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Taiwanese IC Design

A Quiet Storm Sweeping the World

A Quiet Storm Sweeping the World

Source:CW

Taiwanese IC design companies enjoy a global market share second only to the US. With IC design, Taiwan is shifting from manufacturing brawn to brainpower, from low margins to high added value.

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A Quiet Storm Sweeping the World

By Sara Wu, Victoria Sun
From CommonWealth Magazine (vol. 383 )

The hot financial buzz in October centered on MediaTek.

MediaTek made NT$11 billion in the third quarter, exceeding the company's capitalization and setting a historical record high.

The company's stock value went north of NT$600 billion, making it the second highest valued IC design company in the world. Sales volume is expected to exceed NT$100 billion this year, which could make it the fifth largest chipset designer in the world.

Still, MediaTek chairman Tsai Ming-kai remains as low-key in his daily life as ever, living a simple life and focusing on work.

The hot financial buzz in October centered on MediaTek.

MediaTek made NT$11 billion in the third quarter, exceeding the company's capitalization and setting a historical record high.

The company's stock value went north of NT$600 billion, making it the second highest valued IC design company in the world. Sales volume is expected to exceed NT$100 billion this year, which could make it the fifth largest chipset designer in the world.

Still, MediaTek chairman Tsai Ming-kai remains as low-key in his daily life as ever, living a simple life and focusing on work.

Global UniChip company president Shih Ke-chiang offers the incisive analysis that the rise of Taiwanese IC design foundries “has relied on naive fearlessness and brave determination. Even if they don't do well, they manage to exist in limbo . This encapsulates the Taiwanese character of extreme perseverance and patience , waiting for the next opportunity to come along. Out of every ten IC design firms, two do well, four are modestly profitable, and two neither succeed nor collapse yet make enough to pay out their salaries. They think of ways to transform themselves, and when the opportunity comes along they spring back to life. The last two companies fold.”

Even if they don’t do well, they manage to exist in limbo,waiting for the next opportunity to come along. Full of ambition, these design houses exhibit hearty resilience. They also share other common character traits, tending to be low-key, rational, logical, fond of thinking, and not very polished or inclined toward the complexities of socializing.

Although it is fair to say they are low-key, and the CEOs of companies long traded publicly on the stock market generally steer away from media interviews, they are nonetheless assertive. Luke Hsieh, president and CEO of Richtek, the number one name in analog ICs; Ho Tai-Shung, chairman of top LCD controller company Novatek; Alex Chiu, president of number-one communications chipset firm Realtek; and Sen Huang, CEO of top CMOS controller chipsets PixArt, all agreed to exclusive interviews with CommonWealth Magazine , marking their first public interviews. This was also the case with both Alcor Micro and Phison executives.

A new IC used to cost NT$20 million to develop. Nowadays, from design to production, packaging, and market launch, through constant revisions in response to customer demands, it takes at least NT$100 million to bring about a successful product.(see Table3)

IC design puts a premium on technological know-how, stressing teamwork. A good product design can place a company in a stable market position to become a goose laying golden eggs, which is why there are no individual heroes. “Engineers are the bosses, teamwork is primary.” Such is the golden rule oft repeated by chipset design company CEOs.

Their intense competitiveness also makes them highly secretive. IC design companies are product-oriented, and as product concepts are easily copied, they demand secrecy from engineers, who are prohibited from uttering a word before a product is officially launched.

“Everything is a secret, everything is strategy,” relates the former CEO of a foreign-operated information technology company. After leaving his company to become a top executive at a leading IC design vendor, he had a hard time acclimating, and relates that he got the third degree after returning to the office from being the keynote speaker at a symposium.

Riding the Tide of the Industry Chain

The largest contributor to Taiwanese IC design's success is Taiwan's integrated semiconductor industry chain. Without the support of the island's colossal semiconductor industry and computer assembly industry, the chipset design sector would not have it so good today.

Alcore Micro, founded in Taiwan in 1999, is a good example for understanding the various advantages the island offers in one place.

Wen Ko relates that Alcore Micro, in which his company invested venture capital, experienced great difficulty upon its founding in Silicon Valley, but was able to succeed when it brought the same management team to Taiwan . In an interview with CommonWealth Magazine , company president Dennis Chang, a gentle-looking, soft-spoken individual, became teary-eyed at one point, relating how at the age of 38, he and his partner picked out a folding table at Costco upon the company's founding in Silicon Valley. They spent their first six months in a cramped 10 square-meter room, facing each other across that table. Even with the know-how in place, capital, market and customer issues put the company in peril. “With people hard to find and capital hard to come by, we couldn't get a clear picture of tomorrow. It felt like we were a group of people totally forgotten by society,” he describes.

