop chips for consumer electronics devices, such as Bluetooth earphones.
Taiwan's Andes Technology, a chip design service provider based on the RISC-V ecosystem, has already seen its business boom in China. M31 and eMemory, two other Taiwan-based chip IP providers, are also expected to benefit as Chinese companies look beyond American technologies.
"China would not want such crucial technologies and sensitive client data to land in the hands of an American company. In the long run, more Chinese companies will avoid using Arm as much as they can to lower the risk of their supply being cutoff one day," J&J Investment's Cheng said.
Nvidia's Huang downplayed the potential impact of the ownership change on Arm, saying that he does not see any change when it comes to export control rules compliance, as Arm would still be headquartered in the U.K.
But market watchers see it differently. Capri of the National University of Singapore, said once Nvidia, an American company, completes the deal, even if Arm is still based in the U.K., it will become subject to the U.S. export controls and the constraints of CFIUS, the Committee on Foreign Investment in the United States, and will "be pulled directly into Washington's techno-war with China."
"This deal spells even more trouble for China's tech industry. Companies such as HiSilicon rely on Arm to design their chips, and now the U.S. government could have additional leverage, as it could potentially place restrictions on Arm's technology -- and who is or isn't licensed to use it," Capri said.
Arisa Liu, a veteran chip industry analyst with the Taiwan Institute of Economic Research, also flagged the geopolitical risks.
"If Nvidia later controls Arm, we expect the U.S. will then hold another key bargaining chip in this ongoing tech war," Liu said. "In the future, it's definitely possible that the U.S. could block more Chinese companies' uses of crucial chip intellectual properties, and it's possible that we will see government interventions given what has happened between the U.S. and China."