Buy, buy, buy or develop independently? Where is the future of China's "chips"?

Chips, also known as integrated circuits, have always been a major weakness of China's rapidly developing ICT industry. Over the years, my country's government departments and related enterprises have made great efforts to have Chinese "chips", but the results have not been significant. Data from the customs show that chips ranked first in my country's imports in 2013 and 2014, with a total value of more than 200 billion US dollars, which is higher than the total amount of oil imports. The core chips are controlled by others, which greatly reduces the gold content and added value of my country's electronic information products, making it difficult for related industries in my country to get rid of the situation of being in the middle and low end of the industrial chain.

Not long ago, my country's Tianhe-2 once again won the title of the world's fastest supercomputer. However, embarrassingly, the core chip of Tianhe-2 is not made in China. Even so, the US government issued a ban on the export of Tianhe-2's high-end chips at the beginning of this year. In other words, no matter how much money we spend, the United States is unwilling to sell this high technology to us.

With the transformation and upgrading of my country's economy and the increasing scale of the ICT industry, the demand for Chinese "cores" has become more urgent than ever before. It is against this background that two completely different development ideas have emerged in the industry. One is the path of mergers and acquisitions represented by Tsinghua Unigroup; the other is the path of independent research and development represented by Huawei and ZTE. Both development practices are in progress. It is worth discussing and thinking about whether to buy or make, which is better.

Tsinghua Unigroup continues to make large acquisitions

Not long ago, Zhao Weiguo, chairman of Tsinghua Unigroup, announced his intention to cooperate with MediaTek in M&A. Prior to this, Tsinghua Unigroup had acquired Spreadtrum, the world's third largest mobile phone chip designer. In the past six months, Tsinghua Unigroup has spent at least $7.5 billion on external acquisitions and investments, with an average spending rate of $1.25 billion per month, or about 8 billion yuan.

Tsinghua Unigroup has been an obscure company for many years. Tsinghua Unigroup was founded in 1988 as Tsinghua University Technology Development Corporation, renamed Tsinghua Unigroup Corporation in 1993, and renamed Tsinghua Unigroup Co., Ltd. in 2005. Tsinghua Unigroup came to prominence in 2013. In December 2013 and July 2014, Tsinghua Unigroup announced the acquisition of mobile phone chip design companies Spreadtrum and RDA for US$1.78 billion and US$907 million respectively. After the successful acquisition, Tsinghua Unigroup jumped from a mobile phone chip layman to the world's third largest mobile phone chip design company in terms of baseband chip shipments, thus laying the foundation for its core business of chip design and manufacturing.

Tsinghua Unigroup positions itself as a chip giant that is "No. 1 in China and among the top three in the world." On September 30 this year, Tsinghua Unigroup announced that it would invest $3.8 billion in Western Digital , a U.S. memory chip giant , and become Western Digital's largest shareholder by acquiring 15% of its shares. On October 30, Tsinghua Unigroup announced that it would invest $600 million in Taiwan's Powertech Technology to acquire about 25% of Powertech's shares, becoming the largest shareholder of this memory packaging and testing manufacturer. However, the wealthy and willful Tsinghua Unigroup also has its setbacks. For example, it has leaked that it wants to cooperate with Taiwan MediaTek at the capital level to compete with Qualcomm , but it has not received a response for cooperation. Tsinghua Unigroup also recently planned to invest 30 billion yuan to acquire a stake in SK Hynix, an important Korean chip manufacturer, but was rejected. In July this year, Tsinghua Unigroup executives expressed their intention to acquire Micron Technology, the world's largest memory chip giant, with a bid that may exceed $23 billion. The deal has not made significant progress so far, but Tsinghua Unigroup executives said that relevant negotiations are still ongoing. This shows that Tsinghua Unigroup's intention to expand its industry scale through mergers and acquisitions has not changed.

Although Tsinghua Unigroup's series of M&A moves have attracted widespread attention in the industry, and its lavish spending has led people to speculate on the powerful background of the "mysterious funds" behind it, some analysts also said that Tsinghua Unigroup's continuous and excessive M&A in a short period of time may lead to "indigestion", and it is also questionable whether the M&A can obtain the core chip design technology that it urgently needs.

Huawei and ZTE's independent research and development gradually gain momentum

Unlike Tsinghua Unigroup's merger and acquisition expansion, Huawei, ZTE and other companies have chosen the path of independent research and development in the development of chips. Recently, Huawei's annual flagship smartphone Mate 8 made its debut and was praised as a large-screen mobile phone with a very high comprehensive cost-effectiveness. What is more eye-catching is that Mate 8 uses the new generation Kirin 950 chip independently developed by Huawei HiSilicon. The chip is evaluated by industry experts as comparable to Qualcomm's flagship product Snapdragon 820. It is precisely because of its independently developed core mobile chips that Huawei's smartphones have accumulated a lot of experience this year, with shipments and brand awareness rising sharply, becoming the number one mobile phone manufacturer in the domestic market, surpassing Samsung and Apple ; in the global market, Huawei's smartphones have also grown significantly, with shipments rising rapidly to third place.

