Imagination May Face Wider Risk of IP Sales to China

Article By : Nitin Dahad and Barb Jorgensen

Imagination Technologies’ now-defunct plan to add four Chinese investors to its executive board has touched a raw nerve in the UK...

Imagination Technologies’ now-defunct plan to add four Chinese investors to its executive board has touched a raw nerve in the UK and triggered a series of events leading to a full-blown government inquiry. In a three-hour hearing before the UK parliament’s foreign affairs committee, three Imagination CEOs, past and present, were grilled in a public battle to preserve the IP developer’s legacy.

The public debate centered around the suitability of Imagination owner Canyon Bridge Partners’ attempt a few weeks ago to add new Chinese directors to the board, and the government’s role — if any — in protecting home-grown intellectual property (IP).

Tech industry executives watched the live online event as factions within Imagination’s past and present senior leadership defended their business strategies. Imagination’s revenue has steadily declined since 2017, and its recovery path has pitted former CEO Hossein Yassaie, Black and Rayfield against interim CEO Ray Bingham, who favored the involvement of Chinese backers.

Imagination, licensing, IP, UK, China
Ray Bingham

None of the issues were resolved. The committee tried to unravel the drama that sparked the questions — the departure of CEO Ron Black and senior executives John Rayfield and Steve Evans, and fears that Imagination would relocate to China.

The bigger picture — IP licensing and security risks represented by China — isn’t unique to the UK. Electronics companies view the lucrative Chinese electronics market as fiscal salvation; governments greet China’s foreign-investment plans with suspicion.

During the hearing, the committee was intent on rigorously examining how the UK’s Foreign and Commonwealth Office (FCO) could assess whether a potentially hostile party is seeking to secure significant influence or control over a UK company; and in what circumstances the FCO should intervene. It also wanted to focus on what safeguards are required in its forthcoming national security and investment legislation to ensure that the FCO has a full role in the decision-making process and is able to intervene when necessary.

Imagination is a great case study for them to strip bare and examine, and it suited the protagonists’ agendas seeking to protect their reputation and legacy. The “China as a security risk” narrative suited that agenda nicely.

Here’s what we know so far
Venture firm Canyon Bridge Partners acquired Imagination in 2017, relying on money from a fund backed by the Chinese government called China Reform Holdings. Imagination’s profitability had been declining and China was seen as an avenue for growth. Canyon Bridge and Imagination management were receptive to China Reform’s offer to get the company back on track.

The results were mixed. Recently, Imagination appointed four people from China Reform to its board. The appointments were reportedly intended to tap China Reform’s experience and expertise in the Chinese market. From the outside, it looked like China exerting undue influence on Imagination. Internal and external pushback was immediate, said Bingham, and the proposal was scrapped. The FCO committee probed the timing of the events — was the plan abandoned before or after Imagination attracted public scrutiny? Notably, there was little discussion of the company’s strategy to return to growth.

The bigger picture

Imagination, IP, license, security, UK, China

The semiconductor industry supply chain and the position of IP vendors (Image: Imagination Technologies)

There are several bigger picture issues here. Intellectual property (IP) licensing evolved as a business model over the years as the semiconductor industry disaggregated. The fabless chip industry evolved with players like Arm, Ceva and Imagination emerging as specialists in particular design elements, licensing their blocks or cores of IP to chip companies.
As Woz Ahmed, chief of strategy for Imagination Technologies, highlighted in his briefing paper to parliament this week, fabless companies have emerged in many countries across Europe, USA and Asia. He explained that Imagination’s business model — like other fabless companies — is the licensing of pre-designed and pre-verified blocks of hardware IP together with software drivers that licensees integrate within their overall chip designs. Customers pay an upfront license fee and per-unit royalties when the chip enters mass production.

The IP licensing sales cycle can take six- to 18 months. Many fabless semiconductor companies therefore can go for long periods where they constantly have to raise money, until the point when they receive cash from the closure of a licensing deal.

