The "China Chips" scandal made headlines across the country and the news that some enterprises are considering layoff plans have some worrying about our IC design industry.

But the outlook may not be as bleak as it seems.

"I remember that companies were considered "big" if their sales reached 100 million Yuan back in 2004. But now in 2007, this figure is no longer significant," said Yorbe Zhang, Global Sources' Chief Executive Analyst. He revealed that China's IC design has maintained an annual growth of 50 to 70 percent for the last few years.

"Two Generations" Behind the Leading Developers

The recently published "2007 IC Design House Survey: China" headed by Zhang shows that the average sales of China's IC design companies was US$7.8 million and some of them even exceeded US$100 million.

"2007 IC Design House Survey: China" also shows that by the end of 2007, the IC industry in China has formed a complete production chain after a decade of development.

Global Sources conducted a survey of nearly 500 IC design companies, of which 83 produced completed samples. The results show that IC design companies employed an average of 125 staff and 53 IC designers. And 13 percent of the surveyed companies employed more than 100 IC designers with 70 percent marketing their own-brand ICs. Revenues in 2006 averaged US$7.8 million, with 28 percent of them reaching over US$15 million.

"Companies employing an average of 53 IC designers are 'small' by world standards," said Zhang. However, according to his research on China's IC industry for the past seven years, the IC industry is regarded as a sunrise industry in China, which helps attract new recruits. And the competitiveness of China’s IC companies has been rising, evidenced by growth in sales.

However, the domestic IC supply in this booming China market still falls short. IC Insights predicts that mainland China's chip consumption will hit US$100 billion by 2010, of which 89 percent will be imported.

Other figures show that, in 2001, China imported 95 percent of its chips. Since gross domestic demand has been increasing 30 percent each year, the drop of imports from 95 percent to 89 percent actually represents an impressive growth.

"The Top 10 China IC Design Enterprises 2007" were announced by the China Semiconductor Industry Association on February 29, 2008. Awarded enterprises included CEC Huada, Hisilicon under Huawei, Spreadtrum, DaTang Microelectronics, Sky League, Wuxi China Resources Semico, Hangzhou Silan, Vimicro, Shanghai Huahon and Tsinghua Tongfang.

Among these top 10 IC enterprises, the group led by CEC Huada topped the sales chart with RMB 1.46 billion, and Hisilicon came second with 1.29 billion. Others grossed between RMB 400 million to 1.1 billion.

However, it would be misleading to use "by leaps and bounds" to describe the current growth of China's IC design industry. So how far has the industry come?

"In general it's lagging behind leading world class technologies by two generations," Zhang said. He cited the process technology as example – only 75 percent of the surveyed companies are utilizing 0.25um or smaller technology for digital design.

Zhang said: "In 2006-2007, the mainstream IC industry utilized 0.13um or smaller. However, the top process technology in the world is now 90nm (0.09um) and Intel has even achieved 45nm." Zhang said that 49 percent of China's IC companies are now utilizing 0.25-0.18um process technology, and 24 percent are even in the 1.5-0.35um range.

China IC Designers Experienced

Comparing the 2006 and 2007 Surveys, it's noteworthy that there was a marked growth in the number of China IC companies utilizing the mainstream 0.13um or smaller process technology, rising from 14 percent to 25 percent. In 2007, 9 percent of them utilized 90nm.

Zhang believes that the standard of IC design indicates a country's competitiveness in the world market. Development of China chips will follow the paths of Korea and Japan – "IC design led by the whole IC industry". In other words, China's IC design boom has been driven by the rapid growths of consumer electronics, communications and computer electronics.

Hisilicon, a subsidiary of Hauwei, is one of the IC companies surveyed in "2007 IC Design House Survey: China". Established in October 2004, it was a former core department of Huawei set up in 1991.

Published information shows that Shenzhen-based Hisilicon has design centers in Beijing, Shanghai, Silicon Valley, the US and Sweden. Hisilicon's products are mainly sought after by communication, networking and digital media buyers. By the end of 2007, Hisilicon had over 1,600 employees.

Judging from Hisilicon's products and development, its main business and clients are not separable from the parent company, Huawei. Hisilicon has relied heavily on Huawei in order to grow in its initial stages.

This is one of the typical models for the development of China’s IC design companies. These companies are usually spin-offs from major industry players. They are attached to the parent companies, providing specialized products to single or few clients, and thus develop rapidly due to stable orders and less fierce competition. Examples are Zhong Xing Semiconductor, a spinoff of Zhong Xing Telecommunication & Equipment and Haier IC Design, a spinoff of Haier.

According to Zhang's analysis, Hisilicon broke away from its parent company and became independent in a bid to broaden its product and client bases. "They didn't want to just take Huawei's orders. The wanted other clients," said Zhang.

Hisilicon's development has followed this path – born with parent company's support and grew gradually to fend for itself.

"Government officials have time and again stressed in conferences that the future of China IC design is to integrate with the IC industry, combining down-stream and mid-stream sectors. If the IC designs are not used by our own country, how can we expect to export them to overseas?" Zhang said. He thinks the only way for the China IC design to grow is to follow the IC industry. It was illustrated by Samsung, Panasonic and Sony. With their dominance in consumer electronics, their IC designs have grown into the top 10 of the world as well.

Gamble and Chaos

In general, the development of domestic IC design companies like Hisilicon is still in the early stages. The 2007 IC Design House Survey: China shows that over 80 percent still do direct sales, which means their sources of clients and products are still very limited," said Zhang.

Zhang thinks that China's IC design companies are mainly in specialized IC, low-competition ASIC markets, while the general IC, or ASSP markets that capture the bigger market share, are dominated by giants like Intel and AMD. Sony and Samsung are also key players in some specific sectors of the ASSP markets. Zhang said: "Chinese companies lack competitiveness in general IC designs."

According to the statistics of China Semiconductor Industry Association, the top 10 IC design companies can be divided into three categories: 1. "State-run" companies like Huada and Datang Microelectronics, which capitalize on government policies or projects such as the nationwide ID card chips project offered to Datang Microelectronics. 2. Large company spin-offs like Hisilicon characterized by their IC industry connections and the development path similar to Samsung and Panasonic's. 3. New companies funded by risky investments or managed by Western-style systems such as Vimicro, Spreadstrum and Sky League. These companies are quite dominant in their specialized sectors, such as Vimicro in computer cameras and Sky League in MP3 players.

The "2007 IC Design House Survey: China" also shows that 27 percent of the China IC design companies are subsidiaries of foreign enterprises. Only 43 percent were pure local investments. Meanwhile, 13 percent were foreign technology ventures while the remaining 17 percent were capital ventures.

"2007 witnessed a year of reshuffling. Many companies grew rapidly, while some ran into troubles," Zhang said:"There were about 500 IC design companies in China in 2007. However, half of them were not up to standard to produce commercial products yet. "

Zhang said: "The growth of Vimicro and Spreadtrum will set examples for other smaller companies to follow, but they were not without troubles in 2007 due to fierce competition." For most China startups, the pressure of escalating costs is huge. What’s more, they lack stable orders and the advantage of large-scale production.

Zhang said that in recent years there have been foreign investment capitals flowing into China's IC design market, looking for "treasures". As a result, some of the local companies have to expand by absorbing foreign investment.

Zhang said: "It's a gamble. Among the 500 IC companies, half are struggling to survive. That means it leaves much room for further merging and acquisition and even more influx of foreign capital."