TAIPEI -- British chip designer Arm Holdings intends to keep advancing in China even though the SoftBank Group unit spun off its businesses in the nation to a local joint venture, an entity focused on developing chips secure enough for Beijing's needs, a company executive says.
"We expect to continue to grow our China market along with the joint venture," Nandan Nayampally, vice president and general manager of Arm's client line of business, told the Nikkei Asian Review earlier this month.
Arm's Chinese joint venture began operating by the end of April, taking over the licensing business and dealings with Chinese customers such as Huawei Technologies and Xiaomi from the parent company. Arm ceded control of its China operations to the venture, with stakes totaling 51% owned by Chinese investors including state-sponsored entities, the Nikkei Asian Review first reported May 1. SoftBank on June 5 confirmed the $775 million sale of the 51% stake. Arm was acquired by SoftBank in 2016 in a $32 billion deal.
The joint venture represents Arm's only channel to sell its intellectual property in China, Nayampally said, while the entity can create products tailored to Chinese markets with Arm providing technical support.
"They want to build something that's specific for them -- security is an example," he said. "If [the joint venture develops] products that have the potential to sell globally, Arm [as the parent company] is a channel and has the right to sell those products globally. That's a dual way."
Meanwhile, Arm's China joint-venture is targeting business deals with the Chinese government or other projects for Beijing-backed enterprises which previously are not open to foreign companies, according to an industry executive.
The majority stake taken in Arm's Chinese business was viewed as a move by Beijing toward securing key chip blueprints for local electronic device makers amid trade tensions and escalating scrutiny from Washington over ties between American firms such as Facebook and Google and their customers in the world's No. 2 economy.
The chip designer's intellectual property is used in 90% of mobile devices globally. Companies including Apple, Samsung Electronics, Huawei, Qualcomm, Broadcom and MediaTek need to license Arm's technology to develop chipsets for smartphones, tablets, wearables and various connected devices. Developers pay royalties to Arm to sell their chips. Chips generally are viewed as the most important component in all such electronic devices, and they carry national security implications.
Nayampally declined to comment on revenue attribution between the venture and the parent, and on whether a new pricing structure exists for Chinese customers.
Arm's sale of the stake came as the company seeks new growth opportunities amid a weakening smartphone market. The chip technology provider's operating profit margin plunged to 24% for the year ended in March from 48% in the previous year as Arm raised its research and development expenses substantially. The company's revenue of 1.36 billion pounds ($1.83 billion) grew around 8% on the year, with 20% of total revenue coming from China.
The overall mobile segment still could grow, Nayampally said, with unit increases coming mostly from entry-level phones for emerging markets.
Meanwhile, Arm continues expanding its footprint into laptop computers, a segment previously controlled by Intel.
Intel's x86 architecture dominates processors for computers and servers by providing better computing power, while Arm-based architecture offers efficiency for low-power consumption that suits mobile applications.
But as notebooks grow thinner and lighter, Arm gains advantages. HP, Lenovo Group and Asustek Computer rolled out laptops by the end of 2017 that run on core processors with Arm's intellectual property, while Samsung Electronics looks likely to join the camp. Apple is also designing MacBooks that use Arm-based core processors, industry sources say, which is set to introduce by 2020.
Though Arm has a limited presence in the clamshell notebook segment, Nayampally said his company expects to gain a 25% market share by 2021.
For the longer term, the company places a big bet on the "internet of things," forecasting over 1 trillion connected devices by 2035 that will require a massive volume of chips to generate data.
Chris Porthouse, vice president and general manager of device services, said connected devices remain tied more to consumer electronics such as voice-activated smart speakers for now. But enterprise demand will boom in the mid- to long term as all traditional businesses undergo a transformation, embedding chips across a wide range of industry applications, he said.
The internet of things "is nascent, and it is fragmented. But we believe the explosive growth is going to come from IoT in years to come," Porthouse said. "Now, smart speakers are driving the volume of what is called internet of things, but that does not get you to 1 trillion connected devices. It's when you start getting temperature sensors, lighting sensors, and when everything is connected and you can get the usable data from sensors all around us. That's what is going to drive the revolution."