Taiwan is like a river, with a complete set of supports running through it. Upon returning to Taiwan , with Wen Ko making things happen, Alcore has established major strategic partnerships with WK Technology Fund, Asustek, Creative, and Chicony.

“Taiwan is like a river, with engineers, technology venture capital, downstream customers, and a capital market that let my little boat float smoothly ahead. It's tough in America,” laments Dennis Chang. Establishing his first company in 1996 in the US , he poured US$3 million into it before he began to make money four years later. But the tide really floated his boat after he relocated to Taiwan.

Fertile Training Ground

Manpower is the core competitiveness of IC design. Seamless cooperation among industry, government, and academia underpin the success of Taiwan 's IC design industry. Apart from Taiwan 's industry environment itself, sustenance provided by the government and education give IC design companies a reservoir of qualified personnel from which to draw.

According to statistics from the Ministry of Education, science and engineering students account for over half of the 1.3 million current college and university students. Similarly, over 70 percent of master's degrees are being pursued in science and engineering, demonstrating a national full-court press to develop technology.

In 1991 Chiao Tung University president, Dr. Chung-Yu Wu, then chief of the Engineering Division at the National Science Council, established the National Chip Implementation Center to provide free software to help professors teach students to design chipsets. This put software costing over NT$20 million in professors' hands for very little money. With the production opportunities close at hand through such foundries as TSMC and UMC, over 1000 professors and 10,000 students became involved in IC design R&D. On average, each master's student designed at least two types of chips, while doctoral candidates designed three to four. This is a good example of how Taiwan has offered a hands-on environment for cooperation among industry, government and academia, inspiring design innovation among young people and providing them with opportunities.

Presently the director of the National Si-Soft Project, with an annual budget of NT$2 billion, Dr. Wu is charged with promoting the development of system-on-a-chip(SOC) technology and encouraging Taiwan to advance from “chips” to “systems-on-chips” in the hopes of fostering the next wave of competitiveness in Taiwanese IC design.

The Golden 307 Laboratory previously chaired by Wu, and well known throughout the industry, cultivated numerous IC design seeds. This laboratory taught advanced analog IC technology, and the students it produced every year have directly entered the industry to become leading figures in IC design.

Chipset design companies constantly come up against an assortment of operational challenges, as MediaTek chairman Tsai Ming-kai often reminds listeners with his “reigning heavyweight champion” theory. Tsai relates that IC design is largely about the design of applications, but as the mainstream of products are always in flux, if corporations are unable to establish their core competitiveness through each market change, they set themselves up for being eliminated as flashes in the pan.

Star Search

Upon finding success in single products, finding the next superstar product to maintain growth momentum is the biggest challenge IC design companies face. “What will be the next big product?” seems to be the biggest weight on CEOs' minds.

One miscalculation could leave a company with only half its marbles. CEOs interviewed all referred to the strategic errors of both VIA Technologies and Silicon Integrated Systems (SiS).

In 2000, having captured over half the global chipset market, VIA Technologies sat atop the local stock market at NT$629, the highest stock price per share. The next year the company unveiled its ambitious Project Canaan, a realignment program that aspired to extend its reach into computers, graphics, communications, multimedia, and DVDs. This ultimately led it to tread on Intel's sacred ground of central processing units (CPUs), provoking a vicious backlash from Intel from which it has never fully recovered.

“VIA's problem was that it wasn't focused. In the IC design industry, deciding what not to do is harder than deciding what to do, ” relates one industry CEO. With world-class competitors in every field, laser-like focus is needed to prevail.

SiS's misstep involved pursuing a strategy of vertical integration, reaching into the capital-intensive downstream contract manufacturing realm and attempting to establish an 8-inch wafer fab. But it failed to offer better competitiveness over other professional wafer fab contractors, and the IC design client side was difficult to tie up. This continued to plague the company until it was sold to UMC, after which it got back on its previous track, once again separating design from manufacturing.

The competitive nature of Taiwanese IC design places perils both in front and behind.

Challenge: Holistic Planning

Nearly every field must compete with major international companies. In Realtek's case, it comes up against the world's number two IC design company, Broadcom, in nearly every product line, and now Taiwan 's own newcomer, Ralink Technology, is going directly after Realtek in the WiFi sector. Not just an isolated case, it is the kind of situation all IC design companies face. MediaTek, for example, is feeling the hot pursuit of MStar Semiconductor.

