Arm is the premier electronics intellectual property company almost everyone on the planet uses but nobody has heard of. The company designs the processor that goes into almost all smartphones today and the use of its designs are expanding.
Arm is increasingly adding AI processing capabilities to make devices more powerful. For example, Apple announced recently that starting in 2021, its own processors compatible with Arm’s design will power Apple laptops and desktops. Furthermore, Arm has started developing processors for data centers.
Nvidia is known as the leading graphics card provider for personal computers and has morphed into one of the leading AI processor companies for data centers. When you look at Nvidia’s core competency then it is parallel computing with graphic processing and AI-- the two prevalent applications of parallel processing. Arm’s and Nvidia’s worlds have started to converge.
The key difference between Arm and Nvidia is that Arm licenses its technology to other companies who then incorporate the technology into their physical chips, whereas Nvidia makes their chipsets and then either creates their own finished products or lets various companies build the actual graphics card. This means that Nvidia has been able to manage the inherent channel conflict between being a chip supplier to graphics card manufacturers and being a graphics card manufacturer.
Several industry observers have commented about the potential backlash from various players in the ecosphere where companies did not want to be suppliers and competitors of the new Nvidia at the same time. Intel was mentioned as one of these companies that is currently working with Nvidia, ignoring the fact that Intel has a significant endeavor underway designing and ultimately selling discrete graphics cards to compete with Nvidia. Companies in the electronics ecosphere are used to being both suppliers and competitors at the same time. Samsung, the large handset vendor, is also one of Apple’s largest suppliers of components for the Apple iPhone.
While the deal for Nvidia to buy Arm will need approvals from regulators in the U.S., U.K., E.U., and China, it is China that is the wild card here with its selective anti-trust and monopoly enforcement. It will put Chinese interests first and Arm is of particular importance to the Chinese electronics industry.
Most notably, Huawei has already been hurt through the invocation of US trade sanctions that prevent Qualcomm from selling chips to the company and that prevents chip fab companies such as TSMC from not being allowed to build processors like the Huawei Kirin chips which use U.S. technology and software. As a result, Huawei has been restricted to using current and previous-generation Arm processors rather than having access to next-generation processors as its competitors do.
In a world of tit-for-tat and escalating tensions, it is quite possible that the acquisition of Arm by Nvidia will be blocked by the Chinese government. We have seen actions like this before as in the case of the Chinese government blocking Qualcomm’s acquisition of NXP, the Dutch automotive electronics company during the trade tensions of 2018.
If Arm becomes part of an American company, it would make it even easier for the Trump administration to exert control over the Chinese computer industry as it has started to switch from x86 processors to Arm processors. Huawei’s new Kunpeng, Kirin, and Ascend chips are all Arm-based. Chinese experts, such as Xiang Liang, director-general of the Bejing-based Information Consumption Alliance, expect that the chances of approval are low. Even the prospect of Arm being acquired by an American company and all its potential consequences will strengthen China’s resolve to accelerate its Made in China 2025 initiative.
On the phone operating system side, Huawei has launched its Harmony phone OS that is built on the open-source version of Android. This was necessary since the fully -fledged Android version that Google provides to anyone else fell under the technology cites in the US Department of Commerce entities list. Harmony OS is now struggling with similar problems as Microsoft’s Windows Mobile OS: building an OS is easy; building an app ecosphere is hard.
A potential reaction of Chinese chip companies would be to switch from Arm, which uses the RISC instruction set for its processors, to the open-source RISC-V variant.
Such a move would lead to an even greater economic and technological decoupling of China and the West as the technical foundation of consumer electronics would separate. Software-wise the separation has already occurred in the mobile world. By its own choice, China’s mobile devices are not using Google’s full suite of programs internally as Google has been banned in China. Google did not cooperate fully enough with China’s state surveillance and censorship laws and an effort to increase the usage of the domestic Baidu and Sogue search engines. Other companies such as Facebook were banned for similar reasons. As a result, China’s mobile internet and app world looks completely different.
Innovation is not a Western prerogative as the Chinese version of WeChat shows. It is a holistic application that seamlessly combines Facebook, Instagram, Whatsapp, Amazon, Paypay, and Uber. As a result, innovation slows down due to the lack of economies of scale, duplication of efforts, and slower time to profitability. Furthermore, due to having two smaller markets compared to one larger market, the pressure to innovate and compete decreases. As a net effect, everyone loses in the long run.
There is plenty of evidence that countries act in what they consider to be their best interest. Blocking mergers to make a political point or to retaliate in negotiations is commonplace today as countries are jockeying for advantage and company plans evaporate into thin air. From Nvidia’s perspective, buying Arm makes perfect sense; we’ll have to see if this will be another deal that gets blocked by politics.
Roger Entner is the founder and analyst at Recon Analytics. He received an honorary doctor of science degree from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide insights into technology. Follow Roger on Twitter @rogerentner.
"Industry Voices" are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.