The Arm Holdings’ China Question (Tech Strategy – Podcast 188)


This week’s podcast is part two of a deep dive into Arm Holdings. It focuses on how China and AI are external factors impacting its future trajectory.

You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.

Here is the link to the TechMoat Consulting.

Here is the link to the China Tech Tour.


Related articles:

From the Concept Library, concepts for this article are:

  • Semiconductors
  • External Factors: Changing Customers, Govt and Tech

From the Company Library, companies for this article are:

  • Arm Holdings
  • Masayoshi Son / Softbank

Photo by Vishnu Mohanan on Unsplash

——-–Transcription below

Welcome, welcome everybody. My name is Jeff Towson and this is the Tech Strategy Podcast from Tecmo Consulting. And the topic for today, the arm holdings China question. Now this is really part two of last week’s podcast, which was about Arm holdings as well, sort of, you know, mostly the strategy, the business model, things like this. But this is the big overhanging question, which is what’s going on with Arm in China, which is about 24% of their revenue and sits squarely in the center of the US-China tech dispute. semiconductors which is where they live. So I’ll give you sort of my take on that question which is pretty interesting. It sits nicely in sort of my two areas of expertise, digital and China. So at least you’ll have a strong opinion on what I think is going to happen and what matters. Okay so that’ll be the topic and let’s see any housekeeping. I’ve got a book coming out hopefully in the next two weeks. This is the… Basically the short version of the motes and marathons instead of six long books. That’s going to be one short CEO playbook. which you can read pretty quick. And this is a partnership with me and Jonathan Wetzel, McKinsey. And there’s been a lot of approval process dealing with McKinsey. So I’ve been waiting for several months, but it’s officially done as of this morning. So we’ll try and put that up ASAP and I’ll send out a link on that. Let’s see, other stuff. Standard disclaimer, nothing in this podcast or in my writing or website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions may no longer be relevant or accurate. Overall, investing is risky. Do your own research. And with that, let’s get into the topic. Now let’s start with sort of three minutes in tech events. So anything big happened this week? Well, there’s one thing that caught my attention, which was the quarterly earnings release from Pinduoduo, which pretty much shocked everybody. It was a blowout. 2, 93% year over year increase in revenue for the quarter. And a lot of that has to do with Tmoo, which was launched really back in October of 2022. Kind of an amazing story. The rumor is that it was conceived as an idea about six months prior. It was developed, it was launched in October, and it really blew out the numbers. You know, everyone was talking about it as early as December, that the revenue was kind of stunning. Hard to know exactly what was going on, but it looked pretty stunning. And, you know, one year later, massive increase in their revenue. In some numbers it has surpassed Xi in. We’re mostly talking about the US for its international markets at this point, but you can assume it’s going to follow Xi in everywhere, so international, but maybe have surpassed Xi in and definitely spiked the Pinduodua numbers. It was so impressive that Jack Ma even chimed in on, this made sort of Bloomberg and some other stuff news in the last day. You can hear me quoted on that if you read the article. But basically, Jack Ma made a comment about it in sort of an internal memo discussion, saying basically we need to sort of refocus. I’m paraphrasing, this is not his words, but sort of reinvigorate and most great companies are sort of founded in winter. So sort of, you know, a lot of people were like, this is this Jack Ma, is he going to get involved again? Because he’s been sort of out of the picture operationally since about 2020. Is he going to get back involved more? That was kind of the question. And you know, is Pinduo Duo going to surpass Alibaba, at least in market cap? which it’s pretty close as of this week. You know, their stock popped pretty good, maybe. In a way, my take on what all this means is, look. China e-commerce, China is kind of the crucible of e-commerce. It’s the most innovative market in the world. It produces the toughest competitors, you know, and it’s just very dynamic. It’s not like the U.S. where it’s kind of boring and stale. Think of all the cool stuff that has emerged in e-commerce in the last five to six years. Almost all of it came out of China. Social e-commerce. When people say social commerce, they’re really talking about pin duo group buying, things like that. That came out of China. Live streaming China, South Korea. TikTok shop, which everyone’s talking about, came out of China. You know, just very dynamic space where even when you have giants like Alibaba and JD, you can see these companies like WeChat, Mini Programs or Pinduoduo just show up very quickly. Shiyin came out of China, Tmoo out of China. So a very innovative space. You kind of have to be because it’s such a ruthless environment that if you are not innovating aggressively, you’re going to get in trouble very quickly. And so is it a big surprise that the companies that rise to the top in China like Pinduoduo can then go international and sort of shock people? No, if you can win in China, you can run circles around most other companies in the world. You just kind