(Bloomberg) -- Arm Ltd., the chip designer owned by SoftBank Group Corp., accused the ousted head of its China joint venture of hurting its business there, escalating a dispute that’s becoming a test of Beijing’s willingness to protect foreign investment in the world’s second-largest economy.
The U.K. chip giant in June announced it was firing Allen Wu, the head of its Chinese unit, over undisclosed breaches of conduct, but the executive has refused to step down and remains in control of the strategically important operation. Rather than the peaceful, rapid resolution that both sides have said they want, the situation has escalated.
Wu has hired his own security and won’t let representatives of Arm Ltd. or his board on the premises, said a person familiar with the situation. He’s refused to hold a previously agreed event which would connect Chinese chipmakers with Arm Ltd. and is also refusing to negotiate, despite public statements to the contrary, said the person, who asked not to be named.
Wu is “propagating false information and creating a culture of fear and confusion among Arm China employees,” the U.K.-based company said in a statement. “Allen’s focus on his own self-preservation has also put China semiconductor innovation at risk as he has attempted to block the critical communication and support our China partners require from Arm for ongoing and future chip designs.”China is the largest market for semiconductors and Arm China is the main sales conduit for the U.K. company with customers including Huawei Technologies Co. In early June, Arm China’s board – which includes representatives from Arm Ltd. and Chinese investors - ousted Wu for setting up an investing firm that competes with its own businesses there. He refused to accept the decision, saying it was invalid and has remained in control at Arm China’s headquarters in Shenzhen. The conflict casts uncertainty over SoftBank’s reported plans to sell Arm, a lynchpin in the global smartphone and computing industry that the Japanese firm bought for $32 billion in 2016.Arm Ltd. is responding to Wu’s latest salvo, a public letter which accused representatives of the U.K. company of going directly to customers and threatening to amend or cancel contracts if they didn’t stop dealing with Arm China. The letter, posted on Arm China’s social media accounts and issued under the name of its employees, also said the Chinese venture had the exclusive rights to sell Arm’s products in the country.
Both parties are arguing that the longer things drag on the worse the impact will be on the Chinese chip industry, which relies on Arm’s technology. They also urged the Chinese government to intervene and resolve the disagreement. If and when authorities in the world’s most populous country get involved, their actions could provide a major indicator of Beijing’s willingness to uphold the rights of overseas investors on its soil.
SoftBank bought Arm Ltd., which then operated under a different name, in 2016, initially gaining full control over the Chinese subsidiary. SoftBank gave up a majority stake of Arm China in 2018 when it sold more than half to an investment group. It now owns 49% through Arm Ltd. The consortium that bought 51% of Arm China includes China Investment Corp., the Silk Road Fund and Singaporean state investment firm Temasek Holdings Pte. The Japanese company is considering selling the company either through a private deal or public stock listing, people with knowledge of the matter said earlier this month.The intricacies of Chinese rules confer an advantage to Wu as the holder of key registration documents. As the legal representative of Arm China, Wu holds the company’s registration documents and the company seal, or stamp. Changing the legal representative requires taking possession of the company stamp -- something Wu has refused to give up. Arm Ltd. and the investors could go through the courts, but the process could take years.
Arm’s technology underpins the most important component in almost all of the world’s smartphones and is making headway in other markets such as personal computers and servers. The company sells chip designs and licenses the fundamental technology that allows chips to communicate with software to companies that prefer to design their own.
©2020 Bloomberg L.P.
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