Beijing’s long arm is stretching further into the tech sector—whether the U.S. likes it or not.
The latest sign: SoftBank Group’s decision to sell a majority stake in the Chinese operations of its U.K. subsidiary Arm Holdings, which designs the chips that power almost all of the world’s smartphones.
At $775 million, it looks like a steal for the buyers—a Chinese-led consortium that includes state-backed Hopu Investment Management. China last year accounted for one-fifth of revenue at Arm, which SoftBank paid $32 billion for in 2016.
The low price is just one curious element. SoftBank has given few details, but it’s likely the Chinese investors are paying so little because a large chunk of the China unit’s revenue will still flow back to Arm—and hence to SoftBank—through licensing fees and royalties on its semiconductor products.
Of course, those revenue isn’t really what Beijing has its eyes on. It wants China Inc. to get its hands on Arm’s cutting-edge intellectual property. Many of China’s notable industrial successes of recent years—its expansion of high-speed rail and nuclear power, for instance—have been powered by technology transfers.
Now the government is desperate to accelerate development of its own chip industry. The near collapse of telecoms company ZTE after the U.S. cut off its supply has only deepened that desire.
SoftBank may have had little choice but to sell: China is a huge market for Arm and other companies the Japanese conglomerate owns, so keeping Beijing happy is imperative. SoftBank already has strong links to China: It owns around a quarter of e-commerce giant Alibaba and has a piece ride-hailing firm Didi Chuxing.
For the U.S., though, the deal poses a new challenge. Washington may have done its level best in recent years to block Chinese tech-sector acquisitions, while railing against what it calls China’s intellectual property theft.
The reality is that China has plenty of places to find the technology it needs. Given that SoftBank—which runs the $98 billion tech-focused Vision Fund—is a big investor in U.S. companies, it could even do future deals by which U.S. technology indirectly ends up in Chinese hands.
With its sale of the Arm China unit, SoftBank has exposed a sore spot for the U.S.
Write to Jacky Wong at JACKY.WONG@wsj.com