of have to be really innovative. really tough to get to the top. So anyways that’s kind of how I read it and didn’t surprise me at all and the Jack Ma comment I think is sort of… Alibaba and JD, you know, the founders have both gotten involved again in the last nine to 10 months. Joe Tsai is back. Richard Lio at Pindu, JD is back. Jack Ma may be back. Eddie Wu has taken over at Alibaba. He was one of the founders pretty much. So, you know, the old guard is coming back and sort of reinvigorating the culture, which I think has to happen. So anyways, I thought that was interesting. Wasn’t unexpected at all. and we’ll see if Alibaba and JD hand off to the next generation of management. I mean, one last point on this. Two of the most innovative e-commerce companies in China, ByteDance, Pinduoduo. What do they both have in common? They are both led by next generation founders. Jiang Yimin over at ByteDance, Colin Huang over at Pinduoduo. This is 20 years younger than the Richard Leos and the Jack Ma and the Joe Tsai’s. So there might be a generational thing happening here. Anyways, very interesting subject. That’s all I’ll say about it. I think it’s a cool space this year. China, Asia, e-commerce, very cool this year. A lot of interesting stuff happening. Okay, let me get to the topic at hand. Now, if we look at… at Arm Holdings. Arm, for those of you who are subscribers, I’ve sent you three articles on this already and the fourth and final one is coming probably tonight or tomorrow. So that was a pretty deep dive on Arm, which is what I’m trying to do going forward is to alternate between strategy lessons and deep dive on companies. About 50% are going to be U.S. companies now. So hence Arm. Okay, when I look at Arm, I basically ask myself four questions, and this is, I have a checklist. This is how my checklist breaks down. Question number one, I look at the customer base, I look at secular trends, I look at sort of, you know, industry level numbers. So. The question would be something like, is this company targeting a big market that is benefiting from a secular trend? Is there a tailwind? It’s a lot easier to grow shareholder value when your market is growing 3, 5, 8 percent per year. Is there a secular tailwind that goes on for a long time? Okay, not hard to answer that question for ARM because they do basically semiconductor architecture, which is the mother of all secular trends. It’s global, it’s huge. CPUs are in going into everything, smart connected devices, which is where they live. Okay, great secular trend. Is it changing? you know, is it capped? Is there a minimum? That’s kind of question number one. I’m not going to talk about it in this podcast. Then I move on to question number two, which is, okay, how does this company meet customer demands? You know, what is the value proposition to the customer? How well is it serving it? Is this unbelievable? Everybody wants it, like TikTok. Is it just kind of okay, like you’re selling batteries? You know, how strong is this particular company against customer demand? And that’s when you go into, okay, what is their value proposition? How is it used? How frequently is it used? Now, for those of you who I sent out an article about this the other day, you know ARM has an unbelievable value proposition in terms of CPUs, right? Its customer base has always been a handful of large semiconductor companies. It’s a B2B supplier. And then outside of that, a lot of OEMs that make everything that chips are going into. Fine. They’ve got 99% of the smartphone market. They’re also really strong in OEMs, not as dominant in terms of market share when you move into things like networking equipment, smart vehicles, data centers. They’re there, but they’re not 99% of the market. Okay, I talked about that one, not going to go into this. The last podcast I did, which was last week, was on question number three, which is, okay, I’ve looked at the market, I’ve looked at the trends, I’ve looked at this particular company’s value proposition to customers, their product market fit. Then question number three is, okay, what are the competitive strengths of this company versus others? Yes, you have to have a great customer value proposition, but at the end of the day, there aren’t going to be 20 types of smartphones sitting on the shelf of the Walmart. You know, I don’t care what customers want. There’s going to be three or four. So competitive dynamics and customer value proposition are two sides to the same coin. You know, Was Microsoft Windows the greatest operating system ever? No, but it was so powerful on competitive dynamics that it was pretty much the only game and customers had to accept it. So those two things go hand in hand. Now the podcast last week I talked about the four digital concepts that I think really power arm holdings in terms of competitive dynamics and you can listen to that and I sent out a couple articles about this. Okay that leaves me to the last question, question number four in my checklist which is the topic for today which is okay are there external factors that would impact the picture I just described. The picture I just described, question one, two, and three, that is a commercial picture. It’s customers, it’s competitors. How does that all play out? Very much a commercial picture. Okay, but there can also be external factors that would impact that. And the three I always look at first, I look at others, but the three I always look at are CGT. C stands for customer behavior, usually consumer behavior. G stands for government and T stands for technology. Are there