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Arm's China joint venture ensures access to vital technology

Document also reveals chip venture seeks to outsell SoftBank-owned parent

HONG KONG/TAIPEI -- The China joint venture by chip designer Arm Holdings and Chinese investors has big goals: to surpass its British parent in revenue by 2025 and ensure easier access to critical semiconductor technology for the world's No. 2 economy, according to people familiar with the matter.

A document obtained by the Nikkei Asian Review from an industry source familiar with the venture -- known as Arm mini China -- projects revenue of $1.89 billion by 2025, topping parent Arm's fiscal 2016 sales of $1.68 billion, thanks to the booming market for connected devices.

Arm mini China looks to achieve net profit of $30 million for 2018 on sales of around $398 million, the document said. The venture, now valued at $1.52 billion, plans an initial public offering on the mainland as early as 2021.

Nikkei first reported on Tuesday that the Chinese venture began operations in April and would take over all business for SoftBank Group subsidiary Arm Holdings involving local partners. Chinese and external investors, including Beijing-sponsored entities, control 51% of Arm mini China while the British parent owns 49%.

SoftBank bought Arm in 2016 in a deal worth $32 billion. SoftBank and Arm did not immediately respond to requests for comment. 

Hopu-Arm Innovation Fund, also known as Hou An Innovation Fund, will be a crucial stakeholder. The fund's backers include sovereign wealth fund China Investment Corp., the Beijing-owned Silk Road Fund, Singaporean sovereign wealth fund Temasek Holdings, Shenzhen government-owned conglomerate Shum Yip Group and Hopu Investment Management, according to China's Ministry of Science and Technology.

Chinese internet company Baidu, China Merchants Bank, Bank of China Group Investment and venture capital firm Sequoia also are prominent investors, the document obtained by Nikkei said.

The venture currently involves overseas investors, the document said, but the terms request that backers who wish to transfer shares after the three-year locking period sell only to Chinese investors and not American entities or Arm's competitors. Arm and Hou An inked an investment agreement Sept. 29, the document said.

Beijing achieves a big victory with the creation of Arm mini China, as the parent ranks among the world's most influential chip technology providers. Arm's intellectual property is used in 90% of mobile devices globally. Companies like Apple, Samsung Electronics, Qualcomm, Broadcom, MediaTek and most developers worldwide require Arm's blueprints to design their own chips for mobile gadgets, tablets and various connected devices.

Arm's key Chinese clients and partners included Huawei chip unit Hisilicon Technologies, Unigroup Spreadtrum & RDA, Xiaomi, Fuzhou Rockchip Electronics, Semiconductor Manufacturing International and many other chip startups. Arm licenses technology to these developers and charges royalties after they ship their products.

Crucially, the Chinese venture can receive transfers of intellectual property now controlled by Arm, as well as training and technical support from Arm engineers, according to the document and people familiar with the matter. The joint venture could help Chinese developers secure sources of technology previously controlled by a foreign chip intellectual property provider.

To license technology from Arm Holdings, companies had to go through Arm's American team, a person familiar with the plan said. 

"That somehow worries a lot of Chinese chip designers," the person said. "They are wary whether they could always get good support. But with this joint venture, which is now a Chinese company, they are expected to secure sources of Arm's fundamental IPs that are foundations of their chip products."

China has realized the importance of controlling a competitive homegrown semiconductor industry in order to slash reliance on foreign suppliers ever since the leaks from American whistleblower Edward Snowden in 2013 unveiled a massive U.S. surveillance program.

The current Chinese trade tensions with Washington and the U.S. ban on exports to smartphone maker ZTE provide even stronger incentives for Beijing to swiftly boost self-sufficiency in chips, which serve as the brains of every electronic device and have strong national security implications.

Allen Wu, Arm's executive vice president and president of Arm Greater China, will serve as chairman and CEO of Arm mini China for five years, the document said.

Arm mini China intends to add 1,000 staffers in Shenzhen, where the entity incorporated, on top of the 300 employees currently in the country. A 30-member research and development team based in the Taiwanese city of Hsinchu will offer exclusive support for the venture, according to the plan. Hsinchu is home to the world's biggest contract chipmaker, Taiwan Semiconductor Manufacturing Co.

China was the largest semiconductor market last year, reaching $131.5 billion, the World Semiconductor Trade Statistics organization said. But the $24.7 billion in revenue generated by mainland China-based chipmakers accounted for just 4.9% of the semiconductor industry value chain last year, trailing rivals from the U.S., South Korea, Taiwan, Japan and Europe, according to IEK, a market research division of the Industrial Technology Research Institute based in Hsinchu.

"Once the Arm China joint venture lists on a Chinese domestic stock exchange, we think it could offer a much higher price-earnings ratio than before Arm was acquired by SoftBank, and that should give SoftBank's [founder and CEO] Masayoshi Son great investment returns," said longtime market watcher Wang Yanghui, secretary general of Shanghai-based Mobile China Alliance.

"For Arm, to take in China state-backed investors will help it secure a massive market and the next wave of growth opportunities amid a slowing mobile market."

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