ARM Fired ARM China’s CEO But He Won’t Go, a Breakdown
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I haven’t yet heard of any new development that has come along since I released this video a few months ago. But I’ll definitely write on it if something pops.
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ARM is the most impactful company out of the United Kingdom’s semiconductor industry in the past 30 years. The company’s architecture powers the mobile phone revolution and recently has embarked on a journey to the desktop. It stands a good chance of winning significant market share there.
With that being said, the company has been involved in some weird stuff lately. It was acquired in 2016 by Japan-based SoftBank. Which to me was a bit baffling in of itself. How did that get through?
Anyway, then SoftBank launched its $100 billion Vision Fund and started splashing money around like a drunk limey.
Then SoftBank hit a few duds and needed quick cash. So they are now in the process of selling the company to GPU-maker Nvidia - an odd choice.
But by far what I would say is the most bizarre thing happening to ARM right now is the kerfuffle in ARM China. They tried to fire their own subsidiary's CEO and he refused to leave. Everyone is mad at each other and no one knows what is going on. In this video we are going to pick through this current event.
About ARM and ARM China
Let us briefly talk about ARM. ARM has been around for a quarter of a century. Its primary business is in IP licensing. They license their IP to other companies like Apple for resale. ARM Ltd does not itself sell chips directly to consumers.
The company's designs underpin many of today's most advanced gadgets. Apple's M1 chips in its latest super-fast computers are ARM-based. The iPhone is ARM-based. The Qualcomm, Exynos, and HiSilicon CPUs that power today's sexiest Android phones are all ARM-based.
ARM is especially prominent in China. Today, it is estimated that 95% of computer chips designed in China are ARM-based. The country's entire indigenous semiconductor industry sits on this British company's IP. For a look into the critical role ARM plays for Chinese fabless makers you can check out my video profile on Huawei’s HiSilicon.
Likewise, China is very important to ARM. In 2018 the company said that China brought in over 20% of total revenue. Heartened by this success, the company sought deeper relationships and more localized designs. So thus ARM China was founded.
For reasons that are not entirely clear (perhaps national security related), ARM sold 51% of the China subsidiary's stake to four companies. Hopu Holdings, a prominent Chinese private equity fund, owns 36%. two China Merchants shell companies have 13.8% and an obscure, unknown Hong Kong shell company has the rest. It is a common tactic to dissuade the possibility of losing control of a China joint venture’s intellectual property. ARM is not the majority shareholder but it does hold the most shares of all the partners - a plurality.
ARM appointed Allen Wu to be ARM China's CEO. The 56-year old Wu is a US citizen who joined ARM in 2004 and worked his way up through the ranks. He had pushed heavily for the creation of the entity. Seemed like a decent choice.
Then in June 2020, ARM fired Wu for allegations of "serious irregularities" and "conflicts of interest". Allen was leveraging his position as ARM China's CEO to generate opportunities for his personal venture capital fund.
The fund, named Alphatecture, was set up in July 2019 to invest in Chinese tech startups. The two companies' interests began blurring together. ARM China invested in a company called Bestechnic. Alphatecture invested in Bestechnic too. Stuff like that.
Whistleblower accounts began percolating about Wu offering discounts to ARM China customers if those customers invested in Alphatecture. That he was presenting himself as China's version of Masayoshi Son, SoftBank's famous CEO. And then it came out that a subsidiary of Temasek had pledged $50 million for Wu's personal fund.
So on June 4th, 2020, the ARM China Board of Directors got together and voted 7-1 to fire Allen Wu. Allen was the only member of the board who voted against the decision. Hopu and SoftBank issued a joint statement announcing the firing - making it clear that this was not a China geopolitical thing. This was a “bad CEO” thing. Remember, Allen is an American citizen.
And then ... Allen Wu decided that he was not going to be fired. Yeah, he just was like nah I won't go.
Allen's side of the story is that he had told the board that he would set up this fund from the very beginning. The board, he said, was totally okay with it. The board responded to that claim with, "Yes, the matter was brought up but not finalized". In other words, it was rejected. Why would Hopu ever allow it? Who wants to have the CEO of their own investment competing with them?
Then the board found out that the proposed hypothetical fund had already been set up by the time it came up to them. That was a firing offense.
With most companies in the West, if the Board says you are out then you are out. But in China, it is not so easy. Allen still holds the company chop. For Chinese, Taiwanese, and many other East Asian companies, the chop is a stone or wooden stamp that is stamped onto paperwork, contracts, and other documents. People have them to indicate their official approval of things. The Qianglong Emperor is famous for it and his was jade. And thus the same with companies.
FYI. The word "chop" definitely confused me at first. Who is getting chopped? Well it comes from the Hindi word "chapa". The Chinese word, 印鑑 (Yìnjiàn), just means "seal".
Not the animal. The animal is 海豹, which literally means "ocean panther", which is cool and I wanted to share that with you.
Allen Wu is ARM China's legal representative. And he holds the company chop. The board cannot change Allen's status as the legal representative without the company chop to stamp the documents as being official. Local management, or whoever is running the WeChat, appears to be on his side for now and they put out a statement saying that Allen continues to be CEO and Chairman. Since it’s WeChat it’s official.
So Allen can't be removed as legal representative unless they go to court in Shenzhen for several years to invalidate the chop. Political guanxi from Hopu's powerful founder Fang Fenglei hopefully can get the case's progress accelerated, but who Fang Fenglei actually is, I cannot get quite a hold on. The best thing that I can find on the guy is that he worked in the finance industry restructuring SOEs like China Mobile. So maybe he knows Wang Qishan.
Or they can steal back the chop. That is what happened with Chinese online bookstore Dangdang. Former CEO and major shareholder Li Guoqing broke into the building at 9:34 in the morning, cornered the secretaries, and stole the chops. When interviewed about the matter he said he was busy "taking over the company".
Not sure if ARM's new co-CEOs, the guys appointed by the board to take over for Allen, are going to try that. Would be cool if they did. Last comes to last though, ARM can also withdraw all of its technical support to the company. But that would finalize a breakup, hurt customers, and could lead to further escalation.
Allen continues to go to work at Arm China. When interviewed in November 2020, he said that he and the board needed to be in "alignment and agreement" on major issues. He also said that "All these challenges can be solved ... it is natural for people to have different opinions". Sounds to me like a boyfriend unable to move on.
The ARM China uncertainty throws a wrench into SoftBank's attempts to sell ARM to American-based Nvidia for $40 billion. With the way things are, China will think hard about the company behind 95% of its indigenous semiconductor designs heading over to the United States. They have already nixed Qualcomm's acquisition of NXP Semiconductors for national security reasons. We shall see. Perhaps they think they already have enough indigenous control of the core technology and its future direction already that it doesn’t matter to them.
What is most likely going to happen to Allen is that he gets bought out of his position for a pretty sum, kind of like the WeWork guy. But this whole thing has been a really fascinating exploration of how Chinese business traditions and ways of doing can conflict with how it is done in the west. Let’s stay tuned to find out how it all ends up.