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?
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.
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?