Taipei, Taiwan Two of China's top fabless IC makers are heading for the Nasdaq, the first in the country's fast-growing chip design sector to see if they can cash in on a hunch. Vimicro Corp. and Actions Semiconductor are betting that China is the future of design and the best source of sales growth for companies around the world.
Hoping to turn a buck from China fever, Vimicro looks to raise at least $100 million and Actions $200 million from the initial public offerings, which were filed within hours of each other a week ago.
But it won't be easy. Many global investors lack confidence in China investments, given the lack of strong management teams and transparency, and structural problems in company formation. So these IPOs will test investors' faith in China's emerging fabless chip designers.
So far, results have been mixed for China's tech IPOs. Though entrepreneurs lap up the hype over China, squeezing it for any advantage in terms of raising money, the attention hasn't benefited the country's chip makers and designers as much as it has the Internet and gaming sectors. Companies like the foundry Semiconductor Manufacturing International Corp. and cell phone designer Techfaith Wireless are trading below their IPO share price, while Internet stars like China's biggest online-game operator, Shanda Interactive Entertainment, and Internet search engine Baidu.com have skyrocketed.
Nevertheless, last year the Chinese tech sector drew in $424 million in venture capital, or a little over a third of the VC funds flow. IC design supplanted IC manufacturing as the hottest sector, with about $350 million going to 30 fabless companies. In 2003, VCs invested only $42 million in the sector, spread across just six fabless firms.
Tale of two little dragons
Vimicro and Actions have a lot in common, not only with each other, but with at least a dozen other emerging fabless designers in China. A common thread between these two "little dragons" is an international management team that's able to source and train local engineers. That is quickly becoming a template for other companies waiting in the wings for their shot at an IPO and there are plenty of them.
Vimicro, a maker of PC camera graphics processors, ripped a page from the Taiwan playbook, and leveraged a core group of founders who were educated and formerly worked in the United States. Three of its largest individual shareholders hail from UC Berkeley. Two of them, CEO John Deng and CTO Dave Yang, founded Pixim Inc. in Silicon Valley.
Actions, an MP3 system-on-chip maker, has an even stronger connection to Taiwan with most of the board of directors and senior management being Taiwanese or linked to Taiwanese companies. Its chairman, Peter Kang, has connections to Realtek, Holtek and UMC. Chief executive Yeh Nan-horng is a former vice president at Realtek, and board member Casper Lin is the former chief financial officer at UMC.
Being in China and developing for hot markets is a blessing and a curse. These firms don't have much protection from local competitors ripping off their intellectual property (IP), since China's legal protections are vague and its system for testing the credibility of patents remains unreliable. Both companies have acknowledged this as a significant risk.
Both vendors are also lawsuit targets. Actions is already defending itself against patent infringement claims from SigmaTel, but minimizes the potential damage by claiming that only 5 percent of its product reaches the United States, where the lawsuit was filed. Vimicro may be sued by Pixim, because Deng and Yang allegedly did not disclose their involvement with Vimicro while still on the job at Pixim.