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Issue 36, July 2011

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

ChinaCompass - The rise of the Chinese fabless IC industry

With sales reaching US$5.2 billion in 2010, Chinese fabless integrated circuits (IC) firms are gaining shares in this hypercompetitive industry. According to market research company HIS-iSuppli, industry revenue expanded 23.6 percent, up from US$4.2 billion in 2009. Last year, the largest Chinese fabless chip company, Spectrum, grew its revenue to US$343 million by supplying chips to handset and smartphone makers. Together with other leading Chinese players such as Hisilicon (Huawei’s chip-design spinoff), RDA, and GalaxyCore, the top 10 firms had sales of US$1.6 billion, or 31.8 percent of the Chinese semiconductor market.

It was not until the beginning of the 2000s that a Chinese fabless IC industry started to emerge. In the previous decade, Chinese engineers at the integrated chipmakers rarely went beyond "reverse engineering". From 2000 to 2002, massive startups entered the industry, driving the number of Chinese fabless firms from less than 100 to almost 500. These new companies, often founded and operated by Chinese engineers with US graduate education and Silicon Valley business experience, have made breakthroughs in areas such as smart card ICs, communication ASICs, and, more recently, processors. Over the last two years, Chinese fabless companies have been the most active licensees in acquiring IP cores from IP suppliers such as ARM, MIPS, and CEVA. As many of these licenses involve cutting-edge technologies, such as CPU design, some industry observers have gone so far as to predict the potential of disruptive technologies emerging from China.

There are many factors that have contributed to the rise of China’s fabless IC industry. On the push side, Silicon Valley venture capitalists have favored the outsourcing of chip design activities from the United States to China by supporting Chinese engineers to start new firms in China. On the pull side, the Chinese government recently renewed and strengthened Document No. 18, originally issued in 2000, a policy that specifically supports the IC industry. The opening of a Chinese NASDAQ stock market in 2009 brought up a wave of public offerings of semiconductor firms, encouraging the inflow of domestic investment in startups. And compared with the situation in 2000, supply chain infrastructure in China is now in much better condition: engineering talent is more available, and world-class foundries and assembly firms are all well-established.

Since the 1990s, the global IC industry has become increasingly vertically specialized: what used to be done in one integrated chipmaker is now done by independent fabless design houses, foundries, and assembly & testing companies. For newcomers to this industry, building a complete IC industry is increasingly costly and difficult. With the maturity of the fabless sector, China's long march to establish a globally competitive IC industry is finally reaching the end. Under its national policy in the 1990s, the Chinese government initially planned to create its IC infrastructure by building state-owned and joint-venture integrated chipmakers. That approach turned out to be a total failure. By the end of the 1990s, American and Taiwanese assembly and testing companies became the first to migrate to China. In the early 2000s, ambitious Chinese techno-entrepreneurs, such as Richard Chang of SMIC, raised massive amounts of capital from US investors and the Chinese government to establish chip fabrication foundries. Among them the most successful firm is SMIC, the fourth largest pure-play foundry in the world. Establishing a semiconductor supply chain has cost the Chinese billions of dollars, but as a result of those long-term investments an innovative and competitive indigenous Chinese IC industry is emerging.

Top News of Last Month
Jun 08 Military chief 'confirms first China aircraft carrier'
Jun 09 Sea spat raises China-Vietnam tensions
Jun 14 China inflation accelerates to 5.5%, fastest pace since 2008
Jun 19 China aircraft competition coming fast: Boeing
Jun 22 China allows yuan foreign direct investment
Jun 22 China's import strategy should prioritize technology over capital: Vice Premier
Jun 27 China's Wen calls for greater democracy, reforms
Jun 27 China reports local governments owe $1.6 trillion
Jun 28 Regulator tightens supervision over China's state assets overseas
Jun 29 U.S. export control disappoints China
New Books
America’s Challenge: Engaging a Rising China in the Twenty-First Century

By Michael D. Swaine

“Offering a fresh perspective on current and near-term U.S. policy toward China, Michael Swaine examines the basic beliefs behind U.S.-China relations, recent policy practices by both countries, and the future trends most likely to affect U.S. policy. American leaders, he concludes, must develop policies to sustain America’s economic and technological prowess and improve the U.S. strategic position. Otherwise, Washington will have a hard time maintaining a stabilizing presence in East Asia, shaping regional and Chinese strategic perceptions, and managing key policy issues.” – from Carnegie Endowment for International Peace, June 2011


By Peter J. Levesque

“The Shipping Point examines the historical transformation taking place in China today as it evolves from global manufacturer to global consumer marketplace. The book further examines the impact this transformation will have on the future of retail supply chain management. Peter Levesque and his contributing authors bring together their practical expertise and insight in examining the opportunities that exist in both consumer retail and supply chain management over the next decade in China. In addition they provide insightful perspective into what it will take to turn those opportunities into reality. ” – from Wiley, June 2011
How China's Leaders Think: The Inside Story of China's Past, Current and Future Leaders

By Robert Lawrence Kuhn

“China will soon undergo a complete change of senior leaders and this book covers that new generation’s background and ideas based on personal interviews with member of China’s ruling party. It covers the future of state media, culture, the press, religion, science and technology, healthcare, agricultural, and economic and financial issues. For anyone who wants to understand China’s future, this book offers valuable insight.” – from Wiley, June 2011
Upcoming Events
Jul 14 - Jul 16 China International Energy Saving, Emission Reduction & New Energy Expo
Jul 23 - Jul 25 2nd Conference on Higher Education Development
Aug 12 - Aug 14 The 5th International Conference on Management and Service Science
Aug 17 - Aug 20 Shanghai International Conference on Social Science 2011
Oct 06 - Oct 07 Workshop on “Chinese Ways of Innovation”

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