So who won?

The forced departure of the chief executive and chairman of Arm Technology (China), following a two-year tussle with the rest of the company’s board, seems to have turned the page on a particularly tortured chapter in the company’s history.

‘Rogue’ executive Allen Wu was finally ousted in late April after the Shenzhen government agreed to the board’s longstanding request to update Arm China’s business registration without him being cited as the company’s legal representative.

This paved the way for the formal appointment of two co-CEOs: Liu Renchen (formerly a deputy director of a Shenzhen government and a Tsinghua University research institute) and Eric Chen (a SoftBank partner).

The Chinese media are now asking what comes next, after SoftBank finally managed to wrest back control of a company whose technology is so important to China’s semiconductor sector. One suggestion is that SoftBank should follow the example of other joint ventures in which the foreign partner holds a minority stake. In Arm China’s case, SoftBank controls 47.3% of the shares through its ownership of UK-headquartered Arm Holdings, while Chinese private equity fund Hopu owns 36% and the remaining 15% is under the control of funds with ties to the recently departed Wu (a fact supposedly unbeknownst to SoftBank when it set the joint venture up in 2018).

Chinese media outlets have been citing two examples of this situation in action, one in China (the auto company SAIC-GM) and the other in Japan (tech company Yahoo). In both cases the joint ventures have flourished, it claims.

“Neither SAIC-GM nor Yahoo Japan’s foreign shareholders have tried to control the joint venture,” it notes. “At the same time, both have achieved excellent performance under the leadership of local controlling shareholders and management.”

Analysts have also flagged Arm China’s exclusive and permanent rights to not only authorise the sale of its parent company’s IP in China, but also to develop its own products using Arm’s underlying architecture.

The Chinese JV is, in effect, Arm Holdings’ largest global client. In 2021, it accounted for about 27% of Arm Holdings’ $2.7 billion global revenues, according to Ximou research. However, this represented a drop from 34% in 2020.

The reduction was partly due to the global group’s push into new areas including networks, data centres and electric cars. Prior to this, Arm had been the dominant player in smartphones, about 95% of which have computer chips based on its architecture.

However, it is now making inroads into PCs as well. Apple has swapped Intel for Arm in its self-designed M1 computer processing units (CPUs), for instance, while Qualcomm and Nvidia have started to use Arm-based CPUs as well.

Indeed, one reason why the Shenzhen government decided to support SoftBank in the tussle with Wu is because it probably feared losing access to Arm’s future IP. For almost two years, local government officials had refused to update Arm China’s business registration documentation on the grounds that it was the subject of a lawsuit initiated by Wu. But what changed the calculus in the case was SoftBank’s decision to transfer its joint venture stake into a special purpose vehicle (SPV) it jointly owns with Arm Holding. Caixin reports that SoftBank then “threatened that Arm would not licence new IP rights to the JV if Wu remained in the top job”.

The magazine adds that the share transfer into the SPV has yet to be approved by either the Shenzhen government or Hopu, the other main shareholder in Arm China.

But it also reports on the rumoured sale of the 51% of shares owned by China-based entities to a company called Lotcap. In June, the Macau-registered firm said that it had signed letters of intent to buy out all the Chinese shareholders.

It is not yet clear who is really behind Lotcap, a company “shrouded in mystery” as Caixin describes it. However, the magazine says that Arm China’s articles of association do not permit a stake sale without the prior approval of Arm Holdings, the parent. An Arm China official said further that it has yet to receive any information about the proposed ownership change.

SoftBank’s ultimate aim is to float Arm Holdings, either on Nasdaq or the London Stock Exchange, as a way of releasing funds to reduce its own debt. Clarity about the ownership and future strategy of its Arm China venture is crucial for that IPO to go ahead. Arm seems to have triumphed in the battle with Wu, the maverick former CEO of its China unit. But whether it has ended up with the winning hand in the China market remains to be seen.

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