Arm’s Ongoing Challenges: CEO Wu Xiongang Refuses to Resign Amidst Tensions with Chinese Companies

1. Arm’s Ongoing Challenges?

According to Jiwang News, in the historic year of 2020, Arm is undergoing its greatest test.

It can be said that Arm is having a tough year: the power struggle between Arm headquarters and Arm China has not yet ceased, and recent news about the increase in Arm’s IP licensing fees is also spreading. However, the most concerning issue is the rumor that SoftBank, due to financial pressure, will either relist Arm or choose to sell part or all of it, with potential buyers ranging from Apple and Samsung to Nvidia. Where should Arm go from here?

Power Struggle

Whether for sale or relisting, confidence in Arm is an important factor.

In early June, Arm experienced a sensational “leadership change” incident, where investors Arm and Hillhouse Capital attempted to dismiss the chairman and CEO of the Arm joint venture, Arm China. However, some investors believed the board’s resolution was controversial and resorted to legal means to resolve it. After all, the Chinese market accounts for 20% of Arm’s global revenue, and while Arm’s global growth is slowing, China’s vast mobile internet and IoT market continues to grow rapidly, showcasing immense vitality. Arm still needs to rely on the Chinese market now and in the future. Not clarifying Arm China’s actual control and related subsidiary rights may adversely affect Arm’s valuation.

Now, the “leadership change” dispute has intensified. On July 28, Arm China issued an open letter accusing Hillhouse Capital and some directors from Arm UK of frequently contacting the joint venture’s clients and threatening to modify or cancel existing contracts with the joint venture. Furthermore, some directors have even called the joint venture team to threaten and harass employees personally.

At the end of the open letter, Arm China urged government departments at all levels to pay attention to the turmoil facing Arm China, intervene in a timely manner, and protect this strategic asset, ensuring that shareholder disputes can be resolved legally and reasonably, allowing the joint venture to return to normal operations and the team to work with peace of mind!

It can be said that Arm China has reached a “critical” moment. Both sides have moved beyond the point of negotiating calmly based on their respective interests, and the final outcome will depend on the decisions made by relevant Chinese departments. As a chip company executive pointed out, as long as the relevant government departments do not change the legal representative, Arm China can continue to operate under the leadership of chairman and CEO Wu Xiongang, and the final outcome will depend on whether the Chinese departments can secure a long-term beneficial arrangement for the domestic IC industry in the face of increasing international uncertainties.

It is essential to note that Arm China has acquired permanent and exclusive product sales rights in the Chinese market based on Arm’s technology architecture, and the influence of who holds the “power” will undoubtedly be profound.

The Mystery of Sale

When SoftBank enthusiastically acquired Arm for $32 billion, it probably did not anticipate that the dream of creating a whole “chip” empire would be dashed so quickly.

SoftBank has faced difficulties in recent years, burdened by investment failures in other areas. In 2019, SoftBank’s debt approached $173 billion. Moreover, due to the impact of the COVID-19 pandemic, at least 15 of the 88 companies in the Vision Fund are expected to go bankrupt. The weakness in its cash flow has severely impacted SoftBank, and Arm may become SoftBank’s most reliable cash cow and the most likely chip to recover its losses.

After all, Arm still bears the halo of being the world’s largest chip architecture (IP) supplier, with over 1000 ecosystem partners. As of February 2020, the shipment volume of chips based on Arm’s authorization has reached 160 billion pieces. The Arm ecosystem leads a semiconductor market worth nearly 100 billion yuan and a trillion-yuan electronic information industry landscape; it can be said that Arm’s strategic value is “interconnected”.

Some analysts say that if Arm is sold again, relying on its 95% market share in the mobile sector, its expansion into desktop and server fields, and its grand “blueprint” for IoT chips, Arm’s valuation may not be less than $60 billion, and only a few giants would have the capacity to “take over”.

Speculation about various buyers has also poured in. Han Xiaomin, chief analyst at Jiwang Consulting, analyzed that if Arm is sold, Apple and Samsung would be suitable candidates. However, due to the scope of their business and market position, it is unlikely that either Apple or Samsung would attempt to acquire Arm, as it would place them in a complex situation. For Nvidia, the business connection with Arm is not as close as that with Samsung or Apple, and Arm’s strength in the smart terminal market does not align well with Nvidia’s strategy focused on data centers and AI development, making a large acquisition of Arm less meaningful and less likely.

