Arm’s CEO doesn’t expect global chip production to ramp up any time soon

On this week’s episode of Fortune’s Leadership Next podcast, co-host Alan Murray talks with Rene Haas, CEO of Arm, about the role geopolitics and the pandemic played in slowing the global supply chain of semiconductor chips.

“The pandemic really turned a lot of things on its side relative to demand projections, models in terms of how many products were needed, what were the lead times, et cetera, et cetera,” Haas says. “And then, when you layer on top of that the fact that it just takes one local government to shut down a certain region of a country, the next thing you know, a critical supply component that goes into a device can’t get outside that [region].”

Murray and Haas also discuss what goes into ramping up chip production, what countries need to do to make sure the shortage doesn’t happen again in the future, and the reasons Nvidia’s planned acquisition of Arm in 2020 didn’t pass muster with the U.K.

Listen to the episode or read the full transcript below.

Transcript

Alan Murray: Leadership Next is powered by the folks at Deloitte, who, like me, are super focused on how CEOs can lead in the context of disruption and evolving societal expectations. Welcome to Leadership Next, the podcast about the changing rules of business leadership.

I’m Alan Murray here with my incomparable co host, Ellen McGirt. I’m running out of adjectives here, Ellen.

Ellen McGirt: No, no, no, no. I will provide you a list of superlatives so you always have one at your fingertips. I really appreciate it. My fragile ego really needs it.

And I will tell you something else, Alan—I have talked more about semiconductors in the past two years than in my entire history as a reporter, which has been a wonderful thing, because they have long been an essential ingredient, but now, now they really help the world manage incredible stakeholder issues going forward. So I’m very excited for this conversation today.

Murray: Yeah, and in some ways, our guest was the perfect person to talk about it. He’s Rene Haas. He is the CEO of Arm. Arm is a company that designs computer chips, it doesn’t actually make them. But what makes arm such an interesting player is that it’s kind of neutral. It’s like the Switzerland of computer chips. And at a time when computers become like the new oil, really caught up in geopolitics, he has a perspective on all the players and on the global scene that is very, very interesting. So it was great to have an opportunity to talk with him.

McGirt: I also learned in advance of this interview that while people may not be immediately be familiar with the company, that more chips based on Arm technology are shipped each year than from better known brands like Intel or Nvidia. And Arm is also known for designing power efficient chips, which likely sets up well for our net-zero future. And also they’re probably in that siren that you can hear outside my window right now.

Murray: Ellen, I hope those sirens aren’t coming after you.

McGirt: Well, I’m in New York. They’re never personal here, but I’m usually dialing in from somewhere like my basement in suburban St. Louis, where all you hear are chipmunks. So I apologize for that. All right, Alan, what was the big thing that you wanted to get with Rene, like from that conversation?

Murray: Well, part of what made the timing of this interesting is this conversation happened at our conference in Aspen, Colorado, Brainstorm Tech. Rene was there speaking. But part of what made this interesting is that Arm spent much of the last two years in this stance with Nvidia, they were talking about a possible merger. It actually ended in part because of pressure from governments that didn’t want it to happen, including the U.K. government, where Arm is currently based. So a lot to talk about how the semiconductor business has become a center of geopolitics.

McGirt: He’s still a relatively new CEO, right? He just became CEO this year?

Murray:  February. That’s right. He’s been in the industry for many years, which gives him a good perspective. But he just took over this job earlier this year. Let’s hear what he had to say.

[Music]

Why don’t we start out by telling our listeners what Arm is and what Arm does, because it’s a little bit different.

Rene Haas: It is. And Arm is a company that, when I explain it to my kids, friends or, or relatives, try to explain what exactly that we do, it’s not an easy explanation. The best way to describe it is, we sit inside the semiconductor supply chain, so anyone who’s making a chip typically needs to have some design that goes inside that chip. And we provide that design, the blueprint, if you will. And the primary blueprint that we provide is for a microprocessor. We also do graphics processors and other pieces. But what we do is, we do the design, and we then grant the rights to the silicon partner or the chip company to build a chip using our design. So we don’t build anything, yet our designs, our IP if you will, sits inside all of these chips. And as you said when we started, someone, somewhere is probably using Arm—anyone who’s listened to this podcast.

Murray: Which is why I was really eager to have you on this podcast, because someone has described you as kind of the Switzerland of the semiconductor industry. But the semiconductor industry has become such an important part of our lives and increasingly is entering geopolitics, and is obviously a big part of supply chain problems, and whether you can get your new car, and so forth. What’s going on with supply chains? Are we near the end of the problem? What is it going to take to provide the world with the chips it needs to do all the things that people are demanding?

