Opinion: As ARM enjoys a Japanese embrace, the lessons it can teach UK tech firms

When the 12 founding engineers of chip designer ARM Holdings met in a 14th century barn near Cambridge in 1991 to welcome their new CEO, (now Sir) 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 they would aim to become a global standard. They set a target to embed ARM designs into 100m chips by the year 2000. It was an ambitious goal for a tiny company with only £1.32m of investment from its then-struggling backers Acorn, Apple, and VSLI. At the time, many said it was no more than a pipe dream.

But this week, ARM agreed a US$32 billion sale to Japan’s Softbank. ARM’s chip designs are embedded in more than 95% of the world’s mobile phones, as well as 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. 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.

Workhorses

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 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 aren’t 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.

Growing the market

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 your 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, it’s 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.

The SoftBank takeover is certainly not evidence that life will be rosy if and when the UK leaves the European Union. 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’s 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 multi-national 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% premium over ARM’s share price before the deal was announced, Softbank’s acquisition looks like a smart move.

Peter Williamson, Honorary Professor of International Management at Cambridge Judge Business School, University of Cambridge

This article was originally published on The Conversation. Read the original article.

The opinions expressed in this article are those of the individual author(s) and do not represent the views of the University of Cambridge.