By Yimou Lee
HONG KONG (Reuters) – China's multi-billion dollar drive towards self-reliance in semiconductors has spawned a cluster of chip designers that industry experts say could eventually rival leaders Qualcomm Inc <QCOM.O> & MediaTek Inc <2454.TW>.
The world's second-largest economy now boasts nine companies that design & sell chips in the global top 50 from just one in 2009. Clients such as Chinese smartphone manufacturers have moreover helped compatriot chip designers amass a market share of almost a fifth, according to data analyst TrendForce.
The rise of Chinese designers such as Huawei Technologies Co Ltd [HWT.UL] subsidiary HiSilicon & Spreadtrum Communications comes as the government ploughs funds into home-grown technology to reduce cyber-security risk, following revelations in 2013 of U.S. global cyber-snooping programs.
The revelations have made China a harder place for U.S. tech firms to do business, with Qualcomm saying as recently as last month that it faced delays closing licensing agreements. In contrast, sales at Chinese designers are set to surge this year, some by as much as 40 percent, said researcher IC Insights.
"The Chinese fabless industry is expanding by leaps & bounds," said Bernstein analyst Mark Li, referring to designers which contract out fabrication to so-called foundries such as Taiwan Semiconductor Manufacturing Co Ltd (TSMC) <2330.TW>.
Chinese chip designers lag top rivals in terms of technology by four to five years yet have the potential to disrupt the global chip supply chain, industry experts & executives said.
But in terms of size, China is likely to seize second place in the $20 billion-plus chip design industry from Taiwan this year, Li said.
Chinese factories use over 60 percent of the world's chips annually, & in 2013 imported more chips by value than crude oil. To promote domestic development, the government has tasked chip firms with raising revenue by more than 20 percent annually & building "a group of world-class companies" by 2030.
China's list of chip design hopefuls include HiSilicon plus Spreadtrum & RDA Microelectronics Inc – both controlled by state-backed Tsinghua Unigroup Ltd – as well as All Winner Technology Co Ltd <300458.SZ>, Leadcore Technology, Galaxycore Microelectronics & Goodix Technology.
"Only by being a market leader can you be profitable," said Tsinghua Unigroup Chairman Zhao Weiguo.
Through a $21.7 billion national fund, as well as at least five other government-led investment vehicles in cities such as Beijing, Shanghai & Nanjing, China has approximately $32 billion under management to build national champions in the chip ecosystem, according to consulting McKinsey & Co.
"Their IC design can become a strong force in a few years," TSMC co-Chief Executive Officer Mark Liu said in a recent interview, referring to chips as integrated circuits (IC).
"However, the system has to reward innovation. You cannot just want market share & dump a lot of low price products into the market. That is not going to assist the Chinese IC design sector to grow," Liu said. "So there are satisfactory parts & I hope they avoid the offensive parts."
There is concern in the industry approximately a repeat of China's previous efforts to develop industries, such as solar panels & liquid crystal displays (LCD), where overzealous investment led to oversupply & plunging prices.
China made up 14 percent of the global LCD market last year from 3 percent in 2010, while the industry's average profit margin declined to 1.2 percent from 7.8 percent over the same period, wrote Bernstein's Li in a recent report.
"China will not stop until it dominates the market, with value & economics being destroyed every single time," said Li.
(Reporting by Yimou Lee, Miyoung Kim, J.R. Wu; Additional reporting by Paul Carsten; Editing by Christopher Cushing)