Haas: I don’t think we’re at the end, personally. So it’s obvious now that the pandemic accelerated a number of trends including the digitization of everything, and semiconductor products that we talked about are everywhere, whether it’s our phones, our TVs, our cars, the data center. Everything has chips inside them, and it’s increasingly so. There are so many things that now that we do with our phones—take, for example, you know, checking in for this conference, having to have the app, having to have the the vaccine, all the things required to it. Your phone is your heartbeat around that. So increasingly, we see semiconductor use everywhere. So I think the demand cycle is very, very strong, and it’s quite secular in terms of all the different markets.

Now when we get into the supply side, my personal opinion is that I think we’re going to see bumpy waters for a while. And I think COVID is a big reason for that. The pandemic really turned a lot of things on its side, relative to demand projections, models in terms of how many products were needed, what were the lead times, et cetera, et cetera. And then when you layer on top of that, the fact that it just takes one local government to shut down a certain region of a country that the next thing you know, a critical supply component that goes into a device can’t get outside that…

Murray: That doesn’t sound like an abstract example. That sounds like a specific example you’re referring to…

Haas: It’s a very real example right? I mean, if you look at the the lockdown in Shanghai, for example, the Shanghai port being locked down, then you have container ships that can’t get products out. And it just takes one small device in that value chain to interrupt supply. So I personally think, Alan, we’re in it for a long time. And if you step back for a second, in 2018, 2019, we were seeing the increased demand for all types of semiconductor products. And we were operating what I would call a pretty flat world. Supply chains were flat, no interruption of supplies, certainly no pandemic, and then the pandemic hit in spring of ’20. Here we are in July of 2022, and we’re not back to normal. There are still areas of the world that are that are not operating as normal. So I think until that settles itself out, and models can be built again in terms of what the real supply and demand curves are. I think we get back to a new normal.

Murray: And getting new capacity online is not a simple matter. It doesn’t happen overnight. It’s a couple of years right to get new fabs into operation.

Haas: New fabs take a number of years. Fabs take time to build. The equipment to go into the fab takes time to build. Then you have other parts of the supply chain, the substrates, the packaging everything that needs to line up around that. At the same time, you have to increase demand for more and more, more and more chips, and increasingly, these chips are requiring the most advanced nodes, because the compute power is going up—the amount of computing you want to do in the data center or the automobile. So I don’t see us out of it for for some time.

Murray: And so, overlaid on all of that, you have geopolitics, increasingly, and I think the Russian invasion of Ukraine has only heightened this anxiety. You have people like Pat Gelsinger of Intel saying we have to make chips here in the U.S. You have people in Europe saying the same thing. But there’s a great deal of concern about the fact that such a large percentage of chips are currently made in Taiwan, and Taiwan is kind of a disputed area. Every company—many companies, let me put it that way—I know many companies, after the Russian invasion of Ukraine, were war-gaming: What if this had been Xi going into Taiwan? How would we deal with that? I described Arm earlier as the Switzerland of the chip industry. But I wonder how you view the increasing geopolitical significance of this industry.

Haas: Well, it certainly points to the single point-of-failure concept that you really want to have a geographic distribution of manufacturing, because everyone in the world uses chips. Chips are ubiquitous in terms of all the products that we build, and increasingly, our lives depend on chips. So if that is the case, you want to have leading, leading-edge fabs and semiconductor processing, and equipment, and packaging, frankly, in all parts of the world. So the CHIPS Act, it’s good for the United States. It’s also what Europe is doing, is very, very good. I think other parts of the world, 50 years from now, it would be amazing to see world-class fabs in Africa, and in India, and in Europe and the United States and Southeast Asia. I think ideally, you want to have a very, very wide distribution. So as to your point that geopolitics don’t really come into factor relative to supply.

Murray: We just got too heavily concentrated in one little country, right? Taiwan?

Haas: Years ago, it was much more evenly distributed. And now it’s not not quite so much. And then when you layer on top of that, the capital expenditures required for these new factories are very, very significant. And that’s where some level of funding that takes place from governments, I think is going to be is going to be needed, quite candidly.

Murray: From a business standpoint, you don’t care where the fabs are—you’re supplying technology to all of them.

Haas: We’re agnostic as far as that goes, and any fab, whether it’s advanced five nanometer or three nanometer or older nodes, like 14 and 28, wherever they are, they’re probably using Arm somewhere. So we we build our technology such that we can go into literally any process in any fab across the world.

Murray: And so I think that gets to the deal that fell apart. Nvidia was going to buy Arm. Nvidia makes high-end computer chips itself. What happened?

Haas: So that deal was signed in September of 2020, which seems like…

Murray: You weren’t CEO.

Haas: I was not CEO, and one of the ironies of that whole deal was, I’ve been with Arm about nine years now. But prior to that, I spent seven years at Nvidia, so I knew the video folks really, really well. And when that transaction started, we were already in kind of bumpy, what I would call geopolitical times. And those times really only got bumpier, you know, quite candidly, new leadership in Washington, new leadership in the FTC, the U.K. took a very, very strong voice…

Murray: Which is where you’re based.