changes in customer behavior that are gonna change the commercial dynamic I just went through? Are there government factors or regulations that are gonna change the commercial picture I just painted? Are there technological changes that are gonna, these are all external to what I just talked about, CGT. And within that, Okay, when I go through ARM, the two that are top of my list are, there is a major technological change happening, which is AI. ARM holdings has been based on CPUs and their RISC architecture that they have been involved with intimately since 1990. Okay, those are CPUs. And what about when AI comes in? Are we gonna infuse CPUs with AI, which is something ARM talks about doing, or is this gonna give rise to a completely new chip and chip architecture, which is what Nvidia has been doing, GPUs? Are we gonna see devices running much more on GPUs than CPUs? And keep in mind… When ARM jumped into the market in 1990, through a joint venture with Apple and the RISC architecture, it was as a counter strategy. There was already ISAs, infrastructure, instruction set architecture, that already exist on personal computers with Intel. It was Windows, Intel, and the x86 sort of architecture, that already existed. But the shift from very high powered personal computers to smart devices that needed an instruction architecture set that was high performance but also low energy, that’s really how ARM jumped into the market. is they saw the technological paradigm shift. They jumped in and offered something different and that’s what everyone sort of adopted on smartphones. Well, are we at the same sort of moment here where look, what you’re building and what you’ve been building for 23 years, it’s just not optimal for smartphones, smart devices that are mostly about the AI and not about the CPU. So it might be enough of a paradigm shift that we’re gonna see a new player jump in. Certainly NVIDIA was able to jump in to semiconductors. when the CPUs that were running on laptops just weren’t good enough for graphics processing, gaming. And it turns out most AI is better suited to be running on GPUs than CPUs. So we are at another sort of tech paradigm shift. And the question then would be, can ARM make the transition? Can they adapt their core? business, which is their CPUs, to a more infused, AI-infused architecture? Or is it going to take an entirely new approach and product? That’s the big question. And if you look at the sort of SEC filings for ARM and you look at how they describe their primary customer benefits of their solution, well, they will list the stuff we’ve heard for a long time. I’ll read from their SEC filing. The ability to optimize for performance, power, and area. That’s basically, look, we let semiconductor designers choose how much power, how much performance, and how much area, how big is the chip, that’s basically cost. Okay, that’s always what they’ve sort of let people do, and you can design for smartphones as opposed to tablets as opposed to other things. Okay, fine, that’s nothing new. Number two in their primary customer benefits, alignment with the semiconductors industry. technology roadmap. Now I’ve been writing in these articles what ARM is really offering is a product plus an ecosystem. They’re deeply intertwined with the ecosystem of designers, developers, foundries, all of that. So okay that’s that second bullet point. Number three, reduce design risk and cost. Okay, that’s what I talked about in last week’s podcast, that what they really offer to semiconductor designers and developers is the ability to dramatically reduce their risk and their cost by using our instruction set architecture instead of developing it in-house. Fine. Okay, nothing new there. But there’s a fourth bullet point they list. Here it is, incorporation of AI and ML acceleration in every processor we design, unquote. So you can see they are within their primary customer benefit of their core solution. They are trying to speak to the idea that we are incorporating this new technology into what we do. Now, I’m not totally sure I believe that. Here’s more, here’s sort of that bullet point, using quote, using an ML or an AI or ML. algorithm is just another way of programming the software needed to run a chip, and we expect that AI and ML algorithms will complement the software used by most chips in the future. From high-end superconductors to tiny remote sensors, ARM processors run AI and ML workloads, and every smartphone currently in the market efficiently runs AI in friends’ applications. Okay, so you know, they’re arguing that this is, you don’t really separate MAI and CPUs, it’s all integrated, and that may well be true. I’m watching it, I don’t know enough of the technology there to really be confident. Okay, that’s kind of, if we talk about CGT. Is there a big change in customer behavior? Not really. Is there a big change in technology? Yes, there’s a big one. And then we get to the point of this podcast is what about the G? Is there a major change in government? And that’s when the China question like, yeah, it’s huge. It’s a major issue. Now the US China, let’s call it tech dispute instead of war. It’s been going on for three years now. And… You know, my opinion on this has changed. What people in China have been saying for like 10 to 15 years, I’ve been hearing this, is look, the US government is actively trying to limit the economic and technological rise of China. And I would say, nah, I don’t really think that’s true. It’s more about competition and sanctions where there’s issues of abuse. Okay, I don’t believe that