China Strategy for Fabless Chip Designers

Should Taiwan fabless chipset design companies partner with their Mainland competitors? Its an interesting question. Lung Chu,President of Asia field operations at Cadence, believes they should. According to Digitimes:

Facing emerging competitors from China, IC design companies in Taiwan constantly enhance their products and operation to keep the advantageous position in the IC design field, according to Lung Chu, the president of Asia Pacific field operations, at EDA specialist Cadence. However, China-based IC design houses need to learn from their rivals in Taiwan, and one way to do that is to partner with them to help increase their share of the large China market.

Chu indicated that IC design companies in China such as Vimicro, Actions Semiconductor, and Spreadtrum, among others, have just begun listing and trading on the stock market. But although they have successfully entered the market, these companies still need to think about what can make them sustain growth. Chu pointed to the example across the strait in Taiwan, where IC design companies such as MediaTek, Sunplus Technology, Novatek Microelectronics, and Himax Technologies have achieved a certain positions in the market by their ability to grow and innovate continuously.

When reading this commentary, the first thing that came to mind was Dr. Jones article we commented on earlier this month where he said Taiwan was not yet a global innovator and that China was. This article once again indicates this is not so. Mr. Chu acknowledges in the fabless IC design sector, Taiwanese firms are indeed the innovators, not the Mainland companies! Later in the commentary Mr. Chu says:

"Because the IC market is global, lowering price without innovating will eventually only lead to a one way ticket out of the market . Therefore, China industries have to make a breakthrough to solve this problem or else they can expect a life span of about 2-3 years."

Indeed! His solution: Mainland chipset design companies should partner with Taiwanese companies to ensure their survival. He believes this will be a win-win for both the mainland firms and Taiwan firms. His argument suggests these partnerships will open the Chinese market to Taiwanese firms and the mainland companies will learn innovation from the Taiwanese! Perhaps! A very big perhaps.

Lets be honest. This is a definite win for the Chinese firms. Establishing a partnership with the Taiwanese fabless design houses will teach them a lot. Taiwanese firms in this sector have a lot of experience since the fabless design industry has been in Taiwan for 20 years or more now. The market has grown, there are established players with global market share. These companies have some brand equity and are known by the system integrators who use their chips. They have a secure raw material supply chain and probably have very good relationships with the pure-play foundries established over two decades of working together. Its a definite win for the emerging mainland design companies!

What about the Taiwan firms! Firstly, they are already penetrating the China market. Each will have their own strategy. MediaTek for example sells their chips to bigger mobile phone manufacturers e.g. Nokia, Siemens etc. These bigger branded companies then sell into China. What is the downside? Intellectual Property Rights!

Remember the Cisco/Huawei fiasco in 2003? Cisco contracted Huawei to manufacture their switches. Huawei then stole some of their designs and software and sold it at cut rate prices to Cisco clients. At the time Hwawei was a small manufacturer in Shenzhen. Right now they are a global competitor! Cisco did take Huawei to court in the US but later dropped the case after Huawei ADMITTED to stealing some of their code but suggesting it was accidental rather than deliberate and far less extensive than Cisco claimed! This is a big big fear for companies operating in China! Protecting property rights is a big issue and there is no recourse to the law in China unlike the US or Taiwan.

So there is potentially a huge downside for Taiwan design firms establishing partnerships with Chinese competitors. They might steal their stuff and blow them out of the water! Don't get me wrong! Partnerships and joint ventures can and do work, but for them to work there must be trust and a record of behaviour that speaks for itself. Chinese firms must realize that business is not about getting ahead at all costs and at the cost of those you work with. Only then will people be more willing to partner with them.

I would therefore suggest Taiwanese fabless design houses be a little more cautious when partnering with Mainland firms. The partnerships may provide some benefits, but the upside of deeper penetration into the Chinese market is not certain and the threat against their intellectual property real. But I guess they already know this, or partnerships would already be far more extensive!

Digitimes: Low price strategy limits growth potential of players in China's IC design industry, says president of Cadence Asia

Jackson Hu Takes a Step Back at UMC

Jackson Hu has resigned from his position as chairman and CEO at UMC and will now only take part as a senior advisor. According to Digitimes:

United Microelectronics Corporation (UMC) has announced the election of Stan Hung to the position as company chairman and Shih-Wei Sun to the position of CEO in a board meeting held today (July 16). The election was held after chairman and CEO Jackson Hu announced his decision to resign from active leadership of the company to pursue a role as a senior advisor to UMC.

