At arm’s length

China wants to become a leading player in the semiconductor industry

A lot has been written about the famous ‘invisible hand,’ which the Scottish economist, Adam Smith, described to illustrate his belief that the cumulative impact of individual self-interest benefits society at large because free markets are self-regulating. However, when it comes to ARM Holding’s new Chinese joint venture, the domestic press as well as social media commentators are far more interested in gloves than hands.

In China, the term ‘white gloves’ is often used to describe a person who is acting as a front for someone else, often covering up dirty hands. In ARM’s case, the media has been keen to unpick who is really behind the JV, given the critical role it could play in helping China to develop an indigenous semiconductor industry.

This ambition is a subject WiC has covered extensively in recent weeks. China is determined to wean itself off its dependence on American chips at a time of increasing trade tensions (notwithstanding last weekend’s potential breakthrough on tariffs). And in both countries, the guiding hand of national security interests is replacing Smith’s invisible one of individual self-interest.

From China’s perspective, securing access to ARM’s patents and future R&D is potentially very significant. The company’s intellectual property is used in about 90% of the world’s mobile devices. The Chinese market is important to ARM too, as it currently accounts for 25% of its revenues thanks to a roster of clients that includes chip designers such as Spreadtrum Communications and end-users like Huawei.

On the surface, the JV, known as ARM mini China, has a shareholding split in China’s favour. The UK-based parent, ARM Holdings holds a 49% stake and a China-backed consortium led by the Hopu-ARM Innovation Fund (Hou An) owns 51%.

The Nikkei Asian Review reports that Hou An’s backers include China Investment Corp, the Silk Road Fund, Hopu Investment Management and a few non-Chinese entities such as Temasek. Other investors include Baidu and China Merchants. Crucially, one stipulation is that if any of the shareholders wishes to divest after a three-year lock-up, they have to sell to a Chinese investor and not an American buyer or an ARM competitor.

The new entity has big plans. ARM mini China will be self-funded and aims to IPO in 2021.

It also targets $1.9 billion in revenues by 2025 compared to the $1.69 billion annual sales the Cambridge-headquartered parent most recently reported last May.

However, Sina Finance says the most interesting aspect is how the JV will be run. Sina points out it will not be “utilising existing, or outdated technology”. Instead, it will be responsible for its own R&D, using the parent’s patents. Sina believes this represents a promising and exciting “new model for future joint ventures in the country”.

Social media commentators, on the other hand, are less impressed. The most popular postings are all negative. Many point out that ultimate control rests with ARM’s majority shareholder, Japan’s SoftBank.

“A Japanese-controlled British company has established a Chinese JV,” says one commentator. “How can anyone come to the conclusion that this is a breakthrough for Chinese technology?”

A second contributor also says he doesn’t understand why everyone is so happy, “This is just like all the other JVs. As long as we work for others, we’ll never be able to make any breakthroughs with our own technology.”

Wallstreetcn.com backs these sentiments up. It dismisses arguments that suggest the JV “is some kind of white glove serving China’s national will”. It calls this sentiment “naïve” and believes the venture is no different to existing tie-ups in the auto sector, which it says have largely benefited the Western side of the partnership.

“Japanese-funded ventures are ultimately US lackeys” it continues, concluding that “the biggest kidnappings are directly tied to the amount of domestic capital, which funds foreign entities that retain control of the core technology”.

This nationalistic tone is evident in most of the Chinese articles discussing the ARM JV, reflecting the geopolitical tensions underlying recent US and Chinese trade disputes. Unsurprisingly, the Global Times features prominently among them. It quotes Geng Bo, vice secretary general of the China Solid State Lighting Alliance. Geng says that the key to the JV is the Chinese side understanding how the underlying technology works. “Having fresh meat is good, but you also need to know how to cook it,” he points out.

However, while the deep-seated reasons for Sino-US tension have not disappeared, their respective government pronouncements have become somewhat more constructive (see this week’s “economy” section). Most surprising of all was a tweet from US President Donald Trump that, “too many jobs in China lost” because of his own government’s punishment of ZTE for breaking sanctions in countries like Iran.

He added that the Commerce Department has been instructed to get ZTE “back into business fast”. His move follows a US trip by Xi Jinping’s closest economic advisor, Liu He, who reportedly agreed that China would help reduce America’s $367 billion trade deficit.

This appears to be one of the reasons why China has also finally approved the $18 billion sale of Toshiba Memory to a Bain-led consortium. The Ministry of Commerce had reviewed the deal three times, and exceeded its usual time limit for offering a verdict. It was able to stall its decision on anti-monopoly grounds given how many chips are sold to China.

Next in line is an even bigger deal that has been waiting for the final country (China) to approve it since it was announced in October 2016: the $44.86 billion takeover of NXP Semiconductors by Qualcomm.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.