Beijing’s concerns loom over Nvidia’s $40bn Arm deal

China’s chip industry has urged Beijing to investigate Nvidia’s $40bn takeover of Arm, warning that the deal will hand the US control over key technology used in almost all mobile phone chips.

Zhu Jing, the vice-chairman of the Beijing Semiconductor Association said a US company cannot be trusted with ownership of Arm, whose energy efficient chip designs are used in 95 per cent of the chips designed in China.

“Look at how the US is treating Huawei. If Arm is acquired by a US company, everyone will be worried,” Mr Zhu told The Paper, a Chinese state-owned newspaper. 

The Global Times, another state-owned newspaper, also urged Beijing to intervene on Wednesday. “The possibility that Arm could be politicised as a US technology weapon against China’s technology companies must be taken seriously,” the editorial warned. 

Employees at Huawei’s HiSilicon chip design division, which uses Arm’s intellectual property, also fretted over the deal. “Will it still find a way to provide us with IP after being acquired? I have to say I’m a bit worried,” said one HiSilicon chip designer, who asked not be named. “It’s undoubtedly adding on trouble to our current situation,” said another. Huawei declined to comment.

95% of chips designed in China use Arm’s energy efficient technology

Arm has a joint venture in China with the well-connected private equity firm Hopu, and China’s antitrust regulator will have the right to review the proposed Nvidia deal. In addition, China’s competition law explicitly instructs regulators to judge the impact of any deal on China’s national development.

Competition lawyers said approval from Beijing for the deal would be a huge challenge. “This is going to be a free for all for the Chinese,” said one lawyer in Hong Kong, who asked not to be named. “You have to be crazy to consummate a merger transaction in this space right now.”

Another lawyer said that while Beijing rarely blocks deals outright, it could subject the deal to open-ended delays, as it did with Qualcomm’s attempt to buy the Dutch chip company NXP, or insist upon remedies so costly they would push Nvidia to abandon the deal.

Meanwhile, Nvidia has some leverage, since it could choose to pull out of the Chinese market, which is heavily dependent on both Arm’s designs and Nvidia’s graphics processors, but a lawyer at a Chinese law firm said this would be a nuclear option, since it would find it hard to re-enter one of the world’s largest markets. “Both sides are testing the other’s bottom line,” the lawyer said.

Credit Suisse analysts said there was “meaningful regulatory risk, especially from China” for the deal while James Wang at Ark Invest put the chances of success at “fifty-fifty”.

Jensen Huang, Nvidia’s chief executive, said the company expected to spend time with Chinese regulators and said he had “every confidence” it would be approved, as was the purchase of Israeli chip designer Mellanox Technologies earlier this year.

Mr Huang said Arm’s intellectual property was created and developed over three decades in Cambridge and the company would continue to be based in the UK. “The origin of the technology won’t change. And as a result, the fact that Arm now belongs to an American company versus a Japanese company, that doesn’t change export control in any way,” he said.

But Wendy Wysong, an export controls expert at the law firm Steptoe & Johnson said that with more US staff, financing, and technology, Arm could eventually fall under the jurisdiction of US sanctions.

“There will be more US input into what technology and software go into the chip designs and the US parent company will have more control and ability to say, look we’re not going to sell to China any more as a matter of de-risking,” said Ms Wysong.

Nvidia hopes to complete the deal in about 18 months. As well as passing competition regulators, it also has to resolve a tussle at Arm’s China joint venture, whose chairman Allen Wu has taken over legal control of the company after a failed attempt to oust him.

Arm’s chief executive Simon Segars said the dispute with Mr Wu was “well under control, I’m not concerned about that”, and people close to SoftBank have claimed the matter was “resolved”. But two people in China familiar with the situation say the negotiations for Mr Wu’s exit were ongoing and a person close to Mr Wu said he “remains the chairman of Arm China.” 

Investors in Arm China have tried leaning on connections in Beijing to break the impasse and even lobbied local government officials in Shenzhen emphasising the impression the deal left on China’s investment environment, said a person close to Arm China. But Mr Wu also had backing from parts of the government, a lawyer briefed on the case said.

A spokesperson for Arm China declined to comment on rumours.

Last year, Arm said US restrictions had forced it to cease sharing its technology with Huawei, but the pause was temporary, drawing praise from Diao Yanqiu, chief information officer of Huawei’s HiSilicon unit. He said: “Arm is our partner for the long term, this situation has made that clear.”

In 2018, SoftBank said China was responsible for one-fifth of Arm’s overall sales.

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