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Thursday, June 07, 2012

Why MNC semiconductor firms cannot compete with Chinese Fabless chip vendors?

Vincent 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:
Rule #1: 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.
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.
Rule #3: 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."
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 per cent to a record Rs.1,512.57 crore ($288.9 million), compared to Rs.1,001.05 crore ($191.2 million) in the previous year. The company's gross margin was 34.5 per cent compared to 29.8 per cent in 2010. In the first quarter in 2012, RDA's revenues totalled Rs.376.96 crore ($72 million), with a gross margin of at 35.9 per cent and a 20 per cent operating margin. The company has Rs.748.69 crore ($143 million) in cash and no debt. It currently employs 320 workers.

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