Analysis: China’s chip firms eye domestic growth

Nov. 24, 2008 – China’s semiconductor sales revenue will slow to single-digits (6.7%) in 2008 after five years of stellar growth, though continued push will be seen on the fabless IC side thanks to domestic consumption of wireless and consumer products. And look for a big domestic industry shakeout shortly, according to analysis from iSuppli.

Summer Olympic events across the country helped spur demand for new mobile handsets using new standards — 3G, Digital Terrestrial Multimedia Broadcast (DTMB), and China’s Mobile Multimedia Broadcasting (CMMB), notes Vincent Gu, China research analyst at iSuppli, in a recent report. Despite “substantial economic uncertainty,” popular applications supporting new domestic standards will appear in 2009, he says, as the supply chain coalesces.

There are now more than 550 fabless companies in China, most of them young and small (88% with <$10M in sales this year), but Gu expects more than 100 of them will vanish in the next two years. Not helping domestic fabless firms is the delayed startup of the Chinese Growth Enterprise Market (GEM), a new stock market which had been anticipated to spur "a flood of fabless IC IPOs," Gu writes. And VC firms have cooled on China's IC industry; many firms are now short on capital and face cash flow problems, he adds.

Moreover, Chinese IC fabless firms face daunting competition from the US as well as neighboring Taiwan, Gu notes. There are four major factors he deems required for success in the domestic market (market, manpower, money, and timing); US fabless competitors have a leg up in technology and innovation, which helps them push easier into emerging markets, while Taiwanese companies “have effective cost controls and are highly integrated, helping them to succeed in mature markets.”

Gu characterizes China’s fabless IC industry as “polarized,” with only about 50 companies deemed successful and the rest struggling, some losing money with no mature products to generate sales and keep the doors open. “Most companies have announced layoffs, cut production lines or have shut down entirely,” he notes.

However, Gu expects several IPOs on both the NASDAQ and Chinese stock markets in 2009, with at least five Chinese IC firms seeking IPOs and another 10+ involved in M&A.

China’s fabless IC industry revenues (US $M), 2008-2012. (Source: iSuppli)


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