A Fabless Company for Fabless Companies
Speculation has emerged that Samsung Electronics may seek to take over ARM, a British fabless company, following foreign media reports that the semiconductor design company will be put up for sale.
ARM is currently 100 percent owned by SoftBank, which is in trouble due to a series of ill-advised investments. It posted a loss of more than 11 trillion won in 2019 as the market values of the "shared economy" companies, including WeWork, where it invested tens of trillion won, have plummeted. Analysts predict that SoftBank chairman Masayoshi Son will be forced to sell off ARM or list it on the stock market to secure funds. At the same time, speculation has emerged that Apple and Samsung Electronics may move to secure ARM shares.
However, industry insiders believe that Samsung Electronics is extremely unlikely to take over ARM. This is because: 1) ARM's profit model is based on openness; 2) the value of ARM has been inflated by SoftBank; 3) and Samsung Electronics will have to clear each country's review of the business combination in order to take over ARM. In fact, the entire mobile semiconductor ecosystem could be disrupted if a certain fabless company takes over ARM, which is called a “fabless company for fabless companies.”
ARM make profits by selling IPs to mobile application processor (AP) manufacturers. Apple, Qualcomm, and Samsung Electronics are going to develop CPUs or GPUs that are used in APs based on ARM's instructions set architecture (ISA). Of course, royalties are paid separately. This is why ARM is called a fabless company for fabless companies.
A business model based on selling ISA without producing its own APs can post a high operating margin as it can be operated with a small workforce, but its sales volume is small. ARM posted only 152.4 billion yen in sales and only 24.3 billion yen in operating profit in 2017. Assuming that such an operating profit level continues, SoftBank can recoup its investment (40 trillion won) 150 years later.
Nobody can say that the future of ARM is bright. Announcing the acquisition of ARM in 2016, SoftBank chairman Son predicted that the Internet of Things (IoT) and artificial intelligence (AI) markets would grow rapidly. Yet the growth graphs of these industries are moderate compared to chairman Son's prediction. This is because the construction of 5th generation (5G) mobile networks has slowed down due to U.S. sanctions against Huawei and a global shutdown sparked off by the spread of the novel coronavirus.
AI made a technological quantum jump several years ago due to the widespread use of machine learning technology, but AI’s technological advances have been slow since then.
Of course, ARM has a solid position in the mobile market. It is said to be threatening to dethrone Intel, a traditional CPU powerhouse, based on low-power cores optimized for mobile devices. Apple also recently gave strong support to ARM, saying it will release a MacBook series with ARM core-based CPUs, not Intel CPUs.
Some experts point out that it is difficult for ARM to expect high profits in China, the country with the biggest demand for semiconductors. ARM established a Chinese corporation in 2018 and sold 51 percent of its stake to a consortium of investment companies led by the Chinese government. As SoftBank made a large bet on acquiring ARM shares, it was a move to cover interest costs at the time, industry insiders said. In other words, the Chinese government will take half of ARM’s profits in the Chinese market.