Hu commented that he felt he has accomplished many of his objectives and that the timing is right for a younger and more energetic management team to take over. Incoming chairman Hung said UMC remains committed to serving customers while enhancing the strength of its financial structure and controlling costs, shareholders and employees. Sun added that his top priority as CEO will be to ensure that UMC delivers solutions that target customer success as they face the ongoing economic uncertainty.

Jackson Hu has had quite an impressive 30-year career in the semiconductor industry. According to the UMC profile page:

Dr. Jackson Hu is the Chairman and Chief Executive Officer of UMC. A 30-year veteran of the industry, Dr. Hu possesses extensive experience in the IC design industry in the fields of MPU, Graphics, and wireless communications.

Before joining UMC, Dr. Hu served as President and CEO of SiRF Technology, a fabless communications IC and IP company focused on GPS-based location technology which went public in April 2004. Dr. Hu also helped found IC Ensemble and Verticom, which were acquired by Via Technology and Western Digital in 2000 and 1988, respectively.

Before joining SiRF, Dr. Hu worked at S3, the leading fabless PC graphic chipset and software provider, as senior vice president and general manager. While at S3, Hu helped grow the company into the market leader.

Dr. Hu earned his bachelor's degree in electrical engineering from National Taiwan University and his master's and doctorate degrees in computer science from the University of Illinois, Urbana. He later earned an MBA from Santa Clara University.

Dr. Hu rose to the positions he is now stepping back from after the founder and former chairman of UMC Robert Tsao was accused of illegally investing in China. PC World provides some background:

Jackson Hu took over as chairman of UMC in early 2006 after his boss stepped down in a spat with the Taiwan government. Robert Tsao [CQ], founder and former chairman of UMC, left his job amid allegations of illegally investing in China. Last year, he and another UMC executive were exonerated when a Taiwan court ruled there was not enough evidence to convict them in the case.

UMC has been going through some tough times lately. Their share price is at a near all time low! Their business structures are probably still OK and they are inevitably victims of a global slowdown. Anyway, I am sure Dr. Hu will continue to contribute to UMC and Taiwan's semiconductor industry in a significant way. These business leaders never do step back all the way, its not in their blood!

Digitimes: UMC announces restructuring of executive team

PC World: Chairman of Chip Maker UMC Resigns

Taiwan Technology Index - 15 July, 2008

Today the Taiwan Technology Index bleeds red! Everything is down except Clevo who made a marginal gain. Remember in our post earlier today we spoke about the stock market continuing to decline! Sure, tomorrow anything can happen, but I think it will go down more. I don't see any good news on the horizon. See the picture below. Grabbed it from my Yahoo portfolio for the Taiwan Technology Index. Stocks are cheap now. Maybe they will become cheaper!

Taiwan Technology Index - To invest or not to invest!

I was interested to see two different reports on the Taiwan Technology Index. The first is from Reuters about the new HSBC Taiwan fund. The fund manager, Leilani Lamm argues investors should avoid tech stocks and look at other investment opportunities in traditional industries. The article says:

Investors in Taiwan should be underweight its high profile technology sector because it is unclear how badly a faltering global economy will curb demand in its main export markets, an HSBC fund manager said.

They should instead favour shares of the self-ruled island's telecom, industrial and material stocks, which best stand to benefit from policy changes following the election of President Ma Ying-jeou, added Leilani Lam, manager of the bank's newly launched Taiwan fund.

Leilani Lam is quoted as saying:

"The new administration does make a difference, because for the first time in eight years, this government, they are really focusing on growth and putting Taiwan back on to the map."

A second article on Forbes argues:

A month ago Taiwan hosted two big technology exhibitions, Computex and SemiTech Taipei. Computex attracted 35,000 visitors and 1,700 exhibitors from 25 countries. They already knew Taiwan as a technology powerhouse, but the 2008 inauguration of President Ma Ying-jeou on a platform of increased business ties to China promises to recharge the economy. The Council for Economic Planning & Development, a Taiwan government agency, forecasts 4.3% real growth in gross domestic product in 2008. That's not big by Asian standards, but it's more than triple what will come out of the U.S.

