Rule #3: Chip makers must survive on lower gross margins. Many local
chip companies can live with a 35 percent gross margin in order to achieve a
20 percent operating margin, said Tai. But for most multinational chip
companies to achieve the same 20 percent operating margin, they need a
50 to 55 percent gross margin. “That’s no match with the locals.”
#4: System vendors in China are less technical. Hence, they require
more hand-holding. The success of Taiwan’s MediaTek here can be
attributed to the turnkey solutions it offers Chinese system companies.
said multinational companies retain a model that requires100 engineers
to develop a new system every six months. “We are seeing Chinese system
guys pump out a new product every three months with just five to 10
people.” Tai said, “That’s very disruptive.”
are not only slow to upgrade their products but also are slow to respond
to customer complaints. “I can send someone to my customer’s site right
away and do quick diagnostics,” he said. “A multinational’s core
R&D team is still in the United States, and it takes more than a few
e-mails back and forth to solve problems.”
Many in the West
focus on the cost advantages of Chinese companies. Instead, they should
be focusing on the agility of Chinese chip vendors and system companies
in their domestic market. As Tai noted, “I am local. I have a core
R&D team here, and I have field application engineers here. I have a
huge advantage” over multinationals.
RDA increased its annual
revenue in 2011 by 51.1 percent to a record $288.9 million, compared to
$191.2 million in the previous year. The company’s gross margin was 34.5
percent compared to 29.8 percent in 2010. In the first quarter in
2012, RDA’s revenues totaled $72 million, with a gross margin of at 35.9
percent and a 20 percent operating margin. The company has $143 million
in cash and no debt. It currently employs 320 workers.
"Show me how many fabs,assembly houses,test houses operate in usa. "
IBM, Intel, AMD, and others have answers for you that you might not except.
"companies in USA due to their cost structure need 50% gross profit margin to be sucessful and reinvest in next generation products. While companies in China/Taiwan can do the same investment with 35% gross margin."
There are quite a few US companies making even less than 35% gross margin on their chips.
There are a lot of inaccurate generalizations being thrown around here on all sides.
I think the article hit on some ground realities.
1. If there is a product based on standards( wifi, bluetooth, DVD-s etc) China/Taiwan have an edge. With desin, fabs, assembly houses, test houses all in the same place, it is quite easy to see why there is more collaboration. Show me how many fabs,assembly houses,test houses operate in usa. None that matter, except for IDMs.
With education being globalized, there is no unique advantage for USA. One can get a MIT/Stanford/Harvard quality education to any corner of the globe.
2. companies in USA due to their cost structure need 50% gross profit margin to be sucessful and reinvest in next generation products. While companies in China/Taiwan can do the same investment with 35% gross margin. So they can sell a product cheap with approximately the same quality. I can give numerous examples from the past where a lot of new companies sprung up in Taiwan/china and drove big US companies out of business.
3. The growing market is not in USA but in Far east asia. Naturally, there is a significant shift to use local products to aid in the growth. Companies in US will probably introduce a product first to enable the market, but for sure, a Taiwan/china company will reap all the rewards when volumes pick up.
This is not a reversible process. this is going to go the way how all our clothes, safety pins, every day tools are made in china. Add semi conductors too. This will happen for sure.. just a matter of time. .. my 0.02c
It would not happen voluntarily, it at all, but through market dynamics. Chinese firms will become bigger and Western firms would shrink and at some stage the two might reach a common equilibrium. That would only happen if the process is smooth, and I doubt it is.
It won't work chipmonk - you put a great nation like China on an embargo and they will develop alternatives which you would know nothing about! That and they will also take US technology "for free" using illegal means.
In any case, it's way too late. So instead of swimming against the tide, the US and the West in general should accept that wealth is now in the East, and do their best to get a slice of that wealth.
The West has had it good for 200-300 years now. As a result, people work less hard, and take many things for granted. The value-system in particular is reversed. You look at the other side, and you see people valuing education, knowledge, and hard work. It's only normal, and dare I say fair, that they become wealthier.
PS. I do not buy this "stealing our technology" propaganda. The West also got rich, in part, because of unscrupulous policies e.g. colonialism.
Plenty of U.S. tech companies, most notably Intel in microprocessors, exercise monopoly control over a market. Microsoft used to. Much of what Junko Yoshida is reporting on the ground in China is a reaction to that and the growing resentment over royalty payments. It's as if the Chinese consider IP rights to be usury.
Getting lured by the cheap labor and huge population of China has been the downfall of naive technology Co.s like Motorola and western economies in general. Many US companies have also actively induced US Universities ( with foundations, grants etc. specifically targeted to benefit the Chinese ) to train Chinese grad students ( as a soft 'Bribe" to China ) for almost free. These grads do a better job of technology theft through various subterfuges and then make impertinent statements about profit margin of US developers being too high ( Vincent Tai, RDA per this report ). The case of Chinese employees of Motorola walking out with Base Station designs to Huawei is only a tip of the iceberg.
We've been had. But the suckers still won't face the facts. Only an embargo of all technology going back 2 to 3 generations will stop the bleeding and bold Piracy by the Chinese. The same goes for giving them free education in US universities.
There are far better & sustainable alternatives.
This "monopoly" aspect is, in my opinion, the most frightening aspect. Taking the rare earth metals as an example, China has already flooded the market with inexpensive product, diving competitors out of business and then cutting supply when there are no other options. That is the danger of a monopoly.
Right now, we talk of China doing that, but it's not just a Chinese thing. A hundred or so years ago, here in the U.S., our government busted up monopolies and put in regulations to keep them down for just this reason.
Monopolies will do that because it's in human nature. With so many of our eggs in one basket, we are really putting our economic viability at risk.