Market Watch

China IC Design Firms to Keep Growing Amid Lively Local Front


Most domestic fabless design firms, however, stay stuck at $15 million and are unable to get bigger

A dynamic domestic market in China will help spur the country’s local integrated-circuit (IC) design industry to double-digit growth this year, but challenges remain for the mostly small firms still hoping to break into the big leagues, according to an IHS iSuppli China Electronics Supply Chain market tracker report from information and analytics provider IHS.

Revenue in 2013 for the Chinese lC design industry is forecast to reach $8.2 billion, up 16 percent from $7.1 billion last year. Double-digit growth will continue for the next few years like it has until now, with total Chinese fabless revenue by 2016 expected to hit $12.4 billion.

A total of 595 locally based Chinese IC design firms were in existence at the end of last year, engaged in the blueprinting of semiconductor chips for their customers that are then produced in foundries. The Chinese fabless market is highly concentrated on the three major categories of data processing, wireless communications and consumer electronics. But Chinese IC design firms are small for the most part: only 2 percent had revenue exceeding $100 million, and as much as 83 percent saw sales of just $15 million and less. Also, while many companies easily reach $15 million, few are able to surpass that level, ostensibly bogged down by thorny management issues and problematic strategies related to market expansion.

The relatively young Chinese IC design industry is also unable to supply the tremendous demand for semiconductors by the country—the largest consumer of electronic chips after displacing the United States in 2004. Chinese firms last year supplied just 17 percent of semiconductors needed in the country, with global chipmakers stepping in to fill the void.

Nonetheless, local design IC firms enjoy some home-field advantages. The domestic market is highly active, and the playing ground is large and open to enterprising players. The mobile handset market, for instance, is huge, marked by the continuing proliferation of illegal gray-market handsets outlawed by authorities but in which opportunities for IC design could remain open to intrepid locals.

Chinese IC design firms also enjoy the support of the national government, which has launched policies meant to encourage the overall Chinese semiconductor industry, including more flexible tax and investment regulations.

Still, local fabless firms must contend with an array of obstacles. Domestic companies are small and have no bargaining power within the semiconductor food chain. Firms lack control over pricing with their customers. Oligopolistic conditions reign, in which a small number of suppliers controlling a product can exert a disproportionately significant impact on prices and competitors by what they do. And a domestic standards market dependent on government policy means that local fabless firms have little say in what can be done or controlled in order to change measures.  

Top 10 account for most of the action

The top Chinese fabless design company last year was Shanghai-based Spreadtrum Communications, which produces chips for mobile phones. Spreadtrum pulled in $717 million in revenue, and is the first domestic IC design firm to shoot past the $700-million mark.

Other important Chinese fabless design firms included HiSilicon Technologies, RDA Technologies and Galaxycore, all of which were focused on designing chips for communications, wireless or digital imaging applications. A fifth player, AllWinner Technology, rode to great success last year through chip designs for the tablet market, shipping 20 million units.

Together the Top 10 in 2012 accounted for 42 percent of Chinese IC design industry revenue, taking in $2.97 billion, up 22 percent from $2.0 billion in 2011.

Partnering with Chinese fabless firms are two of the world’s largest foundries—Taiwan Semiconductor Manufacturing Corp and Semiconductor Manufacturing International Corp.

However, the share of Chinese IC design firms in the two foundries’ revenue remains miniscule. Chinese customers contributed just $812 million to TSMC’s 2012 revenue of $16.8 billion. For its part, SMIC took in $576 million from Chinese IC design firms, part of its global revenue of $1.7 billion.

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