[China] Is China's fabless model sustainable?

 

Let’s face it. China’s IC industry still lacks its own superstars – equivalent to Intel, Qualcomm or Broadcom in the West – in terms of the scale, reach and quality these brands possess on the global market.

 

To belabor the point, how many U.S. design engineers can name, say, the top 10 Chinese chip vendors destined to become their fierce competitors in three years from now? The question is tough because Chinese fabless companies, while growing fast, are still small. Many also remain faceless.

 

In contrast, a Chinese executive based in Beijing, speaking with ee Times, rattled off Spreadtrum, RDA Microelectronics, GalaxyCore and GigaDevice as his “top four” picks among local fabless companies likely to become key players in the smartphone IC ecosystem. The executive, heading up a U.S.-based chip company’s R&D team, believes that will happen not within the decade, but in just a few years.

 

Is he right?

 

EE Times has talked to several movers and shakers in China’s semiconductor industry in recent weeks. While our investigation is still in progress, we’ll be reporting our ongoing findings in a two-part series. First, we examine the state of the Chinese fabless industry -- covering how they’ve gotten to where they are today. In part two, we discuss what Chinese semiconductor companies must do in order to cross the chasm – from local heroes in China to power players on the global stage.

 

On one hand, some multinationals like Synopsys (EDA vendor), VeriSilicon (“Design-Lite” service company) and ARM (IP supplier) are well positioned to leverage local engineering resources to respond to Chinese fabless companies’ always pressing (and almost impatient) need to get ahead more quickly.

 

On the other, Chinese startups, still in early days, lack a portfolio of their own IPs. Consequently, “they tend to compete on price with similar products in the same application fields,” observed Jian-Yue Pan, corporate vice president, Asia Pacific region of Synopsys.

 

Meanwhile, some China fabless are coming up with fresh ideas (i.e.Apexone), operating with an incredible work ethic and directing a fanatical focus on customer service (i.e. Awinic). Companies like RDA, Spreadtrum and Rockchip are growing like gangbusters.

 

It’s important to note that there is nothing monolithic about China or China’s fabless companies. Over the last two decades, a number of Chinese chip companies – some well known in the West – had distinct trajectories, with a full array of ups and downs. Some disappeared and others thrived, their fates depending on when each company was born, how it was managed, and whether the ecosystem in China was sufficient to spur growth.

 

Synopsys’ Pan turns out to be as good a student and observer of the Chinese semiconductor industry as any, since he has lived through the rise of the industry over the last 17 years while working at Synopsys in China.

 

Pan isn’t a returnee – like many other China fabless executives today who were born in China and came to the United States for graduate degrees, before going home again to help nurture the Chinese industry.

 
Pan is home-grown. He has worked his entire professional life in China, rather than in Silicon Valley, after graduation from the nation’s elite Tsinghua University in early the 1990’s.

 

Chinese fabless companies have come a long way. 

 

In the interview, Pan said, “A lot of things have happened. Over the last 17 years, we saw the rise of the Korean chip industry, and the decline of Japanese companies.”  To illustrate the rise of the Chinese semiconductor industry, Pan divided the last 17 years in three periods: “incubation” (1995 – 2001); “breakthrough” (2001 – 2007); and “acceleration” (2007 – 2012).

 

Incubation

 
During the incubation period, virtually all the companies taking part in the Chinese semiconductor industry were state-owned. They were largely pushed, prompted and nurtured by Chinese government’s industrial policy and technology transfers from other countries including the United States, Europe and Japan.

 

During this period, the total revenue of the Chinese IC design houses was “less than $100 million,” according to Pan.

 

Nonetheless, several important milestones helped pave the way for the birth of the Chinese semiconductor industry. They include: the completion of technology transfer between Lucent and Huajing in 1997, allowing Huajing—located in Wuxi in Jiangsu Province—to start producing 6-inch CMOS wafers with 0.9 micron design rules. By 1999, SDRAM production started on the 8-inch wafer fab at HHNEC (Hua Hong NEC Electronics Co.) using a 0.35 micron process technology.  These were days when few indigenous fabless companies existed in China. These fabs had to depend on the international semiconductor community for consumption, as well as for technical support.