Huawei CEO Ren Zhengfei once said that the investment and development of HiSilicon was to prevent "being cut off by others". Industry insiders familiar with the development of HiSilicon revealed that HiSilicon Kirin chips also had a series of shortcomings such as high power consumption and heat generation in the early days, but Huawei insisted on using its own chips to produce smartphones. Relying on Huawei's strong support in the smartphone industry, the performance of HiSilicon Kirin chips has improved rapidly. In just one or two years, it has lived up to expectations and has been equipped in Huawei's flagship high-end products.

On November 23, ZTE Microelectronics, a subsidiary of ZTE Corporation, announced the introduction of the National Integrated Circuit Industry Investment Fund. The Integrated Circuit Industry Investment Fund increased its capital in ZTE Microelectronics with RMB 2.4 billion in cash and will hold a 24% stake in ZTE Microelectronics. According to the "National Integrated Circuit Industry Development Promotion Outline" issued in 2014, the National Integrated Circuit Industry Investment Fund with a total scale of RMB 120 billion was initiated and established, and will focus on independent innovation companies such as ZTE Corporation. ZTE Microelectronics was formerly the IC Design Department of ZTE Corporation, which was established in 1996. At present, ZTE Microelectronics has about 2,000 R&D personnel, and has established multiple global R&D institutions in Shenzhen, Xi'an, Nanjing, Shanghai, the United States and other places, with more than 2,000 independent patents.

In the first three quarters of this year, ZTE Microelectronics' revenue grew rapidly, and the total amount has exceeded the whole of last year. The mainstream chip technology of ZTE Microelectronics is 28nm, and the core chip research and development has broken through the 16nm advanced process. At present, ZTE Microelectronics has strong strength in the fields of high-end routers, wireless base station chips, and mobile terminal chips. The investment of the big fund will provide a strong impetus for the development of ZTE Microelectronics industry.

In addition to Huawei and ZTE, Datang Telecom also has a mobile chip company, Unichip Technology, which has now developed into an important mobile chip supplier in China. These chip companies that have developed through independent innovation are increasingly participating in the competition in the global chip market.

Two major trends emerge in the global chip industry

This year, the scale of mergers and acquisitions in the global chip industry hit a record high, with chip manufacturers announcing mergers and acquisitions worth more than $100 billion in total. Since the PC market peaked in 2011, chip manufacturers' strategies have diverged. Some manufacturers focus on developing energy-efficient chips for smartphones, fail-safe chips for cars, high-performance server chips for data centers, and various chips for IoT devices. Market research firm Gartner predicts that global semiconductor industry revenue will decline by 0.8% this year, the first decline since 2012. Leading chip companies such as Intel , Qualcomm, and MediaTek have all experienced revenue declines to varying degrees.

As the industry's overall revenue growth slows and costs rise, semiconductor manufacturers have launched a wave of mergers and acquisitions to simplify organizational structures and improve product lines. Financial data provider Dealogic said that the scale of chip industry mergers and acquisitions has reached US$100.6 billion so far this year, far exceeding the US$37.7 billion for the whole of 2014. Dealogic data shows that the number of chip company mergers and acquisitions so far this year has been 276. Compared with 369 in 2014, the number of chip company mergers and acquisitions has been on a downward trend. However, the scale of this year's mergers and acquisitions is larger, such as Avago Technologies' acquisition of Broadcom for US$37 billion in May this year .

Chips are still as important as ever. Now more products need to use chips, including cars, home appliances and other home and commercial devices. The development of smart terminal devices has also maintained a high speed. According to Huawei's forecast, by 2025, there will be 100 billion connections in the world. The huge and rapidly growing IoT market will put forward new demands on chip supply, and large companies with complete product lines and the ability to provide various types of chips will be favored.

In addition to the wave of mergers and acquisitions, the development model of vertically integrated industrial chains is also highly respected in the industry. For example, Samsung has become the world's second largest chip company after Intel , and Samsung has many types of chips, including storage and computing. Apple also develops its own series of processors and then outsources them to foundries for production. Moreover, Apple processors often pioneer technology, such as 8-core and 64-bit computing. The success of Samsung and Apple has made vertical integration of the industrial chain a model that whole machine manufacturers are vying to emulate.

From the perspective of industry development trends, mergers and acquisitions and independent research and development are the dominant trends in the development of the current chip industry. Tsinghua Unigroup and Huawei represent the epitome of the two major international development trends in China. Which model will be more effective remains to be tested by time.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.