As it seeks to pull off what could be the largest IPO of the year, Arm Holdings Ltd. spent more than 3,500 words explaining the risks it faces in China, a critical market that accounts for about a quarter of its revenue.
In a chunky section of the IPO filing’s 330-page prospectus, the British designer of chips detailed a litany of challenges in the country: a concentration of business in the People’s Republic of China that “makes us particularly susceptible to economic and political risks affecting the PRC”; a downward spiral in Asia’s biggest economy; rising political tensions with the US and the United Kingdom; and the potential complete loss of control over its pivotal Chinese subsidiary.
Arm runs most of its China business through an independent unit, called Arm Technology Co., which is its single largest customer and accounted for about 24% of its sales in the year ended March. But Arm and its parent, Japan’s SoftBank Group Corp., don’t control that business.
Instead, SoftBank owns approximately 48% of Arm China, with the majority held by local investors, including entities affiliated with Allen Wu, Arm China’s former chief executive officer who was fired over allegations of conflicts of interest in 2020. The prolonged power struggle still leaves open the risk of leadership changes and affect regional operations.
“We depend on our commercial relationship with Arm China to access the PRC market,” the filing said. “If that commercial relationship no longer existed or deteriorates, our ability to compete in the PRC market could be materially and adversely affected.”
More immediately, a slowdown in the world’s biggest smartphone market and manufacturing hub, as well as steps by the US and its allies to limit China’s access to leading-edge technology, are eating into sales. Arm’s had to sell architecture for lower-performance chips in China, the company said.
Arm’s royalty revenue growth in the China slowed last fiscal year, and the company warned royalty revenues and licensing revenue could take further hits in the future.
Arm’s biggest customers include Apple Inc., which relies on China for close to 20% of its revenue every year, with its major hardware lines all powered by Arm-based processors. Leading mobile chipmakers Qualcomm Inc. and MediaTek Inc. sell the bulk of their chips, built on Arm designs, to Chinese smartphone makers.
The company depends on a handful of companies for a majority of its sales. Five entities including Arm China accounted for a combined 57% of Arm’s total revenue for the fiscal year ended March 31, according to the filing.
“A significant portion of our total revenue comes from a limited number of customers, which exposes us to greater risks than if our customer base were more diversified,” the filing said.
Arm Needed 3,500 Words to Explain Its China Risks Before IPO
As it seeks to pull off what could be the largest initial public offering of the year, Arm Holdings Ltd. spent more than 3,500 words explaining the risks it faces in China, a critical market that accounts for about a quarter of its revenue.
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