The proposed marriage between US graphics chip giant Nvidia and UK-based chip design specialist Arm might face the same fate as Qualcomm’s failed bid for European chip maker NXP if Chinese regulators have their way, according to analysts.
The US$40 billion deal could strengthen Nvidia’s leading position in graphics processors for artificial intelligence applications by giving it control over Arm’s vast computing ecosystem, which includes the architecture found in nearly every smartphone processor chip.
“Nvidia is the [market leader] in graphics and artificial intelligence [so] this is just expanding their lead where they see an opportunity,” said Cameron Johnson, an adjunct faculty instructor at New York University and partner at Tidal Wave Solution.
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However, completion of the deal is far from certain as most Chinese watchers agree that Beijing would be concerned about the possibility of Arm technology coming under US export control regulations.
“China has more reasons to block the deal than to approve it,” said Gu Wenjun, chief analyst at Shanghai-based semiconductor research firm Icwise. “How to guarantee Arm continues to be a neutral and open platform after the sale is what concerns China,” said Gu, who provides consulting advice to Chinese semiconductor companies.
Johnson said that while potential US export controls were a valid concern in the current geopolitical environment, in the case of Arm’s technology, it was freely available to all users via an IP licensing business model. Yet Johnson agrees that it will be challenging for China to approve the deal in the current environment.
China’s antitrust regulator could block Nvidia from acquiring Arm, which Japanese investment group SoftBank Group acquired for US$32 billion in 2016, given that it may create a monopoly for the supply of chip design tools. When Qualcomm bid US$44 billion to buy Dutch chip maker NXP Semiconductors four years ago, China was the only jurisdiction that did not approve the merger. The deal collapsed just over 18 months later, adding to then already tense relations between the world’s two largest economies.
The Nvidia announcement comes at a time when China’s telecoms champion Huawei Technologies is facing a life or death situation due to crippling sanctions imposed by the Trump Administration, blocking its access to US-origin semiconductor technologies.
Huawei’s predicament has reignited an intense debate in China over the urgent need to independently develop core technologies like semiconductors amid an increasing risk of a decoupling between China and the US.
Arm’s software and tools are crucial for chips used in consumer electronics, networks and servers, and Internet of Things (IoT) applications, with Apple, Huawei, Qualcomm and Samsung all depending on Arm IP for chip design and development. Huawei‘s Kunpeng 920 server CPU, its Kirin 990 smartphone processor and Ascend 920 AI chip are all based on Arm’s design architecture.
For the fourth quarter of 2019, Arm’s licencees reported that shipments of Arm-based chips rose 11 per cent year on year to 6 billion units.
Arm entered China in 2002 and now has a predominant position in the market, deriving about 20 per cent of its revenue from Chinese customers, according to a Reuters report. Arm’s 200 Chinese licencees have shipped more than 19 billion chips as of September 17, according to the website of Arm China, a subsidiary of Arm UK.
The CEOs of Arm and Nvidia have downplayed potential challenges to closing the deal.
Arm CEO Simon Segars said in a media briefing after the announcement that most of its products are not subject to US export control regulations and that would not change after the sale to Nvidia.
Jensen Huang, founder and CEO of Nvidia, told Chinese financial media Caixin that regulators should like the deal because it benefits Chinese companies by offering them more diversified solutions. In April, Chinese regulators approved Nvidia’s US$6.9 billion acquisition of Israeli chip designer Mellanox Technologies. However, the Arm deal is almost six times larger.
Even with Beijing’s blessing, the deal needs regulatory approvals from the UK, the European Union and the US. But analysts see China’s sign off as the biggest hurdle.
“Nvidia can‘t promise that the US won’t apply some regulations that restrict their Arm tech exports to China,” said Art Dicker, a director at R&P China Lawyers, a Shanghai-based law firm. “That’s out of their control. [However] at this point it’s just a hypothetical risk…but if you’re the Chinese government, why would you even let that be a hypothetical risk,” he added.
Stewart Randall, director of electronics and embedded software at Intralink, a Shanghai-based consultancy, agrees that the deal could give the US another way to hurt Chinese chip companies, but of equal concern to Beijing was the potential loss of competition.
“It means a lot of Nvidia‘s AI chip competitors in China, which use Arm architecture now, will have to licence IP from Nvidia, i.e., their competitor,” he said.
One alternative to Arm is RISC-V, an open standard instruction set architecture (ISA). However, it lags Arm in performance but could catch up in 2 to 4 years, according to Florian Wohlrab, sales manager at Andes Technology, a Taiwan supplier of RISC-V CPU cores.
“It took Arm some years to go from basic processors, like those in the Nokia 3210 mobile phone, to high end processors like Oppo 12,” he said.
Outside China, the deal is also facing scrutiny and even triggered resistance from some British electronics industry professionals concerned about the erosion of Arm’s neutrality if it changes hands.
Hermann Hauser, Arm’s co-founder, urged the UK government to intervene to help preserve Arm’s business model, which he said was “the Switzerland of the semiconductor industry, dealing in an even-handed way with its over 500 licencees”.
The deal could be further complicated by an ongoing boardroom dispute over control of Arm China after its CEO Allen Wu refused to step down despite being ousted by a board decision by Arm UK.
The Chinese joint venture was set up in April 2018 by Arm UK and a consortium led by Chinese state-backed investors. Arm owns 49 per cent of Arm China, while the consortium holds the rest. It is not immediately clear what would happen to Arm’s 49 per cent ownership in Arm China, with analysts believing a spin-off may be likely.
Arm China did not immediately respond to a request for comment.
Despite the potential obstacles to closing the deal, some believe it still has a chance.
“I think Nvidia has figured out what China wants in this deal, otherwise they would not try to pull such a huge deal to change the entire industry,” said Johnson.
More from South China Morning Post:
- Nvidia’s acquisition of Arm throws company into tech spat between US and China, analysts say
- Nvidia vows to invest in Britain as part of US$40 billion Arm deal
- Nvidia a clear winner in otherwise brutal quarter for chip makers
This article China has more reason to block Nvidia’s Arm deal than approve it, say analysts first appeared on South China Morning Post