Regarding the possibility of Intel making a move to acquire Arm, Guan Zheng believes it is unlikely, as it is already a shareholder, and maintaining operations along both x86 and Arm lines poses challenges.

Thus, Han Xiaomin believes that overall, the acquisition of Arm by a semiconductor company presents two challenges: first, its massive size, with only a few leading companies likely to be capable; second, its high market position, which would trigger antitrust reviews and other series of challenges for any acquisition attempts, making it difficult. Therefore, the probability of Arm being sold to a semiconductor company or a terminal enterprise like Apple is low; if SoftBank intends to divest, it is more likely to sell to an international capital-led consortium or introduce various major customers as shareholders, forming a management-led but not absolutely controlled “shared” situation.

Aside from selling, relisting is another option.

For Arm to return to the capital market, delivering an impressive operational performance is necessary. However, based solely on its dominance in its existing fields and IP licensing revenue, Arm’s business revenue has only been slightly dull over the past three years. According to SoftBank’s financial report, Arm’s revenue for 2017-2019 was $1.831 billion, $1.836 billion, and $1.898 billion, respectively. Moreover, while Arm appears to dominate the market, it has long-standing concerns: in new application fields like AIoT, its layout has not been swiftly positioned; entering the data center x86 architecture has remained steady, although cracks are slowly emerging with the evolution of the ecosystem; and the emerging open-source architecture RISC-V is eyeing the IoT field with intent.

With the U.S. stock market’s tech stocks soaring, can Arm also make a significant profit by going public? Guan Zheng believes that the valuation and direction of the IPO are difficult to control, and selling would be a better choice. However, all of this may have to wait until after the U.S. presidential election to be finalized, as political instability will inevitably lead to economic and financial turbulence.

However, tech veteran Dai Hui is more optimistic about the value of Arm going public, stating that with the current strength of U.S. tech stocks, Arm not only has CPUs but also GPUs and AI, and could potentially become a “merger” of Intel and Nvidia.

Sadly, Arm’s fate seems to be determined by forces beyond its control. As investment expert Cui Jun stated, many political factors influence these mergers and acquisitions, especially with the frequent unexpected events in the current international environment; ultimately, Arm’s fate will not be determined by itself, and the outcome should be decided after the U.S. election.

Price Increase Trend

Compared to the relatively “distant” sale, the rumors in early July about Arm possibly significantly increasing licensing fees have drawn more attention from the industry.

Guan Zheng informed Jiwang News that he has consulted Arm China’s relevant personnel, who stated that they have not received any notification regarding this matter. Additionally, Arm’s revenue primarily comes from licensing income and royalties, with royalties being the main source of income. After all, over 160 billion chips based on Arm architecture have been sold, and even if a single chip generates a royalty of 0.1 yuan, it is still a considerable sum that can be easily collected.

Regarding Arm’s licensing revenue, there are three main models: architecture, instruction set, and IP licensing. Guan Zheng pointed out that the instruction set is rarely adopted in the industry; major clients like Huawei and Qualcomm generally choose architecture licensing and have already paid for high-end A-series architecture licensing fees to independently design based on their business needs. Smaller clients typically opt for IP licensing. Additionally, Arm has adopted a free licensing model for its low-end M series. Therefore, any price increase at this time would contradict its strategy and is unlikely to occur in the short term, resulting in no significant revenue.

Of course, Guan Zheng also analyzed that Arm has its own considerations; the pandemic combined with the impact of the U.S.-China tech war may have impacted its revenue, and whether selling or relisting, it requires more impressive performance, making a future price increase possible. However, for Chinese clients, most of the A-series products have already been purchased, and for the M series, many domestic manufacturers have bought most of what they need, with many smaller companies enjoying fee-free licensing. Therefore, even if prices increase, it should not have a substantial impact on domestic clients.

From a broader perspective, a price increase for Arm is a process of negotiation. Raising licensing fees may not produce significant revenue immediately,

and if royalties are increased, existing clients have already paid, meaning it can only be imposed on new clients. For Arm, which aims to continuously expand its ecosystem, it must also weigh the acceptance of new clients.

