TAIPEI -- Arm China, the Chinese subsidiary of the British chip company owned by Japan's SoftBank, has become a key player in Beijing's quest for tech self-sufficiency and, in a move likely to alarm the U.S., has developed codes that enable Chinese semiconductors to run state-approved cryptographic algorithms, the Nikkei Asian Review has learned.

Huawei, the Chinese telecom gear maker that Washington has accused of spying, is among the company's biggest customers after Arm China took over the Chinese business of its larger U.K parent last year.

Cambridge-based Arm is the world's leading designer of mobile chips, with reported revenues of $1.8 billion in 2018.

Arm China's breakthrough is the latest evidence of Beijing's push to protect itself from U.S. bans on tech transfers by building out domestic supply chains and developing its own secure, intellectual property.

In little more than a year, Arm China has also developed infrastructure needed to make an artificial intelligence processor as well as a central processing unit -- two other milestones in Beijing's drive to build its own chip industry and buttress national security.

"The goal of Arm China is to help all Chinese chip developers and other product makers to use Chinese-controlled technologies -- not only for the domestic market but for global markets," said William Liu, Arm China's vice president of product development.

"In the future, these China-developed technologies could even become world leaders and have a say on the global stage," he added.

Arm China was formed last April after SoftBank sold a 51% stake in the company for $775 million to a consortium of Chinese investors that included sovereign wealth fund China Investment Corporation and the state-owned Silk Road Fund.

Its U.K. parent, which has a virtual monopoly on the designs of core processors used in smartphones made by Samsung, Huawei and Apple, owns the remaining 49%.

SoftBank Group, led by chairman and CEO Masayoshi Son, purchased the U.K.'s Arm Holdings in 2016, later selling a 51% stake in Arm China to Chinese investors in 2018. (Photo by Kyosuke Tomoda)

The deal was hailed by SoftBank as way for Arm to expand its Chinese business, and has subsequently gained geopolitical significance as the U.S. scrambles to curb China's technological ambitions.

In just over a year, Arm China has doubled its head count to over 600 employees, around 500 of whom are engineers, according to three people familiar with the company.

Arm China, which sells and licenses its parent's technology in China, has also moved to develop its own intellectual property, meaning that China can circumvent technology bans that could affect its U.K. parent.

This became crucial to Beijing this year when Arm, which has a research and development center in the U.S., suspended sales and contracts with Huawei after Washington put the company on a technology blacklist in May.

Huawei's servers and flagship mobile processors are all based on Arm designs, meaning Arm China needs licensing permission from its U.K. parent.

In September, however, Arm said it would continue to supply Huawei after its legal team advised that two of its crucial chip technologies were of U.K. origin and therefore not subject to American restrictions. Any of its U.S.-originated intellectual property would however remain subject to the guidelines.

As many as 30 Chinese clients now use chip designs and infrastructure developed by Arm China, Liu said. Among its most important clients is Huawei's semiconductor unit HiSilicon Technologies, a source added.

"The company will develop at least another three different chip design blueprints next year and every year," Liu said. "We are happy to help our customers' products to later go global," he added.

Among the technologies already developed by Arm China is a design that allows Chinese-made chips to run a cryptographic algorithm built by the State Cryptography Administration, China's top encryption regulatory agency.

It has also designed chip infrastructure that enables Chinese developers to build an AI processor -- dubbed Zhouyi -- to be used in mobile phones, smart homes, surveillance and automotive applications.

Furthermore, it has developed source codes for the design of central processing units that can be used in wearables, smart speakers and other internet of things devices.

"China now has all the right ingredients it needs to boost its [chip] industry," said Arm China COO Wang Dajun at a technology conference in Nanjing last month. Outside pressure, he added, "will only accelerate the development of our products and enlarge the local ecosystem."

Softbank bought Arm in a $32 billion deal in 2016. The subsequent creation of Arm China in 2018 was unusual as it was the first time in Arm's history that it had created a separate entity to transfer and market its technology abroad.

Arm justified the move, saying it expected China to become its biggest market and that the joint venture would enable it to develop products that Western companies would be unable to do.

According to company documents seen by Nikkei, Arm China projects that its business will overtake its parent's by 2025. It also envisages eventually selling and licensing its own technology to its parent, a source said.

Although Arm China's rapid development represents a major step forward for China's tech self-sufficiency, analysts cautioned that complete self-reliance was still a ways off.

"Arm China is very likely to receive huge support and resource from China, but it's still [struggling] to develop core chip intellectual properties from scratch," said Chris Hung, a consultant at Market Intelligence & Consulting Institute.

"My assessment is it will take some three to five years for Arm China to have truly concrete achievements ... But never doubt the efforts that China will make to become self-reliant."