Haas: …which is where we are based, the U.K. C.M.A. [Competition and Markets Authority], and then the European Commission. So what we found was the regulatory climate—and I think when when the deal was consummated, we knew that it was going to take a lot of work to get it through, but we all thought it would get through—I think the regulatory climate, you know, candidly, Alan, became much more difficult throughout that transaction.

Murray: Was it the U.K. regulators who were the determining regulators? They wanted Arm to remain a British company.

Haas: All of the jurisdictions, whether it’s the U.K., the European Commission, the U.S. FTC, required a lot of detail. There was a tremendous amount of information that had to go back and forth, and we didn’t end up getting approvals in any of those jurisdictions. And we actually never even got to China. So the way these deals get approved is, you need every single jurisdiction to say, okay, you need approval in the U.K., Europe, U.S., and then China, and the deal we were saving China for last, China was gonna be the last one, and all three parties decided at the end of last year, early this year, that they have some conversations about potentially calling the deal off, which we did in February of this year.

Murray: And so now Softbank, who is your major investor, has said that it wants to do an IPO. Why would you in what is arguably the worst IPO market we’ve had in a couple of years, why would you do it now?

Haas: I’ll pull on my safe harbor hat here for a second back to… when we announced the end of transaction, Softbank and Masa Son said that the intent was for Arm to go public, and the intent was for that to happen sometime between that time and the end of our fiscal year, which is March of 2023, so that’s when our fiscal year ends. So that is the timeline that he’s put out. And I’m not able to say too much more beyond that. That the timeline that we’re talking about publicly.

Murray: Okay, we’re going to watch that one closely. We’ll stay tuned. Either you are going to be a true unicorn going out into a market that nobody else is willing to venture into, or we may have news to come about at Deloitte, but I won’t push you on it. I get it.

[Music]

I’m here with Joe Ucuzoglu who is the CEO of Deloitte U.S. and had the good sense to sponsor this podcast. Thanks for being with us and thanks for your support.

Joe Ucuzoglu: Thanks, Alan. Pleasure to be here.

Murray: So this new wave of business technology, artificial intelligence, Internet of Things, the ability to make intelligence out of data, is creating huge opportunities for companies. But a lot of the CEOs I talk to feel daunted by it. It’s like where did they get the imagination to rethink their entire corporation? How do they deal with that?

Ucuzoglu: The opportunities are immense, particularly when you look at not just any one of these technologies individually, but the convergence of all of them collectively creating the opportunity to truly transform business models. And I know it can seem daunting, but the reality is taking a first step in actually produces huge benefits, because what we’re finding is that many of the cutting-edge applications are not coming out of the corporate headquarters. They’re coming out of putting the technology in the hands of our people on the front lines. They find new and innovative uses. We then funnel them back up and leverage them across the entire client base.

Murray: It really gets to the importance of a culture of innovation at the company.

Ucuzoglu: It is essential that our people feel empowered to take the latest and greatest and define new and innovative ways to use it for productive purposes. Thank you, Alan. It’s a real pleasure.

[Music]

Murray: So another interesting thing about Arm is that you’ve worked very hard to reduce the energy intensity of your compute processes. Can you talk about how you’ve done that and how that plays into the demand for your designs?

Haas: It’s one of the things that I’m most proud about. It’s one of those things that really defines Arm. So Arm was born 30 years ago in a barn in Cambridge, and the DNA of the company was originally working on a custom design of a chip that was going into the Apple Newton. So for those listeners who remember what that product was, that was a PDA way, way, way ahead of its time. It had to do handwriting recognition, it had to do some contact management, the most important, it had to run on a battery. So the company grew up with a sensibility around doing microprocessor designs that ran on batteries, and that was really the ethos about how the company was was started. And fast forward: Arm had a lot of success in the first mobile phones that GSM phones that turned into smartphones. But I think the important point is that we grew up around energy, energy efficiency. We grew up around low power. And when that is in the DNA of the company, when it’s in the DNA of the engineers, and that’s how people think about design, how they think about building products, it lends itself very well to continuing on that. That set. That’s why it’s the heart of what we do. Everything we do is really around energy efficiency, sort of starting with a product that was originally designed to run on a battery.

Murray: How important is that going to be in the marketplace going forward? I mean, all these tech companies have made commitments to net zero 2050, 2040, even sooner. All the big companies are talking about Scope 3 commitments, which means it’s not just their use of energy, but their products’ use of energy. Is that going to be a driving growth factor?

