Japan's SoftBank Group is beginning to realize that the IoT gamble is a costly disaster.
SoftBank Group Chairman Masayoshi Son made a clear message in 2016 when he tried to convince investors that it would be wise to buy ARM: "In the era of the 'Internet of Things', I think the champion will be ARM. ”
When Son spearheaded the $31 billion acquisition of ARM, he saw it as a bet on the future of the entire tech industry, when the future around the concept of the Internet of Things was becoming clear, and he continued to push the executive team firmly in the direction of designing chips for the future of machine connectivity.
But five and a half years later, SoftBank has found that the concept of connecting billions of everyday and industrial devices to the internet is coming to fruition much slower than expected.
Sluggish performance
ARM plays a pivotal role in the global semiconductor industry. Instead of directly producing chips or semiconductor devices, the company licenses the microprocessor IP it develops to chip design companies around the world. From smartphones and computers to cars, many electronics contain ARM-architecture chips.
Over the past three fiscal years, ARM revenue has grown at an annual rate of less than 5%. In July 2021, Simon Segars, then ARM's CHIEF Executive, wrote: "We considered an IPO, but the pressure to achieve short-term revenue growth and profitability will stifle our ability to invest, expand, act quickly and innovate."
According to SoftBank data, ARM's costs increased from $716 million to $1.6 billion in 2019 from 2015 to 2019; revenue rose 20 percent to $1.9 billion, while profits plunged nearly 70 percent to $276 million.
Mergers and acquisitions collapsed
In early February, SoftBank's sale of ARM to U.S. semiconductor giant Nvidia broke down completely. The $66 billion (420 billion yuan) largest merger in semiconductor history could have allowed SoftBank to more than double its profits.
The level of ARM's final valuation depends on the company's sustained recovery from years of poor performance and whether it can withstand challenges from new technology competitors.
According to the Financial Times, Lil Read, an analyst at British institution Global Data, said: "Although ARM is a very important world-class company, it will face an existential threat to RISC-V in the next 5 years, especially in China, a big country in urgent need of semiconductors. ”
As early as 2019, Ni Guangnan, an academician of the Chinese Academy of Engineering, had looked forward to the development prospects of RISC-V. He judged that in the future, RISC-V is likely to develop into one of the world's mainstream CPUs, thus forming a pattern of X86, ARM, and RISC-V in the CPU field.
At present, among the 19 senior members of the RISC-V International Foundation, there are 12 members related to China, including Huawei, Alibaba, ZTE, Tsinghua Unigroup Zhanrui and other enterprises, as well as scientific research institutions such as the Institute of Computing and the Institute of Software of the Chinese Academy of Sciences.
The Internet of Things is waking up
Five and a half years ago, when SoftBank acquired Arm for $31.4 billion (about 220 billion yuan), Son Zhengyi expressed his expectations for the Internet of Things on many occasions, "Everything will be connected through the Internet of Things, even a cow can be connected by the Internet of Things."
But five and a half years later, the signals are getting clearer and clearer: Son's "Internet of Things" gamble is a costly disaster. In addition, it distracts ARM from the larger data center market that challenges Intel's dominance.
While Son's vision is in conflict with reality, SoftBank is also quietly revising its expectations for the IoT market.
According to a 2018 report, the IoT controller market will be worth $24 billion and the server market will be worth $22 billion by 2026; however, a report released in 2020 predicts that by 2029, the size of the IoT chip market will be only $16 billion, while the server market (Arm has only had a 5% market share so far) will reach $32 billion.
At the same time, SoftBank also lowered its expectations for the size of the IoT market, from $7 billion in 2017 to $4 billion in 2019.
For SoftBank's huge investment in IoT, ARM co-founder Tudor Brown called it "a strange investment" because "that market will never be profitable." Brown added: "They're focusing on ioT, not the bigger market, the server market. ”
In a filing with regulators last December, ARM made strong arguments against seeking an IPO, supporting a sale to Nvidia and saying shareholder pressure could stifle ARM's ability to invest in data centers and the PC market, which has been "difficult to conquer" and where ARM has made only "limited progress."
ARM added in the filing that open market investors will "demand profitability and performance," which means cutting costs, while a lack of funding means not being able to invest in new businesses.
Today, ARM's incoming CEO Rene Haas said: "We have always believed that selling to Nvidia will give us a great opportunity to invest and do more." But now that we have to do an IPO, I'm very optimistic about the company's prospects. ”
Server and PC are still kings
Rene Haas said its products are "much more competitive" in the data center and automotive space than when SoftBank acquired ARM. "Where to invest, where not to invest, these are things that public companies, even private companies, think about every day," Haas said. ARM is in good shape at the moment. ”
ARM did fix its bugs. Over the past four years, it has increased its investment in the growing server and PC market, winning support from Amazon Web Services (AWS) and Apple. AWS currently uses arm-based third-generation Graviton chips, while Apple is moving its entire family of Mac computers from Intel to its own M1 processor, which is based on ARM's design.
Haas said: "While IoT is still a very important area for us, we are very focused on the computer field (service area and PC chips). ”
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