Re-Arm-ed: Nvidia's move on UK chip giant sets up US-China tech war showdown
Four years ago, right after the Brexit referendum in Britain, I was shocked and dismayed to learn that one of Britain's top technology firms, Arm, was suddenly being sold to a Japanese investor for arguably a low valuation of US$31 billion.
Arm, originally Advanced RISC Machines Limited (Arm), was founded in 1990 as a joint venture between Acorn Computers and Apple Computers (now Apple Inc.), having its origins in 1983 designing the first RISC processor used in small computers, including the popular BBC Micro.
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Arm does not make the chip processors, but designs them and charges an initial licence fee that covers its costs and then a royalty on every chip its partners make using its design. It is an unusual and very profitable business model in the semiconductor industry.
SoftBank's Masayoshi Son. Photo: AFP
Arm is considered to be globally dominant, especially in mobile devices, and you will find Arm designs in just about everything, from all brands of smartphones, tablets and computers to supercomputers, IoT devices, networks, and even in space. Most recently, its processor designs have been key in the development of autonomous driving cars.
My concern wasn't that the buyer, SoftBank, would necessarily be a bad parent, but the fact the British government hailed the sale, telling the world that despite Brexit, Britain was still "open for business". If that were the case, it made no sense to me that Britain would panic-sell an industrial crown jewel. To this day, and although no one will admit it, I'm sure the Brits regret the trade.
Having done virtually nothing with Arm over the last four years, SoftBank CEO Masayoshi Son announced last week he would sell the company to US-based Nvidia and pocket a tidy US$9 billion profit.
The pairing of Nvidia and Arm plays into the strengths of both companies, especially in the intense image processing required for a car to drive itself. It also immediately added serious ammunition to the US's tech armoury as it continues its assault on various trade issues against China. Arm is a stand-out leader in microchip architecture development, and President Donald Trump and Secretary of State Mike Pompeo must be rubbing their hands with glee at the deal, if the acquisition comes to fruition.
US President Donald Trump. Photo: AP
Arm's main competitors when it comes to central processing units are IBM, Intel and AMD - all American - and on the graphics processing side are American and Japanese firms, including Nvidia. All chip manufacturers rely on American-owned tech as there are very few alternatives.
The Chinese certainly realise the risk of being blocked from using American technology and have been hiring aggressively the top talents in the industry, with reports they snagged more than 100 engineers in the past year from Taiwan Semiconductor Manufacturing Co. (TSMC), the world's leading chip manufacturer.
The conspiratorially minded might suspect there is more to Nvidia's acquisition of Arm than meets the eye. Trump and Sonare actually closely connected through politics, while Son and Nvidia CEO Jensen Huang are closely connected through business. It is not beyond the realm of possibility that there has been a call behind the scenes to "rally the troops" in the tech war with China. Let me explain.
Way back in 1995, the Las Vegas Sands casino had a cash-flow problem which was resolved when Son's SoftBank came to the rescue by buying Comdex, the then leading global computer trade show, from Sands CEO Sheldon Adelson for US$800 million. Adelson owed Son for that one, and thus started a long-term relationship between the two.
Sands CEO Sheldon Adelson. Photo: AP
Also, the hotel-casino business naturally formed the basis for a deep relationship between Adelson and Trump. Fast forward to 2016 and Adelson became Trump's largest supporter during his presidential campaign, generously chipping in US$25 million to the presidential campaign just when he really needed it.
When elected, President Trump met with Son, an unlikely encounter unless it had been organised by Adelson, and this put the pair of them on front pages across America. Son offered a generous US$50 billion investment in the United States, promising to create a large number of jobs. It also gave him a second shot at acquiring T-Mobile to complement the ownership of Sprint, which SoftBank acquired in 2013. The T-Mobile acquisition had been blocked the first time round by antitrust regulators, but with Trump on Son's side, the deal was struck and closed just last month. Son finally got what he wanted.
Photo: AP
With Arm under American control, Washington could turn up the heat further for China's tech hardware firms. What's more, Pompeo might have another weapon up his sleeve to wield in the form of cloud-software development platform GitHub, owned by Microsoft, and its massive open-source code inventory.
The biggest share of GitHub users is in the US, at 31 per cent of the total, with Britain and China tied for second place with about 6 per cent each. By another metric, the number of GitHub users as a share of total internet users, China is on a par with Japan, India and South Korea.
Weary of reliance on foreign technology, especially from the US, China has been building a domestic open-source code hosting and development platform, known as Gitee. The government-led project is based in Shenzhen, with support from universities and high-profile companies including Huawei - itself under fire from the US. Gitee appears to be about one tenth the size of GitHub in terms of the number of open-source depositories, and has one sixth of the number of developers - not insignificant.
If Trump and Pompeo were so inclined, they could theoretically turn off Chinese access to GitHub. This move would not be without precedent as GitHub has previously cut off certain services to users in places sanctioned by the US, including Iran, Syria and Crimea, sending waves of panic through the global developer community. Given that the open-source software development is based on the principle of sharing information freely, such a move would be a nuclear option of sorts, hampering the development of new software in China and threatening to split the world's open-source development community. This would pose a significant problem for the growth of China's tech hub in Shenzhen.
In a nutshell, the US has plenty more ammunition to use in the technology defensive, both on the hardware and software side. Recent events have the hallmarks of deliberate positioning, and perhaps calling in old favours has been part of the strategy to circle the disk drives and preparing for an attack and a counteroffensive.
China will need to bolster its home-grown technology and hire engineers with the necessary skills to develop a stronger base if it wants to maintain growth in the sector. For the US, continuing to restrict access to its technology which, until recently, was perhaps too freely available will only serve to accelerate this process.
The two powers are about to face off.
This article originally appeared on the South China Morning Post (SCMP).
Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.
