Game over for semiconductor MNCs in China?

"Game is over for semiconductor MNCs in China," asserted RDA Microelectronics Inc.'s CEO Vincent Tai. According to him, MNCs are no longer able to compete with China's fabless chip vendors in the consumer electronics IC business. 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 being a leader in the Chinese market is a good place to be, Tai said in a recent interview with EE Times. 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 base band 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 per cent 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:

The "cycle time" for Chinese handset manufacturers is extremely short. While takes six         months (or a year in the case of Nokia) to design a new mobile handset outside China, Chinese cell phone makers are spinning out new models every three months.

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.

Chip makers must survive on lower gross margins. Many local chip companies can live with a 35 per cent gross margin in order to achieve a 20 per cent operating margin, said Tai. But for most multinational chip companies to achieve the same 20 per cent operating margin, they need a 50 to 55 per cent gross margin. "That's no match with the locals."

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.