However, one portfolio manager is, unlike the HSBC fund manager, starting to look at the tech stocks. According to Forbes:

These developments have yet to be matched with bullishness in Taiwanese technology stocks. "It has been a bad market for seven years, since the bubble burst in 2001. However, we're starting to look at this market," says Khiem Do, portfolio manager of the closed-end Asia Pacific Fund

Firstly, there is a lot of optimism surrounding the election of Ma Ying Jeou and what he can do for Taiwan and Taiwan’s economy. While the so-called “improved” trade links with China may stimulate Taiwan’s economy, this is not definite. Most tech companies make most of their revenues through exports and are therefore dependent on the global economy. The downturn in the States and increasing economic pressures in other parts of the world mean the companies are exposed to forces beyond the control of the Taiwan government.

The Economist (hat tip The View From Taiwan) argues in a similar way in an article about the recent Chinese Mainland tourists in Taiwan. (Emphasis added):

Since taking office in May, President Ma Ying-jeou has faced pressure to reinvigorate the economy. Annual growth remains above the 4% mark and inflation below it, but share prices have been tumbling and concerns are growing over widening inequality and looming economic stagnation. Soaring fuel prices and a global slowdown limit Mr Ma’s room for manoeuvre.

I believe fund managers and others should temper their optimism with the new Taiwan government. There is not much they can do.

So what about buying stocks on the tech index? I polled a broker and a personal wealth fund manager on the weekend and they were both saying don’t buy yet. One of them believes there is stagflation in Taiwan and there are more rocky times ahead. The other believes the bottom of the Taiex is below 6800 points (yesterday it traded at 7200 points). One of them even recommended looking at other emerging markets. I am starting to look at some companies now. A properly diversified portfolio may pay real dividends in the next two or three years, but I think short term gains will be hard to come by.

Reuters: HSBC wary on Taiwan tech firms
Forbes: Tech in Taipei
Economist: First, we take the department stores…

Industrial PC sales rise

China Economic News (CENS) reports both Adlink and Winmate, two industrial PC manufacturers, have had strong sales in Q2. CENS says

Taiwan's leading manufacturers of industrial personal computers, including Adlink Technology Inc. and Winmate Communication Inc., posted outstanding sales in the first half of this year.

After acquiring the U.S.-based Ampro Co. several months ago, Adlink saw quarterly sales break the NT$800 million (US$26.4 million at US$1:NT$30.3) mark in the second quarter of this year. The company saw overall sales exceeding NT$1.3 billion (US$42.9 million) in the first half of this year, up a whopping 36% year-on-year from NT$975 million (US$32.17 million). Winmate saw second-quarter sales reach NT$395 million (US$13.03 million), hitting a historic high for nine quarters in a row and up 47.2% year-on-year.

Since I work in the IPC industry this should be good news for me and the company I work for. Perhaps! However the reporter fails to mention how much of Adlink's growth is directly attributable to Ampro. It would be good to see the breakdown of Ampro sales and Adlink sales and see where the actual increases are being derived! I do believe Adlink will benefit from both economies of scale and scope with their acquisition of Ampro but I would be interested to see how the sales are being broken down between the two companies.

To emphasize this report, while the the Taiex slumped 1.21% today, the share prices for many IPC companies were up by more than 2%. IBASE led the way with a greater than 6% increase in the share price. Adlink went up 2.99%.

Article: Industrial PC Firms Achieve Brisk Sales in Q2

Focusing on Branding

This blog has argued in a few articles that Taiwan's weakness in the technology sector is their weak or complete lack of branding. Although this blog continues to argue that Taiwan is a leading innovator in technology manufacture and production, and a leading producer of many electronic products, with very few exceptions, none of the big companies are household names.

For some of these companies, e.g. TSMC, this is a clear strategy. These companies are not interested in developing their own branded products as they do not want their customers to feel threatened by their forward integration. Companies like TSMC will continue to offer anonymous services to branded fabless chip design companies (like NVIDIA) and will never seek to establish their own brand. According to the TSMC 2007 Annual Report (see page 8):

TSMC is the world's largest dedicated semiconductor foundry.Founded on February 21, 1987 and headquartered in Hsinchu,Taiwan, TSMC pioneered the business model of focusing solely onmanufacturing customers' semiconductor designs. As a dedicatedsemiconductor foundry, the company does not design, manufacture,or market semiconductor products under its own brand name,ensuring that TSMC does not compete directly with its customers.