 

But the most significant milestone of all during this period, according to Pan, was the emergence of the Chinese central government’s “Policy No. 18.” Put in place in July, 2000, the directive was a top-down order to “encourage the development of the IC industry in China,” explained Pan. Under Policy 18, the government offered favorable tax treatment to domestically produced IC chips, while providing heavy government investment in infrastructure, education and basic research.

 

As a result, seven state-owned incubation centers for IC design sprang up, with Synopsys coming out as one of the big beneficiaries. It turns out that the seven state-owned IC design centers standardized their design flow environment on Synopsys tools, making Synopsys the government’s favored tool designer.

 

Breakthrough

 
The following six years (2001 – 2007) is when the Chinese semiconductor industry saw a number of breakthroughs, fueled by the growth of the Chinese economy and adherence to Policy 18. Pan observed that in 2000, there were fewer than 100 fabless companies in China. But 2003, more than 450 fabless had vendors popped up. Also emerging was China’s strategic mimicry of the Silicon Valley model, using stock-based compensation to incentivize managers and engineers in high-tech companies.

 

In 2003, Hangzhou Silan Microelectronics Co., Ltd, popularly known as Silan Corporation, became the first IC vendor on the Shanghai Stock Exchange. Silan successfully made an IPO, initiated with 26 million shares of series A-stock.

 

By 2006, both Vimicro International Corporation and Actions Semiconductor had gone through a rigorous IPO process and got listed in Nasdaq. In 2007, Spreadtrum went public and joined the Nasdaq club.

 

Acceleration

 
Pan now sees the Chinese semiconductor industry in its third phase, where everything is accelerating. There are five more Chinese companies on a wait-list to go public on Nasdaq.As of 2011, China had close to 500 fabless chip companies, with total revenue last year at “give or take, close to $10 billion,” Pan said.

 

Where do they go from here?

 

 Over the last three years, “some startups – including GigaDevice, GalaxyCore, RDA and Rockchip – have grown very fast,” according to Datong Chen, co-founder and managing director of West Summit Capital in Beijing. There is no dispute about that.

 

 The question, however, is how sustainable it is for these companies to continue to grow so rapidly. How many more years can Chinese companies continuously keep gross margin low and perpetually work harder in order to bring down the cost of their products in hopes of beating out foreign competition?

 

 In the top 20 fabless IC companies’ ranking for 2011 (put together by IC Insights), only two from China, HiSilicon and Spreadtrum, showed up.

 

 Top 20 fabless IC companies in 2011

source: IC Insights

 

 Datong has experienced firsthand the rise of the Chinese chip industry, as he was the co-founder and CTO of Spreadtrum Communications. Prior to Spreadtrum, Datong was the co-founder and senior vice present for Omnivision, a leading developer of CMOS imaging sensor.

 

 For Chinese fabless companies to sustain current growth, Datong said, “They need a bigger platform.” By “platform,” he means, “Money, a larger market size, and a bigger customer base.” Then, he added, “Of course, it’s better if they do IPOs – because that will allow them to get fair market value, it would make it much easier for them to do acquisitions, and they will get more trust from the market.”

 

 The potential for Chinese fabless companies to reap greater rewards are already here, according to Allen Wu, president of ARM China. ARM-based SoCs, designed by Chinese fabless companies and shipped globally, jumped from 30 million units in 2007 to 615 million units in 2011.

 

 And yet, Wayne Dai, president and CEO of VeriSilion, calls the Chinese semiconductor industry a “no-man’s-land of fabless companies.” The Chinese market is too big to be effectively shared by a bunch of small companies, and most Chinese fabless companies remain too stubbornly small to exploit the market’s size. There lies the conundrum.

 

 In part two of this article, we’ll discuss prescriptions—what steps Chinese fabless companies must take, and conversely, what actions multinationals should take to survive among all those Chinese go-getters.

 

Source: EETimes

 

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