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.