0x00 Who's Arm-twisting Whom?
From a geopolitical perspective, the failure of the Nvidia-Arm deal benefits China the most.
This is the first post of our new section: Siliconpolitik. There’s so much happening in the world of semiconductor geopolitics that we cannot cover all happenings in our fortnightly mailer. And so, updates on this section will be shorter, more frequent, and somewhat irregular. If you have received this email, you are subscribed to both editions. If you find this section uninteresting, you can unsubscribe from it without affecting the delivery of our fortnightly mailer.
This story has it all: geopolitics, anti-trust, national pride, future of technology, and capital markets.
The Prelude
Arm licenses its CPU designs to customers such as Apple, Qualcomm, Nvidia, and MediaTek. For a long time, it has been trying to break into the data centre CPU market, dominated by Intel and AMD’s x86 designs. Despite an impressive list of customers, Arm’s financial fortunes haven’t been great — revenues through licensing fees and royalties have been on the decline since 2016.
Even though Arm is the sole supplier for mobile companies, why would this happen? Primarily due to four reasons. First, the mobile phone market is already saturating. Second, customers such as Broadcom, Qualcomm, Microsoft, Samsung, and Apple have an expansive Arm architecture license (as against implementation licenses), allowing them to design their customised Arm-compatible processors. So, Arm has little leverage over the sales from these companies. Third, Arm’s big bet on another market — datacentres — hasn’t worked out. And fourth, Arm cannot increase its license fee to compensate for sagging revenues because it faces a new challenge in the form of RISC-V technology.
The Players
In September 2020, Nvidia announced a deal to buy Arm. Since then, Nvidia’s shares have almost doubled. But after months of being blocked by four regulators — in China, the US, the EU, and the UK — reports suggest that Nvidia is planning to abandon the deal.
Let’s have a look at all the perspectives first.
In the US, the Federal Trade Commission (FTC) is opposing the deal because the deal would “distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals.” Unsurprisingly, many high-flying competitors of Nvidia such as Qualcomm and Intel are staunchly opposed to this deal as they feel Nvidia might partially delay or block their access to Arm CPU blueprints. The EU anti-trust regulators also have similar objections to the deal.
In contrast, the dominant narrative in the UK is that the deal would hurt national pride. In ordinary times, such a narrative wouldn’t have carried far. But when the entire world looks at semiconductors from a strategic lens, this view has policy relevance. So, even though Arm is already owned and controlled by a Japanese investment firm, Softbank, the UK has renewed calls to list it back on the London Stock Exchange.
Next, Arm and Nvidia’s joint submission to the UK’s Competition & Markets Authority (CMA) comprehensively captures the two companies' viewpoints. Their main argument is that Arm faces an uncertain future without a takeover. The submission explicitly says:
Deal opponents romanticize Arm’s past and either ignore or disparage Arm’s most powerful competition. But if Arm had market power, it would have sizable revenue growth and would be enormously profitable.
The submission further claims why this deal would increase competition instead of reducing it.
For China, the concerns are entirely different. This deal would mean a more potent lever in the hands of the US to constrain China’s semiconductor sector. The US has already demonstrated that it could deploy wide-ranging export controls to block access to chips to geopolitical adversaries. With Nvidia controlling Arm, China fears that the US can easily prohibit Arm from selling to Chinese customers. As a result, China has been staunchly opposing this deal.
To be sure, the US can still pressurise Arm to not sell to customers in the absence of a deal. Just like it prevented the Dutch semiconductor manufacturing equipment star ASML from selling cutting-edge Extreme Ultra-Violet lithography machines to Chinese companies. Nevertheless, getting the UK — for whom this has become a national pride issue — to comply with such restrictions is far more complicated.
The Result
The deal opponents have their unique reasons. There’s no concrete evidence to suggest that the opponents are collaborating. Regardless, the net geopolitical effect is that China would be immensely relieved if the deal fails. At the same time, China would want to get RISC-V further up to speed with Arm so that this geopolitical weakness is taken out of the question over the long term.