Chip design giant Arm is a rare beast: A UK-founded technology company that has had a truly global impact.

Born 35 years ago in a converted barn in the sleepy Cambridgeshire village of Swaffham Bulbeck, the company’s highly efficient chip designs powered the mobile revolution of the early 2000s, sitting at the heart of the iPhone and millions of other connected devices.

More recently, after several false starts over the years, Arm blueprints have found favor among data center operators, with hyperscalers such as AWS and Microsoft using its designs for their in-house silicon efforts, and Arm-based chips making headway in a market traditionally dominated by Intel’s x86 architecture.

Arm made its name as the “Switzerland” of the industry, licensing its designs to anyone who would buy them and claiming royalties when its clients put their chips into production. It never attached itself to a particular vendor, or tried to compete with its customers, and this neutral business model made the company extremely popular among tech’s biggest names, and ensured its founders got very rich.

But this week, Switzerland decided neutrality isn’t all it’s cracked up to be. Arm announced its plans to make a data center CPU, moving away from pure design work into chip production, and revealing that Meta would be the first company to purchase the chip, dubbed the AGI CPU. It’s a move that has been mooted for some time, and one that, one way or another, will likely have a profound impact on the company’s future.

Why is Arm making data center chips?

It’s not difficult to see why Arm has succumbed to the temptation of making its own processors.

Despite the cloud and AI booms driving demand for chips through the roof, the company struggled to grow its profits in the years after it was purchased by Japanese conglomerate SoftBank in 2016 for £24 billion ($32bn). This led to an aborted attempt by SoftBank to flog Arm to Nvidia in 2020.

When this deal eventually collapsed amid widespread regulatory opposition in 2022, SoftBank, which had taken Arm private after the 2016 takeover, decided to recoup some of its cash by relisting the company, resulting in a 2023 IPO that valued the business at $65 billion. SoftBank remains Arm’s biggest shareholder, and is probably quite happy with its decision given that the firm’s market cap has since soared to $166 billion, largely off the back of the progress its designs have made in the data center. It is an impressive effort led by CEO Rene Haas, who took the top job in 2022 after the Nvidia deal was shelved, and has negotiated Arm’s transition back to the public markets with aplomb.

But with shareholders to keep happy, Arm is eager for more growth, and has decided to try and grab a slice of the data center CPU market, which many analysts expect will grow exponentially in recent years. With the focus of the AI industry set to move from training to inference, many more CPUs will be needed to sit alongside the GPUs hawked with great success by Nvidia and AMD.

Nvidia itself appears to be trying to address this need with its Vera CPU, now in full production and aimed squarely at the much-hyped agentic AI market. Given the amount of money being thrown at AI projects by the hyperscalers, it is likely that even modest success for the AGI CPU will deliver a sizeable boost to Arm’s profits.

“Let’s say [Arm] get five percent of Meta’s $115 to $135 billion capex going into the future,” analyst Patrick Moorhead of Moor Insights told CNBC. “That is a game changer on the top line for them.”

Switzerland no more

While the potential upside for Arm is obvious, moving into chip production is not without its risks.

Though the AGI CPU is designed for a specific use case, the company’s long-time partners (including Nvidia itself) may see this as a first step towards Arm making more of its own components and trying to eat their lunch. Arm has been embroiled in a licensing lawsuit with Qualcomm, one of its longest-standing partners, for several years. It may need to ready itself for difficult conversations of a slightly different nature with its other clients if its CPU is a success.

What’s more, making semiconductors is a notoriously complex and capital-intensive business, particularly at a time when the full implications of the conflict in the Middle East, and the impact it will have on global supply chains, are not known. While Arm is not proposing to set up its own fab (the AGI CPU will be manufactured by TSMC on its 3nm process), it is still taking on more risk than normal, and any delays in production, or performance issues with the chip, are likely to impact its share price. Just ask Intel how that goes.

Moreover, there is something slightly sad about one of the most innovative business models in tech, one that has endured for 35 years to great success, being sacrificed on the altar of AI, to serve demand that may or may not materialize, depending on just how bubbly the AI market turns out to be. There is no doubt that Arm’s licensing business will continue to thrive in the short-term, and the AGI CPU may turn out to be the start of an exciting new era for the company. But there’s also a non-zero chance it could prove a costly mistake.