China cranks up fabless startup efforts

TechOnline India - August 05, 2009

China's planners are cranking up their initiative to seed as many as 30 fabless semiconductor startups that could grow to $200 million or more in annual revenues, according to an industry executive involved in the effort, but so far results have been lackluster for China's fabless companies due to narrow product portfolios and a shortfall of seasoned managers.

SAN JOSE, Calif. — China's planners are cranking up their initiative to seed as many as 30 fabless semiconductor startups that could grow to $200 million or more in annual revenues, according to an industry executive involved in the effort.

The move comes at a time when most venture capitalists are scaling back investments in U.S. based chip startups. But so far results have been lackluster for China's fabless companies due to narrow product portfolios and a shortfall of seasoned managers.

Government planners have earmarked a slice of the estimated $586 million China economic stimulus package announced late last year as a source of funds for grants, loans and equipment for fabless startups. They are working with industry executives to define target markets and attract venture capital funds.

"I'm in the middle of that helping to organize it," said Lip-Bu Tan, chairman of venture capital firm Walden International which claims it is the largest investor in China's semiconductor industry after Intel Capital.


Venture capitalist Lip-Bu Tan

Tan is also chief executive of Cadence Design Systems which hopes to provide EDA tools to the new chip companies. The startups, in turn, will serve China's growing ranks of electronics systems companies ranging from HuaWei and ZTE in communications to Lenovo in computers and Konka and TCL in consumer electronics.

"The main attraction is the China market is so big, and they need the semiconductors to serve the market," Tan said. "China is a leading consumer of electronic components now, so now is the time to build the fabless companies," he added.

Indeed, China's IC market is expected to grow to $100.1 billion in 2013, when it will represent 35 percent of the global chip market, according to a recent report from market research firm IC Insights (Scottsdale, Ariz.). China's 12 percent growth rate will be twice that of the global chip market, the market watcher said.

To take advantage of that market growth, China hopes to follow the example of Taiwan. Three of Taiwan's fabless startups have become billion-dollar companies, lead by MediaTek, the fifth largest fabless semiconductor company in the current rankings of IC Insights.

{pagebreak}But breaking into the big time will not be easy for any new chip startups. No China companies are currently on IC Insights' list of Top 50 fabless semiconductor companies, said Bill McClean, president of the market watcher.

Two China companies appeared on the list a few years ago, but since their sales have fallen below the $148 million level of the company currently at the bottom of the list.

In 2006, Solomon SysTech Ltd. (Hong Kong), a maker of display chips, had revenues of $250 million and Actions Semiconductor (Zhuhai), a media processor maker, hit $170 million. Both companies watched sales steadily decline since then to 2008 revenues of about $95 million each.

"A lot of these companies are like shooting stars," said McClean. "They have one good product, and then they don't come up with a good follow on," he said.

"It's tough time for fabless semiconductor startups right now," said Stanly Zhao, chief executive of GalaxyCore (Shanghai), a maker of CMOS sensor founded in 2003. "I see too many fabless startups in China are bankrupt--totally different from the 2005-2006 period," he added in an email exchange.

GalaxyCore has taken in slightly more than $10 million in seed and venture capital to date as revenues grew steadily to $24 million in 2008, Zhao said. But for any newcomers, "the biggest challenge is you cannot find the best designers in China--you have hundreds of low level engineers," he said.

The first big wave of silicon startups in China was not successful because companies were "one-trick ponies," said Tan of Walden. "The next generation needs to be made up of platform companies with multiple products and [design targets ranging] from cellphones to set-top boxes, digital cameras and netbooks," he added.

{pagebreak}China must also learn from Taiwan's success in attracting expatriate Chinese engineers back from jobs at big U.S. firms such as Intel and Texas Instruments to fill out its limited ranks of seasoned managers.

The U.S. companies "trained [the Taiwanese engineers], and they worked hard and saw government and VC funding, so they went back to their homeland," said Tan. "The same thing is starting to happen in China" but may take the next four years, he said.

"I literally spent six months talking to CEOs in Taiwan, Shanghai and Beijing about what was hampering real growth in the China semiconductor industry," said Jodi Shelton, executive director of the Global Semiconductor Alliance, a trade group of fabless chip makers.

"You have a 10 million company here and one there, but they are all small niche players," said Shelton. "There did not seem to be a player in the China market that was going to hit the $250 to $500 million revenue mark in next five years," she said.

Shelton echoed comments about a "leadership vacuum" in China. She suggested the companies might benefit from consolidation, but deferred to the work of people like Tan sitting on China government advisory boards.

McClean of IC Insights said China has a chance to be more successful in fabless design companies than it has been to date in its stalling efforts to create a silicon manufacturing industry. But that doesn't mean spawning design companies will be an easy job, he said.

"Out of 30 fabless startups only one or two might make the Top 50 list," McClean said. "It's tough to have the staying power and good growth, and it just keeps getting more expensive," with giants such as Qualcomm, Broadcom and Nvidia in the mix, he said.

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