In today’s flat but increasingly complex world, no one
entity can do it all—not even Cisco or IBM, both
prominent proponents of business collaboration and
participation in clusters. The semiconductor industry
came to this realization earlier than other high-tech sectors.
Twenty years ago, TSMC established a service—what was
then a novel idea—of making ICs for other companies. Other
independent foundries followed, nurturing a new industry sector
called fabless semiconductor companies.
Collaboration has been integral to the existence of these
companies. They depend on foundries to turn their designs
into IC products, someone else to package and test them,
and still a third to deliver the final products to the customer.
Frequently, yet another independent party sells these products.
Who else knows more about collaboration than they do?
CHINA’S ASCENSION
But can cross-border collaboration also serve as a model for
entering the China market? China is now the world’s largest
and fastest growing market for semiconductors. Production
of mobile cellular phones, LCD TVs, computers, servers, and
monitors is growing at well over 30% per year.
China now accounts for more than half of the global output
in these categories, except LCD TVs. And these products
aren’t just for export, as China is increasingly the end-market
as well. To meet increasing demand from their fastest-growing
customer segments and score design wins, fabless companies
need to be in China. Indeed, the presence of foreign fabless
companies is picking up in China.
The go-it-alone strategy for entering China may not be viable
for smaller fabless companies. These companies, a fraction
of the size of the industry leaders, may be deterred by financial
and human resources constraints. For them, cross-border strategic
alliances and even formal merger and acquisition of a
home-grown Chinese fabless company may be the answer.
The advantages are obvious—immediate access to trained
engineering staff and a jump-start in understanding China’s
local requirements, bypassing much of the pain and uncertainty
of a startup.
At a recent Silicon Valley conference sponsored by the Asian
American Multi-technology Association, a panel of venture
capitalists pointed out that the total cost of semiconductor
product development in China is 1/25th of the cost of comparable
development in the U.S. One panelist pointed out that
the fabless industry in Taiwan reached global parity about 10
years after the establishment of the foundries. In China, it has
been seven years since the first foundries were established,
and the panelist expected to see a growing presence of China’s
indigenous fabless firms in the global market.
WIN-WIN SITUATIONSM
Partnership between these companies and more established
foreign fabless firms presents a potentially big win-win scenario
for both parties, i.e., the ability to combine China’s low
costs and rapid product development with worldwide distribution
via the foreign firm’s international sales network. Foreign
companies contemplating entry through local partnerships,
though, should keep several basic issues in mind.
At equivalent staffing levels, the Chinese company selling to
its domestic market is likely to be much smaller revenue-wise
than the foreign firm. Also, the culture of the local company
can be quite different depending on whether the company is
private and homegrown, can trace state-ownership in its past,
or was founded by returnees from the West.
The foreign company needs to invest time getting to know
its prospective partner, testing technical skill sets and making
sure that both parties share common goals and subscribe to
similar operating principles. It also needs to constantly assess
the chemistry and communication levels between the two sides
and envision how they will team together over the long-term.
While mutual evaluation continues during the courtship
phase, the foreign company should be thinking ahead to how
the integration process will unfold. Initially, both parties might
be better served by a less formal strategic alliance, constructed
on more narrowly defined common interests and designed to
build the trust required to merge successfully over time.
Demand for ICs in China today exceeds supply by roughly
fourfold. Sooner or later, this demand will be met by a local
supplier, whether a branch of a U.S. or Taiwanese firm, a local
design house, or a newly formed entity that combines the comparative
advantages of both. By 2010, 40% of the world’s purchase
of semiconductors will be taking place in China. Who
can afford to say that they don’t need to be there?