In the current climate, the major global market opportunity for many companies is China. The nation has huge amounts of money to invest in everything from processing to connectivity IP, because of the growth of applications needing connected devices with increasing artificial intelligence (AI) built in; and the push for internet of things (IoT) connected industries, enterprises, and smart cities. As many companies tell EE Times, “China is a major growth opportunity and China has the cash to spend.”

IP development has also become a global industry, as illustrated in another chart from Ahmed’s paper.

Imagination, UK, IP, licensing, China
Imagination Technologies’ development centers around the world (Image: Imagination Technologies)

China, China, China
It’s not just IP companies that see China as a big market. Apple is banking on China for its upcoming 5G smartphone and sales growth via companies like China Mobile.

The dilemma is the tech industry needs China and China needs international tech. Some companies privately say that the political rhetoric with China hurts their opportunities; and for the smaller startups, their potential to sustain themselves or even survive.

But there is the constant fear from governments that China poses a security risk. Neither side in the Imagination hearing was able to throw any light on that. Both sides had reason to be guarded, given the sensitive nature, but that didn’t stop the politicians asking the incisive questions about Imagination’s IP; whether it could be copied by the Chinese; and whether the Chinese ownership of Imagination posed a security risk.

Like many nations, the UK is trying to strike a balance between government oversight and free enterprise. On the surface, Yassaie appears to object to the Chinese ownership, having spoken out against China Reform’s taking control of Imagination. What is surprising is while the acquisition Imagination took place in 2017, he has only spoken out now, contending that the company’s IP is strategically important to the U.K.

Ron Black, Imagination’s newly-departed CEO, pointed to security measures in the US to guard against bad actors. Every company faces managing and mitigating risk in policy development, he said. “There’s a line between what’s OK and what’s not OK, but much of this is tied to business. You really need a risk assessment framework.”

Consideration, he said, should be given to issues of foreign control — are there multiple sources for the technology or is it proprietary? What’s the technology’s impact on the national economy? And what measures can be taken to discourage nefarious behavior? A public framework alone could put bad actors on notice, Black said.

Black’s comments are rather ironic, given that he himself licensed Rambus’ resistive random access memory (RRAM) technology into China through Reliance Memory, a joint venture with GigaDevice, in May 2018. Gaining access to Chinese markets and customers this way is common for IP companies. Arm also needed to go this route, it told EE Times in 2018:

“Chinese organizations prefer to acquire technologies that have been fully developed by Chinese companies. With this JV’s establishment, which will enable Arm-based semiconductor intellectual property to be tailored for the Chinese domestic ecosystem and makes a broader portfolio of technology accessible to Chinese partners for China market needs”. 

Similarly, RISC-V processor vendor SiFive has established SiFan in China through which it accesses the China market.

The FCO committee members reiterated concerns that China gains access to Western technology through acquiring or investing in foreign companies. Such skepticism may be valid.

During January to April 2020, research firm GlobalData found 57 Chinese outbound M&A deals worth US$9.9 billion; and foreign investment worth US$4.5 billion. Targets were distressed companies in Hong Kong, the US, the UK, Germany, France, Canada and India.

“Chinese companies’ acquisition of distressed foreign assets […] remains an area of concern with governments across several countries tightening their foreign direct investment (FDI) policies, said Aurojyoti Bose, GlobalData’s lead analyst. The European Union was among the forerunners in tightening scrutiny of foreign investments.

A precarious balance
It’s fair to conclude that companies are walking a tightrope between balancing the need to do business with the need to be sensitive to political intervention that could scupper deals and cash flow. In the US, the Committee on Foreign Investment in the United States (CFIUS) deals with this issue, often on the basis of deals that pose a national security threat.

Given that UK fabless semiconductor companies rely on overseas customers, this additional bureaucracy could, if implemented, simply encourage startups and smaller IP companies to move elsewhere where governments might be more pragmatic.

Unfortunately, despite Imagination’s protestations in its parliamentary briefing papers that its IP posed no threat to UK national security and it had no intention of relocating to China, the FCO did not appear satisfied.

The committee will be seeking evidence through May 29 regarding the government’s role in foreign acquisition of UK companies; a framework for security risk assessment; appropriate circumstances for intervention; and safeguards that may discourage foreign bad actors.

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