China chip market sales growth slows as fabless competition heats up

According to a recent reportfrom iSuppli CorpChina's semiconductor sales revenue in 2008 is expected to rise by 6.7% to reach $81.7 billion, up from $76.6 billion in 2007. The single-digit gain is in contrast to years of double-digit annual growth.

However, China's fabless IC industry is expected to perform better, expanding by 12.3% to reach $3.5 billion in 2008, up from $3.1 billion in 2007, the market research company said.
 
¡°This growth in fabless IC revenue is being driven by domestic sales of wireless and consumer electronics products, rather than by exports,¡± said Vincent Gu, China research analyst at iSuppli, in a statement. ¡°Moreover, the Summer Olympic events in Beijing and other Chinese cities this year encouraged the release of new mobile handsets supporting the 3G, Digital Terrestrial Multimedia Broadcast (DTMB) and China Mobile Multimedia Broadcasting (CMMB) standards, boosting sales of associated ICs.¡±

China¡¯s domestic market situation improved in 2008 despite regulatory restrictions and an incomplete supply chain, iSuppli said. The research company noted that popular applications supporting new domestic standards will appear in 2009 as their industrial ecosystems mature and that, although there is substantial economic uncertainty, continued revenue growth is expected in 2009.

ISuppli also noted heavy competition among China's fabless IC companies as a contributing factor to the slowing market growth there. More than 550 fabless companies compete in China, iSuppli estimated, pointing out that most of these companies are young and small. On that, the researcher estimated that more than 88% will generate less than $10 million in revenue during 2008 and are struggling to continue their growth.

ISuppli further noted the launch of an alternative stock market in Shenzhen, called the Chinese Growth Enterprise Market (GEM), had been expected to prompt a flood of fabless IC IPOs (initial public offerings) in 2008. However, the GEM was not introduced this year because of the current global financial crisis.

Moreover, venture capitalists "generally lack interest" in China's IC industry, according to iSuppli. A majority of semiconductor companies are short of capital and face cash flow problems, the research company said.

¡°iSuppli expects more than 100 Chinese IC companies to disappear within the next two years,¡± Gu warned. ¡°Many companies presently are seeking buyers and a total of four companies already have been acquired by foreign semiconductor firms during the past 12 months. China's fabless IC industry is polarized with about 50 companies achieving success and the remainder struggling to survive. Some companies are losing money and have no mature products available to deliver the revenues needed to continue doing business. Most companies have announced layoffs, cut production lines, or have shut down entirely.¡±

On the other hand, there are expected to be several Chinese fabless companies that will be seeking IPOs on the Nasdaq and domestic stock exchanges during 2009, iSuppli noted, adding that it expects that at least five companies will seek IPOs and at least 10 companies will be involved in mergers next year.