Right now, Taiwan's IC design field is like summer in full bloom, yet whether those fruits will remain vital through the fall or make it through the trying winter remains to be seen. One chief test will be whether companies can achieve technological upgrades. Likewise, in 2008 when laws go into effect requiring that employee bonus payouts be declared as expenses, they will need to survive the elimination game that will surely ensue. In addition, they must improve international management capacity, and confront the stiff challenges of global competition.

The first issue is technological upgrading .

Going after the low end was once the model for success among Taiwanese firms. Spotting an opportunity, they would pursue a niche and become top dog. And as long as a need for a new product emerged, they could roll out a new model within the same year, or even within three months.

Chintay Shih, professor and dean of the College of Technology Management at National Tsing Hua University, offers that Taiwan's IC design global market share has been stuck around 20 percent for years because of insufficient system planning ability.

Noting the differences between single chipset and system-on-a-chip design, Shih says, “ Taiwan used to build ordinary apartment blocks, and now it can build something like the Taipei 101 building, but without the capacity for urban planning are you really capable of building a modern city? A strong systemic concept must underlie the building of a city,” he laments. He notes that US-based companies spend more time on innovation, system architecture planning, and targeting end-consumer market demands in their IC design endeavors.

The second issue at hand is the accounting system for employee bonuses that will go into effect as of 1 January 2008, under which incentives will be tallied as expenses. This will only serve to further solidify the standing of Taiwan's top chipset designers and make the cluster effect of personnel even more evident.

Once employee bonuses go on the books as expenses, corporate profitability will be more faithfully placed out into the open for scrutiny, allowing good companies to stand out further. Chang Hsing-yi, director-analyst for Credit Suisse First Boston, notes that in the past, IC design company employee bonuses accounted for over 40 percent of after-tax earnings, and that this is expected to drop to around 30 percent with the institution of the cost accounting system. In other words, each company's profits will be diluted by around 30 percent.

Good companies will nevertheless have what it takes to retain personnel, and the elimination of IC design companies that do not show good profitability will accelerate under the new system.

Third is international management capacity, including strategic thinking and international operation. In MediaTek's case, apart from unbranded cell phones in the China market, is the company capable of making inroads into the market of the world's top five mobile phone brands? Having recently acquired US-based ADI, MediaTek has demonstrated aplomb at utilizing global technical resources, and relates that the challenges of global operation are just starting.

In the past, US companies couldn't care less about Taiwanese firms. These days, major player Qualcomm has watched MediaTek's every move with the eyes of a hawk. During a press conference announcing its strategic partnership with HTC, Qualcomm CEO Paul Jacobs remarked, “We are aware that MediaTek will be entering the 3G market next year, and we'll be watching.”

Playing the Next Match

Finally is the threat from emerging international competition. In its Eleventh Five-Year Plan, China clearly states that by 2010, or less than three years, it will do everything in its power to see that it has ten IC design companies with annual sales under US$3 billion, and five chalking up between three and five billion.

“Taiwan should really permit Chinese nationals to work in Taiwan. Top-tier Chinese talents, and first-rate Chinese returning from studying or working overseas should be able to establish themselves in Taiwan . This is a brainpower-oriented industry that doesn't need to migrate offshore,” relates an anxious W.C. Ko. He believes the government should have a forward-looking white-collar manpower policy that includes allowing PRC nationals to work in Taiwan, attracting the world's top talent in order for the island to establish an unassailable competitive advantage.

In an interview with CommonWealth Magazine , TSMC chairman Morris Chang also warned about the future of IC design. First, if the future industry growth rate lingers around 10 percent (it has been around 20 percent over the past five years), how will companies handle shrinking room for growth? The second challenge is how to effectively utilize Chinese manpower and the PRC market to establish a firm position.

Just how will this group of companies focused on IC design approach their next match?

At 10 pm, the night is calm, but activity remains high on Innovation Road I and II. The lights shine brightly as engineers and CEOs worth millions and tens of millions of US dollars work hard through the night.

For the first time they have proven that Taiwan is capable of something beyond the “high efficiency, large investment, low margin” technology manufacturing firm model, taking on the entire world with the “light capitalization, high-profit” approach of “disruptive innovation.” Whether or not Taiwan can stand firmly on this foundation and continue to challenge the world's leaders is a story that remains to be told.


Chinese Version: 低調拳王,奇襲全球 台灣IC設計,世界不能沒有他們

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