How long for China to sort out fabless strategy?

Junko Yoshida

June 21, 2012

Junko Yoshida

BEIJING – With reportedly 450-plus fabless chip companies in China, it’s fair to ask how many more years can they survive in this business and, more important, what they must do now to grow into a significant force in the global market.

(Editor's note: How Chinese fabless companies have gotten to where they are today is examined in the previous article entitled "Is China's fabless model sustainable?")

In a series of interviews recently conducted in China by EE Times, Chinese executives estimated another two to 10 years before these fabless upstarts either become irrelevant or go out of business—assuming that they keep doing what they’re doing right now.

In essence, while this window of opportunity differs from guess to guess, everyone seems to agree that China’s current fabless model isn’t sustainable for the long haul. Chinese companies can’t keep growing simply by relying on today’s cost advantage, and working even harder without sleep. However, the hard truth is that the cost advantage in China has been driving many companies to double or the number of triple engineers they hire. In turn, this trend instills fear – warranted or unwarranted – among engineers whose jobs are still in the United States.

As Datong Chen, managing director of Beijing’s WestSummit Capital Management, pointed out, if a company has 100 engineers in China, it can design a product at a sixth or an eighth the cost of the United
States, and in one-third the time.

Wayne Dai, company president and CEO at VeriSilicon, echoes this point.

When asked “why China,” Dai simply said: “The United State is too expensive. Taiwan is good but doesn’t have enough of the engineers [we want], and India isn’t ready.” As far as the cost of doing business is concerned, if the U.S. is one, Taiwan is about one-third, and China comes out to be one-fifth on average, Dai said. Asked about the quality of engineers, Dai said that young Chinese engineers may be green, but given the best design flows and tools, their energy compensates for their inexperience. “We tape out one chip per week at VeriSilicon,” he added. While the company has multiple offices throughout the world, VeriSilicon has a total of 380 people working in China – 250 based in Shanghai.

But it was VeriSilicon’s Dai who sounded the alarm that Chinese fabless companies “will go out of business within the next two years” without a unique business model. VeriSilicon, similar to eSilicon and OpenSilicon, is a fast-growing “IC design foundry” which offers its customers silicon solutions and SoC turnkey services. VeriSilicon, in essence, is not in the business of making their own chips. Rather, it’s in the service business – designing chips for clients, leveraging VeriSilicon’s own IP’s and those from other sources.


Setting aside the business-model issue, the reality is that the cost of engineers has also been rising in China.

Some report that high-end salaries for Chinese engineering managers – such as a VP of engineering based in Beijing –  might have already peaked in 2007 – 2008. But the price of design engineers is still going up. Hence, companies looking to keep their gross margin low are going westward in China in search of cheaper design engineers.

The biggest trap Allen Wu, president of ARM China sees in China’s fabless model today is that there are just too many local companies who compete purely on cost with similar products. That isn’t sustainable. And it’s why Jian-Yue Pan, corporate vice president, Asia Pacific region at Synopysis, is convinced that the survival of fabless China hinges on companies’ power to innovate. “You need to move up the innovation ladder.”

Pan said, “If you want to play in the global market, you need global talents and global supply chain.”