Power

Nvidia's $40B bet on AI, edge computing and the data center of the future

With its purchase of chip designer Arm, Nvidia hopes to build on its recent success selling machine-learning chips for data centers and define the next decade of enterprise computing.

Nvidia's CEO Jensen Huang

"These types of computing platforms are going to start changing in shapes and sizes, although the architecture is going to be very similar," says Nvidia CEO Jensen Huang.

Photo: Patrick T. Fallon/Bloomberg via Getty Images

Nvidia's landmark purchase of chip design stalwart Arm will have an immediate impact on the mobile market, but the long-term payoff from the deal is likely to come from the enterprise.

The $40 billion deal, coming just four years after Softbank Group's 2016 acquisition of the U.K. chip designer, sets the stage for Nvidia's growing ambitions in enterprise computing. Nvidia rose to prominence building graphics chips for powerful gaming PCs, but in recent years has ridden a wave of interest in data center chips that can tackle complex machine learning algorithms to new heights.

Now Nvidia wants to play an even larger role in the data center. It now has the potential to design chips with a combination of server processing power and machine-learning aptitude that could set the stage for the next era of cloud computing. Emerging concepts like edge computing demand chips designed for difficult operating environments far from spacious data centers, and edge devices will also produce new, massive data sets that will require artificial intelligence technology to capture and analyze.

"These types of computing platforms are going to start changing in shapes and sizes, although the architecture is going to be very similar," said Nvidia CEO Jensen Huang on a conference call following the announcement of the deal. He was referring not just to data centers, but autonomous vehicles, robotics and high-performance computing applications that will require new types of chips designed for those unique situations.

If you own a smartphone, you almost certainly use a chip based around Arm's designs or its underlying technology. Arm doesn't actually make chips, but it designs and licenses core chip technology to other companies, like Apple, Qualcomm and Samsung, that add their own bells and whistles and contract with third-party manufacturers to produce processors for mobile phones.

With this acquisition, Nvidia is also betting that it can extend that model further into the data center. Arm's designs are known for their energy efficiency, which for years was not as prominent a concern inside the server farms that run the internet as compared to performance. But as the costs of operating cloud computing and in-house data centers have skyrocketed thanks to the energy and cooling systems required to operate millions of servers, companies are starting to think differently about the balance of price, performance and power consumption when making purchasing decisions.

It has taken a long time for Arm server chips to achieve performance parity with those designed and built by Intel, which is just one of the reasons why Intel currently enjoys more than 90% market share in the data center. That market stake generated $38.4 billion in revenue in 2019, and that's a big target for its rivals.

However, 2019 was also the first year during which cloud giant AWS started allowing customers to rent computing power running on a custom server processor designed around Arm's technology. A second-generation chip introduced earlier this year offers a "40% improvement on cost/performance ratio" compared to Intel chips available through AWS, according to the cloud provider.

Should AWS prove real demand for Arm server processors exists in the cloud, Microsoft and Google — both of which have chip design expertise in house — are likely to follow suit. Intel's well-documented challenges advancing its chipmaking technology have also opened the door for rivals with alternative products.

Over the long term, however, the marriage of Nvidia's AI technology and Arm's processing expertise is the real key to the deal. This is also one of the major concerns about the deal, that Nvidia's corporate interests will cast a shadow over Arm's road map, bending it toward designs that advance Nvidia's strategy at the expense of Arm's current third-party licensees.

"Every 15 years, the computer industry goes through a strategic inflection point, or as Jefferies U.S. semiconductors analyst Mark Lipacis calls it, a tectonic shift, that dramatically transforms the computing model and realigns the leadership of the industry," wrote Sparq Capital's Michael Bruck, a former Intel executive, in post earlier this month on Venturebeat discussing the potential Nvidia-Arm deal.

The last 15 years have been dominated by the rise of smartphones and cloud computing as the two main forces in modern computing, best exemplified by Apple's Arm-powered iPhone and AWS' Intel-powered cloud operation. Nvidia's $40 billion gamble assumes that the next 15 years will require both edge computing devices and massive data centers to add specialized machine-learning chips to serve new applications such as self-driving cars, which won't be able to tolerate processing delays caused by underpowered chips or round trips to far-flung data centers.

"In time, there will be trillions of these small autonomous computers, powered by AI, connected to massively powerful cloud data centers in every corner of the world," Huang said. If Nvidia can bypass the concerns of the U.K. tech industry and pull off this deal without alienating the massive ecosystem of Arm partners, it will be the chip company for that era.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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