BEIJING – It’s hard to argue against the widely held notion that the weaknesses of China’s fabless companies lies in their inability to go beyond the Chinese market. Put more bluntly, Chinese companies are content with making cheaper products for the domestic market.
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Yiming Zhu, CEO and president of fabless company GigaDevice, takes the argument to another level: The target market for Chinese fabless chip companies should extend beyond the 1.3 billion people in China and reach out to the 6 billion inhabitants of the the developing world.
Of the earth’s current population of more than 7 billion, Zhu points out, “one billion people in the developed countries have already had a chance to try or buy iPhones. There are six billion people in the pool who also want digital life, but can’t afford iPhones.”
If China’s fabless companies can play a role in filling the digital divide with low-cost products, more power to China. (Rockchip, China’s fabless apps processor vendor, for example, is supplying its CPU to 7-inch media tablets made in China. They are being purchased by Thai government for its “One Tablet Per Child” program.)
Zhu also stressed that this strategy might actually buy time for China to buy time, hone its digital skills and catch up with the West. Pursuing a market of 6 billion poor consumers over the next decade “will give China time to grow,” he said.
The view may be a little too utopian.
Moreover, I don’t subscribe to the notion of China being Africa’s "new
colonialists" cultivating a new geopolitical market.
We are too out of it. We are the ones order Diet Coke in Aferican famine refugee camps. The Chinese, on the other hand, were in the camps like that not long ago. They can understand issues without reading a book about it.
We should focus on China, the top 1.3B of the 6B. Let them do the trickle down job. It is not fun.
Mr. Zhu describes a situation common to markets where the original players have gone upscale to meet profit margins. See Harvard Prof. Clayton Christensen among others for discussion about disruptive innovation. When new players come in to the market, the old-timers usually retreat to the upscale area even more. It is usually very hard for established firms to justify setting up more resources just to cannibalize their own sales. The new entrants can go after the low-end markets without attracting too much attention from the established players. Their first products aren't perfect, but usually good enough at the low pricepoint to attract enough customers to support development. Eventually the new entrants correct their mistakes and begin offering products that move upscale. By then it's too late for the old-timers to fight the upstarts off.
Of the big cellphone makers, Samsung might "eat their own lunch" somewhat to go after some of the unserved 6 billion. I don't think Apple is willing to consider this--they like the very fat profit margins they are banking.
Very well articulated. Thanks for your comments above.
As for Apple, the word on the street in China was that Apple did have some discussions with China Mobile -- to offer iPhones for TD-SCDMA market. The two copanies did not agree on the phone subsidies to be offered by China Mobile.
Unsurprising. I've seen suggestions elsewhere that the level of subsidy Apple wants is high enough that carriers do not make money on iPhone customers when they first sign up and get an iPhone. The carrier is doing it to boost market share, gritting their teeth and accepting a loss, and hoping the customer will re-up when their contract period is over and *then* the carrier might make money on the customer.
They apparently feel that *not* offering the iPhone will be worse for them overall than offering it and not making money on iPhone customers.
China Mobile apparently balked at what Apple asked for, but it's hard to blame them.
The shame of it is that the "US" and "Apple" are apparently conflated in this.
I'm not at all sure that one needs to design particularly cheap products specifically for developing country markets. Somewhat like the CD-V (video CD) market. Did it make sense? Or wasn't it predictable that DVDs would soon reach those same low price points?
So back to Apple. If Apple wants to stay with high-margin products only, it's their right. The shame of it is that the US isn't producing more smart phones, from companies which would be willing to continue marketing "older" products for a cheaper price, even if not within the US.
@Bert22306: Certainly economies of scale and semi-conductor electronics economics will be operative, and prices will drop over time. But if you are targeting an emerging market, what do you do? The products you make now carry a price point most of the emerging market can't afford, but if you wait till your costs (and therefore your prices) drop to a level the market can afford, you then have an uphill battle to establish yourself and get market share, because someone has designed products that can be sold cheaply enough to that market and is already established.
I think China sees an opportunity in those markets because they have a production cost advantage and *can* price cheaply enough to be attractive. That's only the first hurdle, but I can see a reason to want to jump it.
As for US companies selling older products cheaper elsewhere, the issue will probably be profitability or lack of some. The question won't be "Is it profitable?". It will be "Is it profitable *enough?*" Corporate management will be pressured to invest money where it will produce the best returns, and they may not see the returns as justifying the effort they'd have to make.
@Junko: Incidentally, the following are relevant to your stay in and comment upon China:
The Hurun Rich List of the wealthiest Chinese:
The Economist's commentary on the implications of the Hurun list:
@DMcCunney, thank you for the links on the Hurun Rich List. Yes, it is interesting, isn't it? I was just reading this one, too.
I'd be interested in seeing the Hunan Rich List for several years, and seeing what changed and who rose and fell. Economic analysis and prediction is a lot like reading tea leaves, but who is suddenly a lot wealthier gives insights into current trends on where money is flowing.
I had already seen the FT post, and thought it fascinating as well.
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