Understanding the Global Chip Industry Landscape Through Arm’s IPO

Will Arm’s IPO Mark the End of the Arm China Era?

Due to inflation and rising interest rates, along with the outbreak of the Russia-Ukraine conflict, major companies have postponed their IPOs, leading to a 90% drop in IPO value this year. However, in June, reports indicated that SoftBank Group Corp adjusted its plans for Arm Holdings, which was previously set to list only in the US, to also include a portion of its shares in the UK.

In 2020, SoftBank attempted to sell Arm to Nvidia Corp for $40 billion but was unsuccessful. Now, SoftBank plans to push for Arm’s IPO, and this article summarizes insights from a former Qualcomm Inc executive, exploring Arm’s future growth opportunities and the implications of Arm’s potential listing in the UK or the US for Arm China (a subsidiary in which SoftBank holds a 47.3% stake).

Our expert told us that Arm dominates the smartphone chip sector, with Apple, Qualcomm, and MediaTek all utilizing Arm’s technology. The only potential threat to Arm’s dominance could come if Apple decides to switch to RISC-V, an open standard instruction set architecture that competes with Arm’s CPU cores. The expert noted that Apple is the only company with the technical expertise to transition its customer base to a different CPU architecture. “Apple has done this three times before; they can do it again.”

Where Will Arm’s Growth Drivers Be in the Coming Years?

From FY2020 to FY2021, Arm achieved a 35% revenue growth.Experts predict that Arm’s growth may slow down in the next 2-5 years.They noted that Arm currently has 160 licensing agreements, which is a high number and challenging to maintain year-on-year growth. Furthermore, Arm’s penetration in the server market has been slower than expected. Previously, Arm projected a 20-25% market penetration by 2025, but experts suggest it may only reach 10% by that time.However, they remain optimistic about the server market, seeing it as a significant growth opportunity for Arm in the near future.

A former Qualcomm executive stated, “Arm had claimed they would capture 20% of the server market by 2015. This seems unlikely, as the adoption of Arm’s technology in the server market has been slow, but eventually, the market will adopt Arm’s technology. The question is how long it will take and who has the patience to wait for the market to adopt Arm’s technology?”

Artificial intelligence is another major growth area for Arm. Experts indicated that Arm is not currently a significant player in the AI sector because it does not allow customers to modify the instruction set. Experts pointed out that this restriction is due to Arm’s creation of an excellent software system and a coherent software description. However, we learned that if Arm could allow customers to customize instructions according to their needs, it would help Arm further penetrate the AI market.

Regarding Arm’s potential IPO plans, experts indicated that where Arm ultimately decides to list is not as important as where it establishes its headquarters and leadership.Experts noted that Arm has done many great things in the US, but they questioned whether Arm could continue to thrive if it closes its research base in the Cambridge Cluster.

We learned that Arm China contributes 20-25% of Arm’s revenue, but its profit margins are lower than Arm’s operations in Western countries. Experts believe that Arm’s listing in the US or UK will significantly impact Arm China—Arm China obtains technology licenses from Arm and then re-licenses to Chinese clients. Once Arm goes public, officials from either the US or UK, or both, may reassess the technology licensing arrangements for Arm’s Chinese subsidiary. In the expert’s view, Arm China will face numerous challenges ahead.

Challenges Facing Chinese Chip Companies

As chip design becomes increasingly complex and industry divisions become more refined, the role of IP in chip design is becoming more critical. In recent years, a number of independent third-party IP companies have emerged in China, targeting various fields. So, how can China excel in this area?

Our experts believe that from an IP perspective, improving aspects like PCle, memory scheduling, or AI computing units largely involves the quality of IP.Currently, the industry standard ARM has been developed over two to three decades of experience, making it extremely difficult for startups to surpass it within 1-2 years.Our experts believe that this situation may require 8-10 years to change.

Regarding the challenges in the Chinese EDA market, our analysts have observed that development was relatively slow a few years ago, with a heavy reliance on foreign tools. However, in recent years, there has been a growing recognition of the importance of domestic alternatives, leading to explosive growth in both the semiconductor and EDA markets.The main barrier facing the domestic EDA industry is the lack of PDK support from foundry manufacturers to ensure smooth data packet reading.

At the same time, our analysts pointed out that the gap between leading domestic AI chip manufacturers and their overseas counterparts mainly lies in ecosystem development, with fewer corresponding upper-layer applications.Domestic startup AI chip companies face major bottlenecks in conveying downstream customer demands, largely due to the strong confidentiality of internet companies’ network architectures and algorithms.

This article cites expert interviews:

1. May 13, 2022: Arm Holdings – IPO & Acquisition Prospects

2. March 25, 2022: Chinese AI Chip Technology

3. February 25, 2022: Development Opportunities in the Chinese EDA Industry

Welcome to click the bottom left corner“Read the original text” to access the full expert interview on Arm’s IPO.

All information used in this article is sourced from experts participating in Third Bridge interviews..Third Bridge has not independently verified, and does not guarantee the accuracy of the information.Information contained in this article is for reference only, and does not constitute any form of commercial advice, nor does it influence investment decisions。

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