At the Crayfish China Semiconductor Roundtable, Tudor Brown, ex- President & Co-Founder of Arm, shared his views on the outlook for doing business in China’s semiconductor industry with Ting Zhang and the audience of CEOs of leading UK and European companies. Here is a summary of Tudor’s talk in a Q&A format, covering how Western companies could still remain competitive in the context of China’s rapid development, and giving some quick advice on balancing IP protection with risk-taking and relationship-building.
Tudor: The political approach to lock down major cities like Shanghai is causing China a major problem that's going to be with us for quite a while because of the big effect on companies operating in China. It's also going to have long-term effects on the global supply chain, bigger than the glitch we had with the Wuhan outbreak over two years ago. Finally, the complexity behind the Ukraine crisis and how China is dealing with it is going to have ramifications but right now there's no point in speculating which way it will flip so just think of it as a very unstable short-term issue.
It's very difficult to predict the future of course but it's very clear to me that we've got a few months of complete chaos ahead of us, in terms of how difficult it is to just move stuff around (especially Shanghai and Taiwan) and therefore to keep production lines running is the short-term thing. China has shown an ability to bounce back from such problems quite quickly so if we look a bit further than that (putting Ukraine aside) I think the outlook is still very good. As Ting mentioned, China is massively building huge capacity in semiconductors that is matched by massive growth in its markets. There is lots of innovation going on in China and so the Chinese market is going to continue to grow.
Tudor: The semiconductor industry is 50 years old or so and we can all look back proudly and say we've been part of the most innovative and fast-moving industry ever and that's continuing. We're not just talking about semiconductor fabrication getting smaller and smaller and hitting limits and whatever, we're talking about innovation, AI, new software approaches, new server approaches, and all sorts of issues. This industry is continuing to evolve faster than any of us actually personally can imagine.
With the announcement made by XI for the 2025 China policy, China is trying to become self-sufficient just like what Korea did back in the 90s. Western companies need to be aware of China's fast-growing technology, but I think it would be very short-sighted to say there's no opportunity for Western companies or that Chinese companies can become a threat in a few years. If we're nimble and stay ahead there are good opportunities for Western companies and Chinese companies to work together to do something special.
Always be aware that there's this danger they're going to try and design you out, but that is the nature of our business. You can't take anything for granted but you have to use those opportunities to try and work with people and drive forwards. Wherever there is growth, there always is the opportunity. We're all fortunate to be in a market that is fundamentally growing and changing and adapting and there are so many places where we can push and find new niches. I see it as a massive opportunity for people in the west dealing with companies in China.
Tudor: For the past 20 years, EDA (electronic design automation) and a lot of the software tools we all rely on to build anything are all American-based, and in recent years America has started to use its extraterritorial powers to great effect. Therefore America acts as a hook to control the distribution of that software meaning they have the ability to control what Chinese companies build and do and in fact, this has severely curtailed their activities.
There is a huge effort within China to build a parallel toolchain although it might not be mature now. Yet, based on the investment ability, given the cleverness of a lot of Chinese people, their mathematical abilities, and the fact a lot of them have worked in America, I am convinced that the Chinese toolchains will be as good as America or possibly even better in 10 years.
Whenever you design something from scratch you can often do it better and it wouldn't surprise me that you'll see improved tools from China over the coming years but it's not happening yet. This is the only way companies like Hisilicon are going to be able to start manufacturing silicon again and that's fundamental to their existence so it's going to happen.
Tudor: I think the main defense against IP issues is to build a personal relationship and make it fundamental to your business transaction. However, the language barrier and pandemic issues make it harder for us to visit China at the moment. A video meeting as often as you can is the only way to keep the personal relationship going.
You can't just sell something and expect your customers to pay your royalties forever but what you can do is keep innovating and building a better product that will make your customers return and keep buying from you. So your own road map is absolutely fundamental to protecting your IP. Keep evolving and staying ahead in your industry area would be the best answer to your concern.
Obviously depending on what you're selling there is a different amount of technical disclosure required depending on what it is your actual product and there are cases where actually you don't want to tell the customer what's going on or what's inside or whatever the secret source of what you have maybe black boxes however you want to describe this.
There are ways in which you can avoid reverse engineering by not allowing reverse engineering technically and contractually. Whether these actually hold is a separate issue and at the end of the day you have to know what's going on in your customer so when you find a customer is starting to do things that are a bit outside of the contract you've got to clamp down on that. So try to build your contracts as a fundamental document for how you expect the relationship to be going forward but at the same time carefully monitor that through personal relationships.
Once we licensed something to a major Asian OEM and very quickly we learned of a parallel activity within that customer that was clearly illegal. Through personal relationships and persuasion, we convinced them this was a really bad idea for our future together. But it's only by knowing what's happening on the ground so your intelligence of what's happening in your customer base is really important and it comes back to this issue that you've really got to double down on the efforts of communication both within your own people and then into your customer base to try and understand what's happening.
Tudor: first and foremost you have to build trust in your local management or directors and they in turn use your company culture to build trust with their staff and the local team. This is fundamental because your local team is working for you, not for China. You have to instil in them the culture that it's important their survival and their remuneration and everything else is dependent on your company doing well there's again nothing unique about that.
Depending on your product and the amount of technical disclosure required, you can adjust the system that your team can access. For example, you can allow your team to use the certain software/product needed to resolve customer issues but not allow them to make any changes. But you can’t just keep everything away from your local team. They are the team who work directly for you and communicate with the customer. Contracts will also help control and build your expected relationship between you and your local team to prevent them from crossing the line.
Tudor: Pandemic issues stopped us from traveling but in the meantime gave us more time. I would suggest increasing informal communication with your customers. For example, a phone call or maybe a WeChat message just to keep in touch with them. Having scheduled meetings every month is not enough for bonding the relationship. A quick chat would help you to catch up on what is going on and improve the communication rather than keep waiting for the scheduled meeting.
It’s also not a problem for western people like me to communicate with Chinese people through WeChat. Although the functional language is Mandarin I can have it translated through WeChat translate. So I don’t see language as a barrier. The most important thing is to give back more time and communicate more frequently. Every little bit helps!
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