Armed and dangerous

A nasty row breaks out at the China unit of Arm Holdings after the boss refuses to leave.

When he proclaimed himself first emperor of China in 221 BC, Qin Shi Huang knew that he needed to legitimise his claim so he ordered a personal jade seal carved with the words “received the mandate of heaven” as an indicator of his divine approval.

The Heirloom Seal of the Realm, as it became known, was passed from emperor to emperor until it was lost forever nearly a thousand years later. Whoever owned the seal, wielded all the power. And so it is today in China, where seals or ‘chops’ still confer legal authority.

One person who knows that better than anyone is Allen Wu. He’s currently the executive chairman and CEO of Arm Technology (China). Or he’s not depending on how events unfold at the Chinese unit of British-based chip designer.

Wu is at the centre of a tussle between shareholders and management after the board sacked him on June 4. He claims the board meeting was invalid because it wasn’t convened according to proper procedures. He says he wasn’t invited and, therefore, couldn’t exercise his vote alongside the eight other directors, six of whom voted against him.

But he is the company’s legal representative and still retains its chop and registration documents. The board cannot change his status without the chop, which he’s refusing to hand over. Wu also continues to go to work, backed by the local management team that published a supportive statement on the company’s WeChat channel.

The media is struggling to unpick what’s really going on. The board say they sacked Wu because of conflicts of interests, including the establishment of a Cayman Islands investment fund behind its back.

Reportedly, the fund was set up to invest in companies that use Arm technology. Sources close to Wu told China’s AI Finance that he had received permission for the fund from Masayoshi Son, the founder and CEO of SoftBank, which owns Arm Holdings.

As we previously wrote in WiC410, it has never been clear where the real power lies at Arm’s China business. When it was set up in 2018, the local press labelled Arm China a “white gloves” operation: a Chinese metaphor for ‘hidden hands’ exercising control.

At the heart of the issue, is whether Arm Holdings has the final say, despite owning less than 50% (it has a 49% stake). This is because the Chinese interests that hold the other 51% are split between private equity fund, Hopu (36%), two China Merchants vehicles (13.77%) and an unknown Hong Kong registered company (1.2%).

Arm Holdings and its major shareholder, SoftBank, have four board seats, while Hopu has three, Wu has one and the final seat is taken by one of Arm China’s industry partners. The Chinese press notes that a number of Hopu board directors seem to have voted with Arm Holdings on Wu’s dismissal. The two also issued a joint statement on June 10 as well.

This makes the press less convinced that that the Sino-US tech war lies behind the row. In May 2019, for example, it was widely reported that Arm China would no longer supply chip designs to Huawei’s HiSilicon unit because of its reliance on US origin technology, which is being denied to a number of Chinese entities. Wu then seemed to contradict this the following September, telling a press conference that the two companies were still working closely together.

In their statement, Arm Holdings and Hopu may have been trying to flag how the move has nothing to do with the Huawei situation by describing Wu as a US citizen. In contrast, his replacements as co-CEOs are Ken Phua from Singapore and Phil Tang, a Chinese national who Wu had sacked on May 26 for unspecified “major violations.”

What it may come down to a disagreement about the company’s future direction, triggered by SoftBank’s financial situation. Back in 2018, much of the initial idea for the China offshoot (heavily pushed by Wu) was that it would have the freedom to develop its own chip designs that could be sold locally, avoiding potential tariffs. However, its main role was still selling licenses for HQ’s chip designs.

Wu naturally hoped that, over time, proprietary chips would become more prominent. But developing that kind of advanced technology from scratch takes patience and capital, two things that SoftBank has less of today. Earlier this year, it launched a ¥4.5 trillion ($42 billion) asset disposal programme after reporting a ¥1.9 trillion loss at its Vision Fund in 2019.

It has publicly said that it wants to float Arm Holdings, raising much-needed funds. What is not clear is whether it wants to float Arm China, or fold it back into Arm Holdings first. The latter action might make more sense from a control standpoint and potentially boost Arm Holding’s IPO valuation given that China accounts for roughly one third of global sales.

A single entity, without messy local ownership issues, could make the company a more clear-cut proposition for prospective IPO investors. But it would not change the increasingly treacherous waters that Arm is traversing between a Chinese government determined to become technologically independent in semiconductors and an American one equally determined to maintain its nation’s global lead.

It is also unclear if Arm China could be re-absorbed into the mothership. When it was set up, there were reports of a three-year lock up period after which the company’s backers could only sell shares to Chinese entities (and none to Arm’s competitors).

Local media is now awaiting the next stage of the battle between Wu and the Arm China board. Arm believes it has a trump card. Sources told Bloomberg that as a “last resort,” Arm Holdings would suspend license sales to Arm China on the grounds of protecting its intellectual property.