Moreover, Dai Hui believes this is a case of “fishing with bait”; for example, if Arm claims to raise licensing fees by 3-4 times, it is actually controlling market expectations, and the final implementation may only raise it by 1-2 times, while the industry will still feel it has gained and will continue to choose Arm. From the perspective of various business lines, after Arm raises licensing fees, its mobile business will not be affected, as there are no other choices. The impact on server CPU business is also minimal, as in the competition between Arm and Intel, the ecosystem is the bottleneck, not the price. The IoT business may be significantly impacted, as Arm faces a strong competitor in RISC-V, and China is the core battleground. Whether Arm will execute previous charging standards for IoT, such as MCU, will depend on the subsequent developments.

No matter what the final outcome for Arm is, clarifying the rights and responsibilities of Arm China will be an important X factor that cannot be ignored. It is hard not to be concerned about Arm, which is already thirty but still struggles to “stand firm”. Under the pressure of capital seeking profit and the ongoing “cloud of calamity”, can it still emerge from this “darkest hour” and welcome a new glorious era? (Guan Zheng and Cui Jun are pseudonyms) (Proofreading/Sky)

2. Arm: CEO Wu Xiongang refuses to resign and attempts to prevent Chinese chip companies from communicating with and supporting Arm’s technology;

Image Source: Internet

According to Jiwang News (by Jimmy), Bloomberg reported that in response to the open letter released by Arm China employees, Arm stated that the company adheres to its beliefs and commitments, supports Arm China and its employees, and continuously promotes innovation and development in China’s semiconductor industry.

In early June, Arm experienced a sensational “leadership change” incident, where investors Arm and Hillhouse Capital attempted to dismiss the chairman and CEO of the Arm joint venture, Arm China. However, some investors believed the board’s resolution was controversial and resorted to legal means to resolve it.

In a statement, Arm said that Wu Xiongang refused to resign and spread false information, causing great panic and distress within Arm China. Wu Xiongang’s excessive focus on self-protection has also put China’s semiconductor innovation at risk, and he even attempted to prevent Chinese semiconductor design companies from engaging in necessary key technology communication and support with Arm.

According to an insider, Wu Xiongang has hired security personnel to prevent Arm representatives or board members from entering Arm China and has refused previously agreed collaboration activities between Arm and Chinese semiconductor manufacturers, as well as negotiations.

Yesterday, Arm China issued another open letter, stating that Hillhouse Capital and some directors from Arm UK have recently begun frequently contacting the joint venture’s clients and threatening to modify or cancel existing contracts with the joint venture. Furthermore, some directors have even called the joint venture team to threaten and harass employees personally.

In response, Arm China urged all shareholders and board members to participate in the company’s strategic decision-making in a legal and compliant manner, without directly intervening in the company’s normal operations or harming the legal rights of employees.

Both sides believe that the longer this drags on, the more serious the impact on China’s chip industry, which relies on Arm technology. They also urged the Chinese government to intervene and resolve the differences. (Proofreading/Ling San)

3. Reuters: U.S. Commerce Department officials join MediaTek’s lobbying efforts;

According to Jiwang News (by Xiaoshan), Reuters reported that a well-informed source stated that Patrick Wilson, who previously served as the director of the U.S. Commerce Department’s Office of Business Liaison, has joined MediaTek as the company’s primary lobbyist in Washington.

(Image Source: Internet)

As the U.S. government tightens its scrutiny of the chip industry, Patrick Wilson began serving as MediaTek’s Vice President of Government Affairs on Monday.

It is reported that prior to last Friday, Patrick Wilson was still the director of the U.S. Commerce Department’s Office of Business Liaison. He had also served as the director of government affairs at the Semiconductor Industry Association.

According to a draft of a press release seen by Reuters, MediaTek’s Vice President and General Counsel Su Wentan stated that Wilson will provide advice to MediaTek and voice the company’s stance on important issues related to guidance and development of the global semiconductor industry.

In May, the U.S. Commerce Department implemented new regulations that further restricted Huawei’s chip manufacturing capabilities. The market speculates that MediaTek may benefit from this and gain chip design orders from Huawei.

However, Taiwanese media believe that after the U.S. expands its efforts to contain Huawei, it continues to court important chip manufacturers, attempting to cut off Huawei’s alternatives. (Proofreading/Ling San)

4. Haige Communications signs a 255 million yuan order contract involving Beidou navigation products and equipment;

According to Jiwang News, on July 29, Haige Communications announced that it recently received an order contract (hereinafter referred to as “contract”) signed with special institutional clients, with a total amount of approximately 255 million yuan. The contract mainly involves wireless communication, Beidou navigation products, and supporting equipment, with delivery scheduled for the corresponding months of 2020 to 2021, as specified in the contract.

