With its architecture, Arm is gaining dominance in the chip industry, including Apple, Nvidia, AMD, Amazon, and Qualcomm.

Every chip manufacturer has a set of instructions that dictate their product's functionality. Over the past three decades, has emerged as the dominant company in creating this chip architecture, which powers most smartphones today. Apple bases its custom silicon for iPhones and MacBooks on Arm, and now Nvidia and are reportedly making Arm-based PC chips, too.

In September, Arm's successful IPO valued it at over $54 billion, largely due to the increasing number of companies opting for Arm's architecture over its competitor, x86.

Despite exceeding Wall Street expectations in its first post-IPO earnings report, with revenue up 28% on an annual basis during the quarter, Arm shares fell more than 7% in extended trading due to revenue guidance falling short of expectations.

The company, based in the UK, provides licenses for its chip architecture to companies that produce central processing units (CPUs). Additionally, it receives royalties on every chip that incorporates its technology. According to Haas, the number of shipped chips reached 30 billion last year. Its clientele includes major tech and chip companies such as Apple, Nvidia, AMD, Samsung, Intel, and Taiwan Semiconductor Manufacturing Company.

According to Bob O'Donnell, president and chief analyst at TECHnalysis Research, most people initially consider a device when thinking about technology. However, if they are advanced, they may also consider the chip. Yet, they often overlook the company that originated the ideas behind the chip's operation. Once people comprehend the company's role, they are astonished by the impact they have.

Recently, there has been a significant increase in the use of ARM chips, which consume less power than x86-based chips.

Apple, Amazon Web Services, and Qualcomm all use Arm as the foundation for their custom processors, which have replaced Intel chips in Macs, servers, and smartphones, respectively.

In recent years, Arm has faced numerous risks, including a decline in smartphone sales, regulatory hurdles, and a significant portion of its revenue coming from China.

In an interview with CNBC in October, CEO Rene Haas stated that the outcome was not what everyone anticipated or hoped for, but the sun still rises the next day. Therefore, one must learn to move forward and construct from this experience.

CNBC visited Arm's headquarters in Cambridge, England, to discover how it managed to become the year's largest IPO, despite declining smartphone sales and global political instability.

From smartphones to AI

In 1990, 12 chip designers established Arm in a turkey barn in Cambridge. Initially, it was a joint venture between Apple, Acorn Computers, and VLSI, which is now part of NXP.

In 1993, Apple launched its early handheld Newton device on the Arm610 processor, marking a significant milestone for the company. According to Haas, this event embodies the company's core values. He stated, "We were built to run a device on a battery that was low-cost."

In 1998, Arm made its first public appearance and Richard Grisenthwaite was there. That same year, Arm struck a deal with Texas Instruments, putting its processors in early Nokia mobile phones and beginning Arm's climb to become the dominant smartphone architecture it is today.

Grisenthwaite stated that there were approximately 100 individuals involved in the company's transition from focusing on a specific market area to a diverse range of computing environments.

In the 2000s, Arm experienced rapid growth, with the launch of the first touchscreen phones in 2007 and the proliferation of connected home devices in the 2010s.

Arm currently has approximately 6,500 employees worldwide, with the majority located in the UK and about one-sixth in the U.S. The company has offices in Arizona, California, North Carolina, and Texas, as well as locations in Norway, Sweden, France, and India.

In 2016, Arm was acquired by Japan for $32 billion and Haas, who was the president of the IP products group at the time, led the diversification into emerging markets, including AI.

Our primary markets include PC and phone, automotive, data center, and IoT, all of which incorporate AI in some form.

Arm possesses approximately 6,800 patents globally, and there are 2,700 pending applications. Among these are patents for Arm's Neoverse line, which has contributed to its success in high-performance computing and cloud computing, as well as its entry into the AI market since its launch in 2018.

Nvidia unveiled its Grace Hopper Superchip in August, combining its GPUs with Arm's Neoverse cores.

Grisenthwaite explained that by combining Nvidia's technology with Grace Hopper's approach, they can achieve up to 2 to 4 times the performance of an x86 system with the same amount of power.

Cash and competition

In 2020, SoftBank sold Arm to Nvidia for $40 billion, but the deal fell apart eighteen months later due to regulatory interference and opposition from some of Arm's biggest customers, who also compete with Nvidia.

Haas expressed disappointment that the event didn't occur, despite the significant time and effort invested in it.

Softbank announced plans to take Arm public again, with Haas taking over as CEO.

Nearly 25% of Arm's stock price increased during its second public debut in September.

The stock has fallen significantly since then.

