Chip Company Arm Discloses China-Related Export Licensing Challenges

British semiconductor company Arm, in its initial U.S. public offering this week, said it’s facing uncertainty from U.S. and U.K. export controls and doesn’t expect to receive an export license to ship certain high performance processor cores to China. The company also said it’s expecting to see slower growth in its China sales revenue due to several factors, including various government-imposed “trade and national security policies.”

Arm, owned by Japanese internet services company SoftBank, announced its stock market launch as the chip industry grapples with new restrictions on chip exports and services involving China (see 2210070049). Those restrictions could be expanded when the Commerce Department finalizes them in the coming months (see 2307260071).

Arm said it has been “impacted” by the restrictions, which have forced it to implement “new process requirements that require licensees to disclose semiconductor manufacturing facilities used for manufacturing Arm-based integrated circuit designs.” The rules also place restrictions around “previously non-controlled Arm interconnect” intellectual property, it said in an SEC filing, adding that it's released a “modified version of such IP that does not exceed the [Bureau of Industry and Security] performance thresholds for” China.

The company also said “it is unlikely” it will receive an export license from either the U.S. or the U.K. to ship to China “certain high performance compute cores,” including the “highest performance processor in our Neoverse series of processors.” It said export licenses for China-destined processors that have “potential military uses” generally “can be difficult to obtain,” especially because “national security concerns are higher” for high-performance computing technologies. “[I]t can be challenging and unpredictable to obtain such export licenses,” the filing said.

The company, however, has been able to meet some of its Chinese customer demand by licensing other central processing unit cores that don’t exceed BIS’ performance and export control thresholds but “yet still present a compelling solution.” Although Arm said it’s expecting “additional changes to U.S. export control regulations in the future,” it said it can’t predict what the new scope will be, when those changes will occur or how they will affect its business.

The company derived about 25% of its total FY 2023 revenue from China sales, which it said “makes us particularly susceptible to economic and political risks affecting” China. Those risks could be “exacerbated by tensions between (on the one hand) the U.S. or the U.K. and (on the other hand) the [People’s Republic of China] with respect to trade and national security.”

Its China-related revenues mainly come from both Chinese and non-Chinese semiconductor companies and original equipment manufacturers that use Arms’ products in chips and the “end products they sell into” China, the filing said. Although China has been a “significant source” of semiconductor industry revenue over the last decade, Arm said the “near-term growth prospects” of the country’s chip industry are “unclear.”

Although its total revenue from China increased in FY 2023 compared with the previous fiscal year, the growth in Arm’s “royalty revenues derived from the PRC slowed for the same period,” the company said, mostly due to “economic issues in the PRC and factors related to export control and national security matters.” The firm said it expects to “continue to see declining royalty revenues, and we could see a decline in licensing revenues, derived from the PRC.”

“This and any similar limitations could also reduce our revenues and cause significant uncertainty in our products roadmap,” Arm said, “which could have an adverse effect on our business, results of operations, financial condition and prospects.”

The chip company also said it’s closely monitoring the Biden administration’s recently unveiled executive order that will eventually prohibit or require notifications for certain outbound investments in three Chinese technology sectors, including the semiconductor, quantum and artificial intelligence industries (see 2308090066 and 2308100045). Arm said it’s “possible that such regulations may impact” its customers, suppliers and its operations in China, but “given the uncertainties with respect to the timing and ultimate requirements of these regulations, we are unable to assess the extent of any such impact.”