Many Western businesses operating in China have become used to dealing with traditions and laws outside their comfort zone. Executives at the British microchip company Arm could be justified in feeling exasperated, however.

For more than a year, Arm has been trying to wrestle back control of its Chinese venture from Allen Wu, a 17-year company veteran who has been accused of abusing his position for his own financial gain.

Last June, the joint venture’s board voted to sack Wu by seven votes to one, and announced two new chief executives to replace him. But Wu clings on, thanks to a relic of Chinese antiquity.

He retains the company’s seal – or “chop” – a physical stamp of authenticity required to sign official documents that in effect confers authority over a business to whoever wields it.

When Arm sacked Wu last year, he reversed the move with a quick stamp. Command of a cutting-edge technology company in the world’s second-biggest economy has been taken with what might in the West be viewed as a trinket. While the situation seems to verge on farcical, the problems it has created for Arm are no laughing matter.

Allen Wu, the rogue chief executive of Arm Holdings’ Chinese division, has “declared independence” from its UK parent company

SoftBank, the company’s owner, is seeking to push through a $40bn (£29bn) sale to Silicon Valley’s Nvidia in a deal that has irked many customers, raised potential UK national security concerns, and is taking longer than expected to be approved by regulators. The uncertain status of the company’s Chinese venture only clouds the deal further.

Last month, Wu raised the stakes further. At an onstage launch event, he declared that the business would be “independently operated” and outlined a “two wheel drive strategy” – one half comprising Arm’s technology, the other selling licences to its own designs.

As if to press home the point, Wu referred to the business as “Arm Technologies”, rather than Arm China.

“The marketing changed to make it seem less like a subsidiary,” says Stewart Randall, director of operations at Shanghai-based consultancy Intralink.

Soon after, billboards targeting business travellers at Chinese airports lit up with the new name and a flag-waving slogan: “The core at the heart of Chinese-made chips.”

Wu’s escapade led one analyst to refer to Arm China as the “semiconductor heist of the century” and a company that had gone “completely rogue”.

Arm challenged the characterisation, as well as denying that the company had stopped supplying its latest technology to the Chinese venture. “Arm continues to have a successful working relationship with the Arm China team in support of this growth, and both the structure and ownership of the JV [joint venture] remains unchanged since its inception in 2018,” a spokesman said.

But the continued dispute over Wu’s control of the business could serve as a cautionary tale for Western technology companies seeking riches in the country.

Arm – whose chip designs power billions of electronic devices from iPhones to connected cars – set up its Chinese joint venture in 2018, two years after SoftBank had paid £24bn to take the company off the London Stock Exchange.

Arm China: a Shanghai-based joint venture

Arm sold 51pc of its China subsidiary to Hopu Investments, a Chinese private equity firm backed by a state sovereign wealth fund. It made $845m from the deal, a figure that raised eyebrows considering China accounted for around a fifth of Arm’s revenues.

Chip designer's global revenues

But as trade wars between the US and China were heating up, the risk of missing out on a growing market was too big for SoftBank not to take the chance.

“It was created a couple of months  after [Chinese telecoms group] ZTE nearly died because it lost access to foreign semiconductor IP,” says Randall.

“They [SoftBank] said, ‘We can’t lose access to this market.’ But it opened up a Pandora’s Box.”

Arm is believed to have considered a joint venture before SoftBank bought it but the British company’s Japanese ownership needed good relations in China. SoftBank’s founder Masayoshi Son had made billions in an early bet on Alibaba, and his Vision Fund was about to make a series of investments in China such as the taxi hailing app Didi.

The deal would almost certainly have attracted more scrutiny today, when semiconductor technology has become the central battleground of a technological cold war. But even three years ago, it was less controversial. Arm China would also develop its own microchip technology.

This fact allowed Arm to credibly insist last week that Wu had not strayed from the original plan in announcing a range of new technologies not based on the parent company’s designs. But the Chinese venture has seemed to be gradually extricating itself since the dispute of his exit.

China's semiconductor industry is still relatively small

Last year, in an open letter, Arm China declared itself a “strategic asset” that Beijing should step in to help. “We plead with the government to pay attention to the turbulence that Arm China is facing now, and intervene to protect this strategic asset,” it said in the letter, signed by 200 employees.

Arm has appealed to courts and local government in Shenzhen, the Chinese city where the joint venture is based, to wrestle control of the company’s seal back from Wu. However, the process can take years and the China chief is believed to have allies among the local authorities. The most likely scenario is expected to be a financial settlement that involves Wu stepping aside, but Jay Goldberg, a San Francisco-based analyst who follows China’s chip industry, says Arm’s proposed sale to Nvidia could give him more power.

“What we have is an executive who has an immense amount of negotiating leverage. And he’s making the most of it. You get the feeling he’s been offered millions, but he wants it to start with a ‘b’, not an ‘m’.”

Arm does not necessarily need to resolve the conflict before SoftBank sells the company to Nvidia. The US company could simply inherit the situation along with the rest of Arm. But it would be far from ideal. “We will get it resolved. And it’s not going to get in the way of completing the deal,” Arm’s chief executive Simon Segars told The Sunday Telegraph earlier this year.

Despite Wu’s overtures, Chinese politicians have stayed out of the matter, at least in public. But Beijing may now spy an opportunity. China is among the jurisdictions where Nvidia needs approval from competition regulators to buy Arm, alongside the US, UK and EU. While Britain’s Competition and Markets Authority has expressed concerns about the deal’s effect on the wider technology industry, China may believe it can use the situation to strengthen its own microchip industry.

The US leads in chip design but most fabrication takes place in East Asia

Authorities could insist that the joint venture remains in place for several years after the deal is completed. But one industry veteran suggests that they could go further, demanding certain Arm technology be transferred or licensed to the venture in a way that would boost the domestic industry.

This might, in turn, raise concerns in the West. “Arm is far from being the first company to find that China wants to rip out their intellectual property to serve their own interests” says Conservative MP Neil O’Brien, co-founder of the China Research Group.

China’s leaders might be wary of overplaying their hand. “This doesn’t look good for China, says Neil Shah, a Mumbai-based technology analyst at Counterpoint Research. “The business is done on trust, and trust being broken in plain sight has set the wrong precedent for the companies outside China.”

But as long as he retains the chop, Wu seems certain to keep playing his hand for as long as it takes.