Haige Communications stated that the total contract amount of approximately 255 million yuan accounts for 5.53% of the company’s audited revenue for the most recent accounting year. The fulfillment of the contract will positively impact the company’s revenue and operating profit, and the company will recognize revenue in the corresponding accounting periods according to the contract requirements and revenue recognition principles.

It is understood that Haige Communications has over 60 years of expertise in the wireless communication and navigation fields and is an expert in the development of Beidou navigation equipment with full-band coverage and a complete industrial chain layout, providing electronic information system solutions. Its main users include national defense agencies, the three major telecom operators, China Tower, government departments, public security, fire rescue, transportation, and other important sectors of the national economy. As one of China’s largest suppliers of integrated systems and solutions in wireless communication, navigation, and information technology, Haige Communications possesses the capability to develop and service products across the entire industrial chain from chips to modules to antennas to terminals to systems and operational services, with broad user coverage and significant industrial advantages. The company has ranked among the top in various scientific research projects related to national defense informatization during the 13th Five-Year Plan, and as national defense informatization construction continues to strengthen, the market potential for special institutions can be anticipated to be vast.

Beidou navigation, as one of Haige Communications’ main advantages, has core technologies, mastery of technical systems, and the ability to conduct research and development and provide services across the entire industrial chain. It possesses proprietary intellectual property rights in key technologies such as high precision, high dynamics, and anti-interference developed independently. In the national key investment project for the Beidou satellite navigation system, the company successfully obtained qualifications for the development of a series of user machines through market bidding and has developed various models of high-dynamic, anti-interference, high-precision, and dual-model user machines for the Beidou satellite navigation system, consistently ranking among the top in various tests organized by user agencies. Haige Communications has broken through core technologies for Beidou III, including the first full-frequency point coverage satellite navigation high-precision RF + baseband full-chip solution aimed at Beidou III applications, which can provide independently controllable core products for applications in measurement and mapping, intelligent unmanned systems, emergency rescue, high-precision timing, and smart cities. As China’s Beidou III global satellite navigation system is completed, Beidou applications will continue to expand, and the industry market outlook is promising. The company will accelerate the transformation of core technological achievements and carefully layout and promote large-scale applications in the “Beidou + 5G” field.

In the future, Haige Communications will adhere to its strategic positioning in high-end high-tech manufacturing and high-end modern services, leveraging its deep technological accumulation in national defense applications, utilizing the advantages of its full industrial chain layout from chips to modules to antennas to terminals to systems to operations, actively seizing new market opportunities, and consolidating and enhancing its market share. At the same time, Haige Communications will increase its layout in the fields of Beidou navigation, satellite internet, intelligent unmanned systems, and 5G, further enhancing its market competitiveness in industry applications and consumer applications, laying a solid foundation for future sustainable development. (Proofreading/Lee)

5. Push for the departure of senior executives from Intel’s outsourcing, TSMC’s order probability declines?

According to Jiwang News (by Xiaoshan), Taiwanese media reported that after Intel announced that its 7nm research and development progress was not smooth and might outsource to third-party foundries, it announced significant personnel changes in its technology department on Monday, with chief engineer Murthy Renduchintala set to leave on August 3. Analysts believe that the departure of the executives who previously pushed Intel’s outsourcing will reduce the chances of TSMC receiving orders from Intel.

Barron’s reported on the 28th that Citi Research analyst Christopher Danely released a research report indicating that Murthy Renduchintala and renowned processor architecture designer Jim Keller, who left for personal reasons on June 11, had both strongly advocated for Intel to outsource chip production. Now that these two have decided to leave, the likelihood of TSMC receiving orders from Intel has decreased. Whether outsourcing will proceed depends on whether Intel can resolve its process issues.

(Image Source: Internet)

Additionally, Danely believes that if Intel can find suitable talent to fill the chief engineer position through this change, it could boost the company’s stock price.