A potential threat to Arm's dominance comes from a free, open-source architecture called RISC-V, which has gained support from some of Arm's major clients, including Google, Samsung, and Qualcomm, possibly as they looked for alternatives when Nvidia was considering acquiring Arm.

According to Futurum Group CEO Daniel Newman, RISC-V is currently considered a low-risk competitor.

RISC-V is a few years behind Arm, and it may not receive much attention initially. However, in low-power, IoT, and simpler designs, RISC-V has some potential, according to Newman.

The dominant architecture used for PC processors, developed by Intel in the 70s, is x86, which has a massive amount of software developed for it.

The success or failure of software in the long run is largely determined by the amount of software support it receives. Intel was successful early on because they had a lot of software support for x86.

O'Donnell stated that the traditional server basis on x86 could change.

The server market has undergone a change where the software has been divided into components, such as containers, making it simpler to operate on different architectures like Arm.

In 2018, AWS introduced its Graviton chips to compete with x86 CPUs from AMD and Intel, who are also major players in the market.

Newman stated, "From a mobile, low-power IoT, automotive specialty embedded device, Arm has evolved into a platform for next-generation servers, PCs, and smartphones, all powered by Arm's massive run of silicon."

‘If Apple can do it, can others?’

Apple is the big partner helping Arm break into the laptop market.

In 2020, Apple shifted from Intel x86 processors to its own Arm-based processors in Mac computers, marking a departure from the previous 15 years of use.

In October, Apple unveiled its latest M3 processors and the MacBooks and iMacs that use them. Apple stated that the Arm-based M3 provides the newest MacBook with up to 22 hours of battery life.

Apple's decision to bet the future of the Mac on Arm was a huge inflection for the company, marking a change of the guard. This move raised question marks about Intel's future, as others began to wonder if they too could follow Apple's lead.

In September, Apple extended its deal with Arm through at least 2040.

Although Qualcomm is a major customer of Arm's latest PC processors, their relationship is strained due to a lawsuit over the right to make certain chips with Arm's technology. The issues began after Qualcomm acquired Nuvia, a CPU company, in 2021 and inherited its Arm license.

O'Donnell explained that Nuvia was initially supposed to design a server chip, which led to different terms with them. Qualcomm believed they could have the same terms, but Arm disagreed, stating that companies have different terms. The issue boiled down to legal discussions about what those terms should be.

The case is set to go to trial in 2024.

The automotive industry is experiencing rapid growth in the arm space, with self-driving capabilities and partnerships with companies like Cruise driving this expansion.

Self-driving is one of the most computationally demanding tasks we've ever encountered on Earth, according to Arm's Grisenthwaite. To enable the world's software developers to focus on this challenging task, we must provide a standard platform.

Non-chip companies such as Apple, Amazon, Google, and Microsoft are choosing to design their own custom silicon.

O'Donnell stated that they have a smaller team compared to entire companies built on that. To simplify the process, they need to make it easier. For instance, Arm is beginning to enable the design of multiple components that connect together.

‘China is a good market for us’

Despite the growing presence of companies in semiconductor design, the chip shortage has brought to light the significant issue that over 90% of the world's chips are manufactured in Asia.

Currently, China and the U.S. are imposing export controls on chip technologies, but Arm reports minimal impact from these restrictions.

We always comply with all export regulations as they arise. Of course, we comply. China is a significant market for us, accounting for approximately 20% of our business. Over the years, our focus has shifted from mobile phones to data centers and automotive.

In 2018, SoftBank separated Arm's China business into a separate company called Arm China, which is mostly owned by Chinese investors.

Haas elaborated, "Our distributor arm in China is complemented by an R&D arm that enables the development of products tailored to the local market, some of which are based on Arm technology while others are not."

Despite being fired, Wu refused to leave Arm China for years.

O'Donnell stated that it has been quite chaotic and disorganized.

In China, a group of former Arm China employees are launching a new internal chip design company with government support from Shenzhen. This news caused Arm's stock to drop by over 5%, but O'Donnell stated that it is not an immediate threat.

Chinese companies have longstanding relationships with Arm, so they are likely to want to work there due to the vast software base. Building new architecture requires years of software development.

Arm also faces some risk from the major slump in smartphone sales.

"Although it may seem like we are not as affected as people believe, we have observed an increase in royalty per phone due to the trend of more Arm processors being used in smartphones, particularly in this industry," Haas stated.

The shortage of skilled workers is causing delays at TSMC's $40 billion fab under construction in Arizona, which is a challenge faced across the industry.

According to Haas, the semiconductor industry is facing a tough competition for talent because the demand for semiconductors is predicted to rise in the next 10 to 15 years.

The AVA developer platform was incorrectly described in an earlier version of this story.