20 Jul 2016   |   Viewpoint

How to grow a new ARM in Europe

Its imminent sale to Japanese technology giant Softbank is a good time to reflect on some of the reasons chip designer ARM Holdings became a global phenomenon, says Peter Williamson of Cambridge University’s Judge Business School

When the 12 founding engineers of chip designer ARM Holdings met in a 14th century barn near Cambridge in 1991 to welcome their new chief executive Robin Saxby, he asked them a brutal question: “Should we strike out for something, or just be in the hand-to-mouth chip design consulting business?”

With Saxby’s enthusiasm and the founding engineers’ belief in their technology, the team decided the aim would be to become a global standard. They set a target to embed ARM designs into 100 million chips by the year 2000.

It was an ambitious goal for a tiny company with only £1.32 million of investment from its backers Acorn, Apple, and VLSI Technology. At the time, many said it was no more than a pipe dream.

But this week, as ARM agreed a $32 billion cash sale to Japan’s Softbank, its chip designs are embedded in more than 95 per cent of the world’s mobile phones, and in tablets, servers, and many other types of smart devices.

Last year, ARM’s designs went into some 15 billion semi-conductor chips. An incredible feat from an inauspicious start.

Lessons for other tech firms

So what lessons does ARM’s success have for other budding British technology companies?

The first is don’t try to do everything yourself. Instead, specialise in the activities where you have a distinctive advantage. In ARM’s case, that was designing capable, reliable chips that used little power and could be manufactured efficiently in volume at low cost.

Then, catalyse the development of a network of partners around you who will fill in the gaps and make you successful as they strive to grow their own businesses.

ARM broke the mould at the time, abandoning the conventional wisdom that to succeed in semiconductors you either had to be a vertically integrated company which made huge investments in wafer fabrication such as Intel, or remain as a small band of design consultants.

Instead, it decided to become a “chip-less, fab-less chip company.” It would specialise in designs for Reduced Instruction Set Computing (RISC) chips, the workhorses that control all the background activities users are not even aware of.

But instead of being a small, specialist provider of designs for RISC processors, ARM was able to turn itself into the pivot of a huge ecosystem, becoming the “glue” that bound a network of hundreds of partners together, as well as a magnet for knowledge fragmented between different players.

These include phone and tablet makers, chip fabricators, tool developers, software providers, and makers of complementary chips.

Lesson one, therefore, is focus on your core and harness the power of ecosystem partners to do the rest.

Build the ecosystem and think global

That leads on to the second lesson: concentrate what you can do to make the overall ecosystem “pie” bigger, rather than worrying about maximising your share of that pie.

Given the difficulties of scaling up a technology company from a UK base, ARM shows the benefits of letting ecosystem partners drive global scale for you, propelling your product into billions of devices and accumulating a small royalty from each, to create a massive flow of cash.

The third lesson is to think global from day one.

ARM grew with hardly a single customer in the UK. It realised that the volume and the lead customers driving the direction of its industry, were scattered around the world.

So, from the outset, its early customers and partners were in the US, Japan and Korea, including Texas Instruments, Sony and Samsung. Later, a few were added in Europe, such as ST Microelectronics and Nokia.

ARM had to be global almost from birth. Now clients include leading Chinese players such as Huawei and ZTE.

Life not rosy post-Brexit

The SoftBank takeover is certainly not evidence that life will be rosy if and when the UK leaves the EU.

In fact, the deal probably has more to do with the decline in sterling relative to the yen and the dollar, which has made ARM shares cheaper for foreign buyers.

Add the fact that ARM has hardly any customers in the UK and few in Europe; most of its sales are in Asia and the US. As a result, it is pretty well insulated from a downturn in the UK economy.

The genuine threat from Brexit would come from any future restrictions on migration. ARM has a very multinational army of engineers and faces an extreme shortage of suitably trained developers in Britain.

Any problems here, and SoftBank’s soothing words about maintaining and growing ARM’s presence in the UK might fade into history.

But ARM is also attractive to the Japanese firm because it has the potential to become a major player in the “Internet of Things” – the emerging world where smart machines, sensors, and devices talk to each other. It is another lesson for UK tech firms to keep moving into new spaces.

ARM is particularly well placed to benefit from this emerging network, not only because of the strength of its technology and development capacity, but also because its ecosystem approach is a perfect fit for a market that requires a multitude of specialist companies, institutions and governments to work together. Even at a 40 percent premium over ARM’s share price before the deal was announced, Softbank’s acquisition looks like a smart move.

Peter Williamson is honorary professor of international management at Cambridge Judge Business School, University of Cambridge. The original posting is here.

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