According to a press release issued by Intel after the market closed on the 27th, Dr. Ann Kelleher will now lead Intel’s technology development team, focusing on 7nm and 5nm processes. Ann Kelleher has previously been a leader in Intel’s manufacturing operations, ensuring smooth operations during the pandemic and increasing supply chain capacity to meet customer demand while accelerating the expansion of 10nm process technology. (Proofreading/Ling San)

6. UMC announces Q2 financial report: Revenue increases by 23.2% compared to the same period last year, capacity utilization rises to 98%;

According to Jiwang News (by Mumei), today (29th), United Microelectronics Corporation (UMC) announced its operational report for the second quarter of 2020. The report shows that the consolidated revenue for the second quarter was NT$44.39 billion, an increase of 5.0% compared to NT$42.27 billion in the previous quarter, and a 23.2% increase compared to NT$36.03 billion in the same period last year. The gross profit margin for this quarter was 23.1%, with a net profit attributable to the parent company of NT$6.68 billion, and earnings per ordinary share of NT$0.55.

UMC’s general manager Wang Shi pointed out that the consolidated operating profit margin for the second quarter was 13.2%, and overall capacity utilization increased to 98%, with a wafer shipment volume of 2.22 million wafers equivalent to eight-inch wafers. The growth in wafer shipment volume mainly reflects the demand for wireless connectivity, display drivers, and flash memory controller ICs in the computer-related field, as well as inventory replenishment in the consumer market.

Moreover, Wang Shi stated that looking ahead to the third quarter, the current market outlook indicates that chip demand remains strong, with a significant increase in design approvals for 28nm processes in the first half of this year compared to the previous year. In the third quarter, it is expected to gain more new design approvals for 28nm products, with more applications in 4G and 5G smartphones and other wireless applications entering mass production, making UMC’s customer distribution across different 28nm market segments more diversified.

(Proofreading/Ling San)

According to Liu Peizhen, a researcher and industry consultant at the Taiwan Institute of Economic Research, TSMC has taken outsourcing to the extreme; unlike the “three to four” margins in laptop outsourcing, TSMC’s gross margin can reach 50%, meeting diverse and customized demands from clients. “TSMC has 258 processes, 480 customers, and 9920 products, which is difficult for ordinary enterprises to imagine.”

Looking back at history, Intel once dominated the global semiconductor industry’s most advanced technology, and twenty years ago, during the peak of personal computers, Intel’s microprocessors (CPUs) reigned supreme worldwide. Even the famous Moore’s Law in the semiconductor industry was proposed by Intel co-founder Gordon Moore, regarded as an important reference criterion in the industry.

In 2012, TSMC’s manufacturing and research capabilities lagged behind Intel and Samsung, and Zhang Zhongmou described these two formidable competitors as “700-pound gorillas”.

However, eight years later, Intel handed over foundry orders to TSMC, indirectly confirming TSMC’s capabilities.

In addition to focusing on its core foundry business, TSMC maintains annual capital expenditures exceeding $10 billion. This year, during its earnings call, it announced that its planned total scale would be raised from $15-16 billion to $16-17 billion, using massive capital expenditure to purchase advanced manufacturing equipment, thus widening the gap with competitors.

As smartphones became increasingly popular, the functions of phones evolved rapidly, and customer demands for chips grew higher. Yang Ruilin, director of the Institute of Industrial Technology of the Industrial Technology Research Institute, analyzed that TSMC’s growth and technological breakthroughs over the past 7 to 10 years, especially during the 4G era, have been significantly driven by smartphone chip customers, including Apple, Qualcomm, and MediaTek, who have continuously enhanced technology and practiced with customers, inadvertently significantly improving their own capabilities.

In contrast, Intel did not invest heavily in smartphone-related applications, and later, when Intel attempted to transition from personal computers to mobile communications, it faced difficulties, resulting in delays in processes and an inability to keep up.

Industry analysis suggests that this also relates to the organizational culture and business model of the two companies. TSMC is a pure wafer foundry, akin to an independent restaurant, primarily serving outside customers; Intel is an integrated device manufacturer, more like a family restaurant, mainly catering to its family. “But as the restaurant grows and expands, it will also attract more good suppliers to do business with it.”

Liu Peizhen analyzed that TSMC’s stronghold is securing orders from major client Apple. In 2015, although Samsung developed a 14nm process that shocked the industry, TSMC’s 16nm process used in the A9 processor’s performance and yield greatly satisfied Apple, leading TSMC to subsequently secure all orders for Apple’s A10 to A14 processors.

Liu Peizhen pointed out that Intel originally announced it would mass-produce 10nm by the fourth quarter of next year but recently stated it would be delayed by a year, which indicates that TSMC has effectively surpassed Intel in terms of technological blueprints, making it undoubtedly the most influential company in the global semiconductor industry. Economic Daily

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