anymore. I think they are actually right. I think the US government, the goal is to limit the technological advancement of China and its economic rise. Now, I don’t quite understand why they’re doing this. The explanation I hear from geopolitical strategists is this is about military and technology. you know, military power, power and trade, all the geopolitical buzzwords, ultimately all follow from economic strength and technological strength. One follows from the other, so they’re trying to limit that. Okay, I don’t know if that’s true, but I’m convinced that’s what the goal is at this point. And within that picture… We are just seeing sanction after sanction and new regulation after new regulation and the center of that is Limiting the access of Chinese companies particularly those associated with more military or government Limiting the access to high-end semiconductors looks like target number one and You know, there’s just let’s say October 2022 The US Department of Commerce added new process requirements. If you’re selling advanced semiconductors out of the US, you basically have to apply for licenses depending on who it’s going to in China. There are new rules on, you know, thresholds for performance of these semiconductors if they’re going to the PRC for certain groups and entities. There are limits on sales. So this hits NVIDIA. It hits Qualcomm. And all of those companies are applying to licenses. They’ve redesigned new types of chips, Qualcomm in particular, that would avoid certain limits. Well, those new types of chips have now been hit. So yeah, we’ve been seeing that for several years. But it didn’t stop with just US semiconductor companies. Then it went to US operating systems like Android. which can’t be sold in certain ways to companies like Huawei. The open source is open source, but the proprietary stuff and yeah, that’s limited now. And then the US did something fairly gangster, which is they expanded their rules to apply to non-US companies, of which TSMC was the first one, where suddenly it’s US government authorities telling a Taiwan company what they can sell. to companies outside of Taiwan. You know, there’s no US company involved there. And then we see sort of the lithography machines, ASML and all that coming out, you know, same thing. So that would be the US side, a government impacting this business as an external factor. But we can also look at the China side, which is also having a big impact because in response to this, the Chinese government and pretty much every tech company in China is looking for alternate sources of technology supply all the way down the tech stack. It’s semiconductors, it’s operating systems, it’s sensors, it’s foundries, you know, because quite rightly they view this as a strategic risk to be overly dependent on US suppliers because the supply chain has been politically weaponized. Okay, so that’s another external factor and between those two government external factors impacting this business right in the middle of that sits ARM. sits Arm China. And if you want to read a really awesome story, read about the history of Arm China over the last two to three years. Because Arm had a subsidiary, Arm is a UK based company, Cambridge, Arm China was a subsidiary of Arm that was basically a sub-licensee of all the intellectual property. They were the exclusive sub-licensee that could go to any of these smartphone makers in China, anyone designing chips in China, in mainland PRC. And keep in mind, the vast majority of the world’s smartphones are all built in China. That’s OPPO, Vivo, Xiaomi, Huawei, now it’s sort of Honor and Huawei. Even Apple, I mean that’s Foxconn, right? So they’re building within China. They’re based in Taiwan But there a lot of their factories are mostly in Shenzhen and other places okay, so this sub licensee thing was a big deal and as manufactured products whether they’re sensors smart cars tablets industrial robots Well, the manufacturing base of the world is Asia and specifically China, Japan, South Korea. So anything that’s going to start having CPUs in it, especially more mobile devices, smart connected devices, you know, that’s China. So ARM obviously sub-licensed this to, you know, well, it was ARM China. And then there became this crazy story where the CEO of ARM China I don’t want to say took control of the company, but there was a dispute between him, Arm, the headquarters in the UK, and then the owner of Arm, which was SoftBank, which has a long history of being very active in China. There was a crazy story of who has control and who can fire and who can hire and who has the chop and who owns what. And I mean, it’s a crazy story. You should read it if you’re interested. lot of back and forth legalese. I don’t understand half of it. The dust settles. Arm, SoftBank basically has control and the stake of Arm China that was owned by Arm is now owned by SoftBank. So this is all sort of under SoftBank at this point and some China partners and they have a license from Arm in the UK. for all of their intellectual property there. The dust is settled, it’s pretty much over, but the intellectual property license agreement, the IPLA, you can go into the SEC filings for ARM, and there’s just pages and pages on what this IPLA covers, which is now held by ARM China, which is no longer owned by ARM HQ. But… It’s kind of a fascinating story, but it basically covers pretty much everything. It covers the customers in China It covers the products it covers the pricing it goes on for decades And you know, how do these government actors? How is it going to impact