This is not true of other companies. Consider Hon Hai Precision Technology. Although they are the world's leading contract manufacturer, they felt compelled to develop their own branded products and created their own Foxconn brand that was spun off as a separate company. Although Hon Hai is listed in Taipei and Foxconn in Hong Kong, they are very closely connected. Hon Hai realized the real money was in the brand, not the manufacturing.

However, this blog has argued that save for a very few companies (ACER, ASUS, VIA etc.) very few tech companies have established brands. Yet this blog has also argued that many Taiwanese Tech companies are yearning to break free of the manufacturing-only business models and establish their own brands. It was therefore with great interest that I read a March 2008 article in the New York Time entitled: Taiwan Wants to Focus on Building Its Own High-Tech Brands. The article argues:

Taiwan companies are also largely focused on making products for global brands like Dell, Apple and Intel, instead of coming up with their own brands, and they focus on hardware manufacturing, where only a small percentage of the price the consumer pays for a product is earned.

As little as 5 percent of the consumer price for a product like a laptop can be earned by the Taiwan companies that assemble them, while a higher percentage — about 20 percent — is earned by contract manufacturers, also known as original equipment manufacturers, or O.E.M.’s — which make chips or other parts for the brand holders, according to industry estimates.

With their own brands, the companies could earn as much as 30 percent of the consumer value of a product, analysts estimate.

The article continues to argue Taiwan is used to transitions and highlights there rapid change from a primarily agricultural community post WWII to a high-tech heavyweight in 2008. The article says:

Transformations are nothing new for an island that has evolved from an agriculture- and textile-dominated society after World War II to a factory for light industrial and labor intensive products like sneakers in the 1960s and 1970s to an electronics production base in the 1990s and now to a high-tech center.

Do I believe Taiwan can develop top brands? Yes! However, there are big problems. The biggest problem is the unwillingness of executives and business owners to employ people with the right skill sets. That is, people who have the ability to communicate accurately and purposively in English. Native English speakers with the right abilities cost a lot in relative terms and therefore are viewed as being over priced for the market.

The second problem I see is the application of a manufacturing mindset to a branding. Most people in the tech companies grew up in manufacturing and come with a manufacturing culture. People with the soft skills required for developing effective brands are rare and knowledge of how to create brands even rarer. Many companies think of great names for their products and stick the name on their PC, screen etc. believing that the product is now branded without understanding that all they have done is name the product. After all a brand is a mental concept of something. Just naming a product doesn't create the mental concept, it merely enables product to be told apart.

I do believe change is afoot in the Taiwan tech sector. The skills that are lacking described above will be learned and the people in Taiwan will adpat. As I have argued before, to underestimate the Taiwanese is not a good idea. The people here do have a lot of potential and are intelligent. If they apply themselves to developing global brands in the same way they applied themselves to developing the technology sector in the first place, there is no reason why they cannot succeed.

There will be teething problems, but the next 10-years will certainly be exciting. Here's looking at you Taiwan!

Article: Taiwan Wants to Focus on Building Its Own High-Tech Brands.

Atom Processors and Industrial PC

The Atom processor has changed the PC landscape. Low price PCs are becoming increasingly prevelant. People don't need the computing power of high-end processors so why pay for the excess capacity. The industrial PC sector is especially attuned to price. IPC customers usually buy embedded systems to be used for a single purpose e.g. being installed in a kiosk or digital signage player. They therefore don't need the full power of a normal processor. The impact the Atom processor will have in the IPC industry is uncertain at best.Will IPC profits fall? Maybe! Digitimes doesn't seem to think so:

Recent market reports that Intel's Atom standard platform has dropped below US$100 have prompted speculation that the new platform could have a possible impact on IPC (industrial PC) makers' profits. But sources at IPC makers have pointed out that although the standard platform could have an impact on the market, the affect will be limited.

The main selling point of IPCs is customization, therefore no matter how cheap the atom standard platform becomes, it will still face difficulties when competing against products developed by specialist companies who are able to add additional value to their products, the makers contended.

IPC makers said they may consider adopting the Atom standard platform for offerings to the system integrator (SI) or international trader market segments, which give priority to low-pricing, however, these buyers will face possible risks down-the-road if Intel decides on a lower than average life-cycle for the platform.

Some IPC makers are already developing Atom based platforms. It will be interesting to see how these products pan out and what the market up take is. For now I guess it is a wait and see game for the IPC industry.

Article: Low price Atom standard platform to have limited impact on IPC makers