Arm has awkwardly become a lifeline for the Huawei cloud

The servers that store the world's information usually come with chips built by AMD or Intel, based on the latter's x86 architecture. But the data center Huawei opened in Moscow last summer was untypical. Cut off from those suppliers by US sanctions, the Chinese vendor had turned instead to Arm, a UK-based company whose blueprints commonly feature in smartphone design. As sanctions now target Russia, Huawei's Moscow data center has suddenly assumed a more critical role.

The cloud business this sort of infrastructure underpins now appears to be thriving. Huawei does not break out results and has yet to publish headline figures for 2021, but the enterprise unit that includes cloud grew sales by 23% in 2020, when total revenues increased just 4%. Canalys, a research firm, reckons it is already the second-biggest cloud provider in China (behind Alibaba), with about 17% of the market.

Outside China, Huawei's cloud momentum has been documented by the Center for Strategic and International Studies (CSIS), a think tank based in Washington, DC. According to CSIS data published in May last year, Huawei had then managed to land 70 deals spanning 41 countries with governments or state-owned enterprises. Most are in developing and illiberal economies. As the West squeezes Huawei out, countries less zealous about democracy are welcoming it in.

Figure 1: Huawei rotating boss Guo Ping said the enterprise business saw 'solid growth' in 2021.
(Source: Huawei)

That worries US critics of Huawei such as Senator Tom Cotton and Member of Congress Mike Gallagher. In a letter written last September to Anthony Blinken, the US Secretary of State, they expressed concern that China might be able to obtain information about Americans who visit or work in countries where Huawei Cloud is active.

John Strand, an outspoken Huawei critic who runs the Strand Consult advisory firm, shares those fears. He believes the US has been distracted by its campaign to expunge 5G networks of Huawei products. "Huawei in the cloud obliterates any security which could be achieved by removing Huawei in the mobile network," argued Strand in a research note written this month.

Arm and dangerous

The Western backlash against Russia following its invasion of Ukraine leaves a telecom and cloud vacuum that Huawei may be eager to fill. Unlike Ericsson and Nokia, its 5G kit-making rivals, Huawei has not suspended product deliveries to Russian customers. Yandex, a Russian cloud company, has already been hurt badly by European and US sanctions. On March 3, it warned investors that bankruptcy is a possibility and said its current technology supplies will last for the next 12 to 18 months.

"In the event of any prolonged suspension of supplies of hardware, software or other technology used in our business or offerings, if we are unable to secure alternative sources, our operations could be materially adversely affected over time," said the company in a statement published on its website.

Provided a Chinese foundry can produce the chips, Huawei's Arm pivot seems to place it outside the reach of US sanctions. For a while in 2019 Arm looked set to join US chipmakers in stopping sales to Huawei. According to a BBC report at the time, a company memo indicated that some of Arm's designs include "US-origin technology," subjecting them to US rules. Yet Arm appeared to change its mind just a few months later, deciding the important designs were of "UK origin" after all. The relationship with Huawei has continued.

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It is partly why Arm's share of the data-center market doubled last year. "About 5% of all servers shipped in 3Q21 had Arm CPUs [central processing units], and it was in just 2.5% of servers at the end of 2020," said Manoj Sukumaran, a principal analyst with Omdia, a market-research firm (and sister company to Light Reading).

Prevented from buying US chips, Huawei has channeled resources into an Arm-based alternative branded Kunpeng for its own cloud business. "They sold off their x86 business in October because of US sanctions and are now fully focusing on Arm servers," said Sukumaran.

Nvidia and beyond

Perhaps no company was more relieved than Huawei when a proposed $40 billion takeover of Arm by Nvidia, a US chipmaker currently valued at more than $610 billion, fell through last month. Under the ownership of an American firm, Arm might have been stopped from offering its blueprints to the Chinese kit vendor. The deal ultimately collapsed because of regulatory opposition. Arm would lose its status as an independent licensor if it was bought by one of its licensees, watchdogs believed.

Yet the likes of Cotton and Gallagher cannot be happy that a British firm owned by Japan's SoftBank has become the motor fuel for Huawei's cloud expansion in Russia and other illiberal markets. Arm did not respond when asked if it had come under recent US pressure to strike Huawei off its customer list, a move that could devastate other parts of the Huawei business.

If it did, though, Huawei would have no mainstream option for server chips. It appears to have been experimenting with RISC-V, an open source alternative to Arm and x86, out of concern that Arm might eventually be cut off entirely. But RISC-V today has negligible support from the hardware community and zero presence in servers, according to Sukumaran's data.

Since the collapse of the Nvidia deal, Arm's future has been uncertain. In its last statement in early February, SoftBank, which acquired Arm for about $32 billion in 2016, said it would begin preparations for an initial public offering in the next year. This week, reports surfaced that Arm intends to cut 1,000 jobs ahead of that move, about 15% of the total. What happens with Huawei could have a big impact yet.

Update. Arm subsequently responded with the following updates about its business in Russia: "As a global multinational, Arm is committed to compliance with all export controls and economic sanctions applicable to the countries and territories in which Arm operates. In compliance with the export restrictions and economic sanctions announced by the UK, EU, US and other governments, Arm has suspended delivery of products and support to customers and partners in Russia."

On the matter of its dealings with Huawei, Arm said: "We cannot comment on specific partners. Arm remains committed to compliance with all export controls and economic sanctions applicable to its business globally."

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— Iain Morris, International Editor, Light Reading