the IPLA? Which is 24% of the revenue of arm at this point And we’re at about 25 minutes here, so I’m just gonna give you my so what, what I think is gonna happen and how I sort of factor it in. Number one, the China revenue coming into arm, which is about 24% in the last year, it could disappear any given day of the week. It could. When government acts, it can happen very quickly. We could see a US action. We could see a China government action. I would basically, I don’t include that in my projections for this company going forward. It’s great if it remains. Awesome, totally could happen. It wouldn’t surprise me if that gets hit 30%, 50%, 70%. at the mercy of very large governments, who knows. However, that’s not the part that I’m concerned about. In last week’s podcast, I basically argued, look, the biggest competitive strength ARM has is its network effect based on standardization and interoperability, that everybody uses their ISA to design CPUs for smartphones, everybody. And If Chinese companies were to start developing a different ISA or using a different ISA, that would be a major event and it would directly hit their network effect. Such that, you know, the revenue, that’s one thing. I would give away the IP in China for free to keep everyone using it. So if ARM were suddenly forbidden from using its ISA in China, which who knows could happen, give it away for free. Make sure all the developers, the semiconductor designers, the smartphone companies keep writing with your architecture. Make it open source in China, because if they lose that, they lose their greatest competitive strength, which is that network effect. And this could go beyond China. Now this will be the last point two separate sort of ecosystems, two different tech stacks. between China and the US. And we already see this at the app level, right? We have iQiyi in China, but we have YouTube in the US. We have Baidu in China, we have Google search in the US. Okay, but now it’s moving down the tech stack. We’re probably gonna start seeing separate foundries. We’re gonna see separate semiconductor, and we will probably see separate ISAs, maybe, unless ARM just sort of gives it away and lets everyone use it in China for free. Okay, that’s not going to limit itself just to the US and China that we start to see these sort of alliances where companies in Southeast Asia, companies in Africa, companies in Latin America. Yes, they’re using some of the digital architecture, the tech stack that comes out of the US. Nvidia chips. AWS, Azure, data centers, but we’re also seeing companies using the digital tech stack coming out of China, which is what we see in Malaysia, we see it in Thailand, we see it in Africa, we see it in Eastern Europe. So it’s not that like it’s just going to be China. You don’t want an alternative ISEA being deployed in China and then starting to go out into the world. that would be the risk. And we’re kind of seeing these two different competing architectures playing out in other parts of the world, which is pretty interesting to watch. Anyways, that’s kind of my take on all of this. So I’m going to go ahead and start The revenue, I put a question mark in terms of China for ARM, but it’s the usage and the market share and how many developers are writing with this ISA. That’s the number one question I’m looking at. Within China is another one emerging and is it going beyond China, which would be a huge event. I’m keeping a close eye on it. I don’t see it yet. I mean, this is theory. I mean, right now, everything looks pretty good. like what we did, you know, you would hope if you were, let’s say, an investor in Arm. But that’s what I’m kind of keeping a very close eye on. Okay, that is it for the content for today. I hope that is helpful. That’s sort of two podcasts, and for those of you who are subscribers, four articles constituting a bit of a deep dive on Arm Holdings. The next company on the list is Salesforce, Super cool company. Like, I mean, I put it right up there with Microsoft as a very powerful business model. Everyone talks about Microsoft, you know, their business model, which I’ve written about as well. Salesforce is really cool. Anyway, so that’ll be the next sort of set of articles and podcasts going out. And that is it for me for today. I don’t have any real fun stuff, I guess, for today. I’m on my way to the US for the holidays. family which is California and then I’m going to the U2 show at the Sphere in Las Vegas which I kind of got by a fluke. I kind of lucked out a little bit on that. I wanted to see U2 and I was thinking about it during COVID that I’ve never seen U2 in concert so I thought well we’ll try and get tickets but it was COVID so there were no shows so I joined the fan club and I did I was basically stalking it and then you know they announced oh we’re starting our again, if you’re a fan club member, you can get tickets. So I signed up and got some tickets. I didn’t even know what the sphere was at that point. And I got sort of tickets before they went on sale. And then like. month later, you know, the sphere sort of turned on and everyone’s like wow, what is that? So I kind of lucked out on that Anyways, I’m gonna head to Las Vegas and then I’ll probably spend a couple weeks in Mexico City working from there So it’s gonna be fun. That’ll be a probably a month on the road, but mostly family and fun So anyways, that’s it for me and hope that is helpful and I will talk to you next week. Bye. Bye


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.


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