Haas: Massively important, massively important, because if you think about all of those commitments, and everything required to get to lower and lower carbon footprints and lower energy, that’s balanced against the insatiable need for more and more compute needs, when you layer on A.I. and all the things that are associated with that, there’s a lot of compute power that is required to do any level of machine learning or artificial intelligence. You’re constantly balancing this need for hig- end compute versus lower power. For example, in the data center, where increasingly Arm has had a very large footprint. AWS is one of our largest partners using Arm in the data center. Why are they using Arm? When they build a new data center, they’re kind of fixed in terms of kilowatts of energy. They’re somewhat fixed in terms of footprint, and they’re fixed in terms of area. So what they’re really trying to manage and optimize for his performance per foot, performance per watt, and that’s an area where Arm plays really, really well. Same thing with automobiles, increasingly automobiles are using lots and lots of semiconductors, and when you combine that with a move to EV, electric vehicles, which is required for the carbon footprint, you need very, very energy efficient processes. And then when you couple that with these cars and get more intelligent, particularly want to go to the autonomous-type level that people want to, all of that I think really adds up an area that I think it’s gonna be great for [inaudible] opportunity.

Murray: So, you feel good about this?

Haas: I do, I do. I think there’s just a number of secular trends that are moving in a direction that are very well aligned with with where we’re taking the company.

Murray: You’ve had to do some layoffs. You’ve talked about some layoffs, anyway. What drove that if the growth prospects are so good?

Haas: We did some restructuring just after the Nvidia acquisition was was called off. We made some very difficult decisions that we wanted to have the company to be essentially the right size and right shape going forward, which really meant creating space for more engineers. With these products, I just talked about how they require a huge amount of engineering effort, whether it’s probably the data center auto. So what we wanted to do basically is create space for for more engineers, and that was really behind it all, it was, it was not an easy thing to do. And it was painful for a lot of folks, but it was necessary for us, because I think our gross prospects, as I said, are really, really strong, and we need engineers.

Murray: So Rene, we started this podcast because Ellen and I both felt that there were some pretty dramatic changes going on in the way people lead large companies, the principles of leadership were changing. You couldn’t be Jack Welch in today’s world. So much has happened in the last 20 years and the kinds of pressures that CEOs face, and the kinds of rapid-pace of technology change they have to deal with. I wonder how you view that. Like ,how do you think the leadership challenges that you face are different from your earlier predecessors?

Haas: I think it’s changed a lot, and geared to your Jack Welch comment, I started my career as an engineer and I started at Texas Instruments, and I was a design engineer working on products back in the day. And I can tell you, as an engineer out of school, if something was happening outside socially, I never expected the TI CEO to make a statement. He was going to talk about product schedules, talking about EBIT, and he was going to talk about EPS. So I think what’s happened—and I don’t want to sound old by saying this, but—there’s been a generational shift where increasingly, our younger population, they care pretty deeply about the company that they’re working for and what their CEO thinks. And I think that is a brand new set of pressures that the previous generation just didn’t have to think about when something would happen. Now, politically, staying silent is not is really, not the right thing, in terms of what employees expect. The balancing act, to your point, is, how far to go with it and how much, how to balance that in terms of all the pressures that are running the day job, in terms of running the business, but I think that’s quite different. And I think it’s where we are now. We’ve changed in terms of the generational objectives.

Murray: I totally agree with what you just said. I would argue there’s another piece to it, which is kind of the rapid pace of change and movement that, in an earlier era, an engineer as CEO would formulate a strategy, and the orders would trickle down the hierarchy from there. And then in this era, so much more of the decision-making has to be pushed to the edge, that your job becomes less about telling people what to do and more about inspiring them, guiding them, motivating them.

Haas: The rapid change is the rapid access to information. Again, back 35 years ago when I started at TI, if you wanted to find out what your competitor was doing, EE Times came out once a week, and maybe you would read it in the newspaper. Now, it’s instant. We are bombarded with information. And then there’s the challenge of, what do you do with that information? Is it data that you need to operate with it, or is it really information that impacts your business? So employees are seeing this all the time, and they’re wondering in terms of, does this change the strategy? Is it change in terms of where things are going? So it’s a much more complex landscape. I think, I think the information, the the access to information, instantly, globally…

Murray:  …ubiquitous.

Haas: It’s everywhere. The generation before didn’t have to deal with that.

Murray: Yeah. Well, Rene, thank you so much. Fascinating conversation. Thanks for taking time to explain it to us, and we’re going to be watching closely for that IPO in the next few months.

Haas: Thank you for having me.

Murray: Leadership Next is edited by Nicole Vergalla, written by me, Alan Murray, along with my amazing colleagues, Ellen McGirt and Megan Arnold. Our theme is by Jason Snell. Executive producers are Mason Cohn and Megan Arnold. Leadership Next is a production of Fortune Media. Leadership Next episodes are produced by Fortune‘s editorial team.

The views and opinions expressed by podcast speakers and guests are solely their own and do not reflect the opinions of Deloitte or its personnel. Nor does Deloitte advocate or endorse any individuals or entities featured on the episodes.