Four reasons why its 'game over' for foreign chip firms in China

Junko Yoshida

Multinational semiconductor companies are no longer able to compete with Chinese fabless chips vendors in the consumer electronics IC business, according to Vincent Tai (shown), CEO of RDA Microelectronics.

SHANGHAI, China – Multinational semiconductor companies are no longer able to compete with China’s fabless chips vendors in the consumer electronics IC business, according to Vincent Tai, CEO of RDA Microelectronics Inc. “It’s game over” for them, Tai asserted in a recent interview with EE Times here.

RDA Microelectronics, founded here in 2004 and listed on the Nasdaq exchange since November 2010, is a leading Chinese fabless IC vendor supplying RF and mixed-signal chips for cellular and broadcast communications used by China handset manufacturers.

RDA is a major supplier to the Chinese mobile handset market. Tai, quoting IHS iSuppli estimates, claimed RDA already has the leading market share in power amplifiers, Bluetooth, FM tuners and DVB-S tuners for the domestic white label market.

Still, RDA has a long way to go to compete with the likes of Broadcom in the global semiconductor market. Still, according to Tai, being a leader in the Chinese market is a good place to be.

RDA’s enviable position foreshadows a growing trend here for companies like RDA to dominate global electronics markets, Tai noted. As evidence, he cited the fact that multinationals such as Analog Devices and Texas Instruments backed out of China’s baseband chip business. While technically not Chinese companies, MediaTek and MStar, two Taiwanese giants, grabbed that market by leveraging their Chinese ties.

Indeed, Tai boldly predicts that the days for multinational chip companies are numbered, especially in the Chinese mobile handset and set-top box markets. “It’s because the supply chain in China can’t allow you to have a 50 percent gross margin,” he explained.

When the entire ecosystem of foundries, design houses along with packaging and system OEMs resides here, “You need to be a local to play the game,” said Tai.

The RDA chief described four rules for surviving in the Chinese market:

Rule #1: The “cycle time” for Chinese handset manufacturers is extremely short. While it takes six months (or a year in the case of Nokia) to design a new mobile handset outside China, Chinese cellphone makers are spinning out new models every three months.

Rule #2: Chinese handset vendors provide chip suppliers will little information about market demand. Therefore, chip suppliers need to be “in touch with the market,” said Tai, so they can be ready when market demand spikes. Speed is the key. “You need to be able to live with the ups and downs on the China market,” he said.

Ground truth

Rule #3: Chip makers must survive on lower gross margins. Many local chip companies can live with a 35 percent gross margin in order to achieve a 20 percent operating margin, said Tai. But for most multinational chip companies to achieve the same 20 percent operating margin, they need a 50 to 55 percent gross margin. “That’s no match with the locals.”

Rule #4: System vendors in China are less technical. Hence, they require more hand-holding. The success of Taiwan’s MediaTek here can be attributed to the turnkey solutions it offers Chinese system companies.

Tai said multinational companies retain a model that requires100 engineers to develop a new system every six months. “We are seeing Chinese system guys pump out a new product every three months with just five to 10 people.” Tai said, “That’s very disruptive.”

Foreign companies are not only slow to upgrade their products but also are slow to respond to customer complaints. “I can send someone to my customer’s site right away and do quick diagnostics,” he said. “A multinational’s core R&D team is still in the United States, and it takes more than a few e-mails back and forth to solve problems.”

Many in the West focus on the cost advantages of Chinese companies. Instead, they should be focusing on the agility of Chinese chip vendors and system companies in their domestic market. As Tai noted, “I am local. I have a core R&D team here, and I have field application engineers here. I have a huge advantage” over multinationals.

RDA increased its annual revenue in 2011 by 51.1 percent to a record $288.9 million, compared to $191.2 million in the previous year. The company’s gross margin was 34.5 percent compared to 29.8 percent in 2010. In the first quarter in 2012, RDA’s revenues totaled $72 million, with a gross margin of at 35.9 percent and a 20 percent operating margin. The company has $143 million in cash and no debt. It currently employs 320 workers.