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Arm reveals just how vulnerable it is to trade war with China
你那里的生意不错,如果出了什么事就太可惜了
Comment Arm's much-anticipated SEC filing this week did more than detail an impending IPO: it revealed just how worried the British chip designer is at the prospect of getting locked out of China.
That regulatory filing documented various risks, uncertainties, and threats to Arm's ability to do business in the Middle Kingdom, which stands to reason as that market accounts for roughly one quarter of the Arm's revenues today.
For those who don't know: SEC filings tend to be packed with descriptions of worst-case scenarios, and doom and gloom, as businesses lay out all the risks they face. That's so shareholders can't say they weren't warned if their investments go south after business plans go awry.
That said, not only is China, as we noted, a significant source of revenue for Arm, the SoftBank-owned biz dedicated more than 3,000 words to the country in its 300-odd-page IPO prospectus.
Worsening trade relations with China spell trouble for Arm
According to that prospectus, Arm is at risk of losing sales on several fronts, though for the most part it revolves around the potential for American, British, or Chinese government (PRC) policies, exacerbated by the ongoing trade war, to inhibit or outright prevent the processor designer from doing business in China.
"Our concentration of revenue from the PRC market makes us particularly susceptible to economic and political risks affecting the PRC," the filing reads.
These rules are by no means new. However, over the past few years, the Biden administration has imposed stricter trade restrictions on the sale of sensitive semiconductor technologies in an effort to stifle China's domestic foundry industry and limit access to GPUs, accelerators, and other technologies that power AI applications. The Chinese government has since fired back by restricting the sale of gallium, germanium, and other raw materials used in semiconductor production.
The US rules, Arm notes, already limit the chip designer's ability to sell its components in mainland China, and only then by jumping through regulatory hoops.
"The US and UK have trade and national security policies regarding exports to the PRC of technology with potential military uses that would require us to obtain export licenses for certain processors," the SEC filing reads. "For example, the highest performance processor in our Neoverse series of processors meets or exceeds performance thresholds under US and UK export control regimes."
Introduced in 2019, Arm's Neoverse cores are designed to compete with Intel and AMD's Xeon and Epyc processors in the highly demanding datacenter space. The most powerful version of this core design is the Neoverse V2 used in Nvidia's 72-core Grace CPU.
Arm says it's been able to address Chinese demand for Arm processors "by licensing other CPU cores that do not exceed the HPC performance export control thresholds but yet still present a compelling solution."
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If the US or UK do pursue stiffer restrictions, as some lawmakers have recently called for, there could be unintended consequences for Arm's operations. These restrictions could further limit what IP Arm can sell or trigger retaliatory measures on the part of China that affect Arm.
These fears aren't unwarranted. Months after the US added Chinese memory maker YMTC to its entity list — basically a no-fly list for trade — the PRC banned the use of memory modules from US-based Micron citing rather ambiguous "security risks caused by hidden product problems."
Even if Arm doesn't fall out of favor with the Chinese Communist Party, stricter export controls on intellectual property could make doing business with Arm a supply chain liability, and drive customers to alternative technologies. Beijing is already promoting such moves under its "Made in China 2025" campaign, which, among other things, aims to achieve 70 percent semiconductor self sufficiency within the next two years.
For example, Loongson — which is already on the US entity list, making it tough for American organizations to work with it — is developing homegrown MIPS-like RISC processors. The quad-core 3A6000 reportedly boasts performance on par with a four-year-old Intel Core-series part. Other Chinese companies remain tied to Arm's ecosystem. Alibaba's Yitian 710, for instance, is based on Arm's Neoverse cores architecture.
What if Arm China goes rogue... again?
The situation is further complicated by Arm's relationship with Arm China, which despite being an essential conduit for doing business in the country operates fairly independently. Arm China did go through a phase of being run by a CEO whom Arm wanted to fire but for a while couldn't, until the exec was eventually forced out.
This corporate structure exposes Arm to significant risks, the company warned in the filing: "Arm China also may fail to comply with the laws and regulatory requirements applicable to its business, which could limit its ability to market or sell our products in the PRC."
Arm wrests back control of its rogue China limb
READ MOREWe've seen similar scenarios play out among Chinese firms with US presences. This spring the US Commerce Department added Chinese server maker Inspur to the entity list after the supplier allegedly attempted to "acquire US-origin items in support of China's military modernization efforts."
The decision effectively barred US companies, many of which Inspur depended on for components, from doing business with it or its subsidiaries.
Whether any of Arm's fears will be realized remains to be seen. However in the near term the Cortex design house warns its interests in the Middle Kingdom could diminish despite the steady growth it has enjoyed in the region up to this point.
"In light of these issues we expect to continue to see declining royalty revenues, and we could see a decline in licensing revenues derived from the PRC," Arm said in the SEC filing. ®
Suednote
That Arm-Qualcomm legal fight over the acquisition and use of Nuvia CPU blueprints is still ongoing, and looks like it'll head to trial in September 2024. It's something the IPO prospectus covers.
Arm noted the case "will likely require significant legal expenditures going forward. It may also require substantial time and attention from our executives or employees, which could distract them from operating our business.
"In addition, our involvement in such litigation could cause us to incur significant reputational damage in the industry, in our relationship with Qualcomm or in our relationship with other third-party partners."