Learn Mandarin: Chinese School - Vimicro's fresh perspective

BIZCHINA / Deng Zhonghan

Vimicro's fresh perspective
(China Daily)
Updated: 2006-03-06 13:45

Chinese semiconductor firm Vimicro sent a group of executives to Sony's
Tokyo headquarters in 2001 to explore business opportunities. A one-hour
talk that the company had arranged with a Sony manager was curtailed to
only five minutes, however. The meeting was unexpectedly brief, but the
outcome was all too common in the chip design industry at the time.

Beijing-based Vimicro makes processors for multimedia applications on PCs
and mobile phones. It hoped Sony would use its chips to power the digital
cameras on the Japanese firm's notebook computers.

The Sony manager simply did not believe a Chinese firm was capable of
making semiconductors, which involves cutting-edge production techniques.
He ushered Vimicro's executives out of the room, despite claims from the
Chinese businessmen that they had already signed agreements with big
global names such as Samsung and Philips.

That's why Vimicro executives' business cards included information from
its subsidiary in California. They were forced to give potential
customers the impression that Vimicro was a Silicon Valley company. The
executives also used to spend 50 minutes explaining why chips could be
designed in China. This typically left only 5 to 10 minutes to present
Vimicro's products.

The times have changed, indeed.

Vimicro's chips powered 60 per cent of the PC cameras shipped worldwide
in 2004, and are also used in a range of multimedia mobile phone models.
Its customers and partners include global giants such as Microsoft,
Samsung, Fujitsu, Logitech, Siemens and Lenovo. Even Sony, the leading
player in the global multimedia entertainment sector, started using
Vimicro's chips last year.

Now the Chinese manufacturer owns more than 500 patents, with some
registered in the United States.

The company's rapid rise to the global stage underlines how the Chinese
Government's efforts to reduce reliance on foreign technologies through
"independent innovation" are transforming a number of key industries.

Despite China's unparalleled economic development over the past several
years, the country has been stung by a lack of core technologies. This
has put it in a disadvantageous position in the global supply chain.

It is therefore not surprising that "independent innovation" has become a
national buzzword.

The National Guideline on Medium- and Long-term Programme for Science and
Technology Development (2006-2020) issued by the State Council in early
February is aimed at reducing the country's reliance on key foreign
technologies from more than 50 to 30 per cent by 2020.

Vimicro is one of a number of Chinese companies benefiting from this
strategy. The government is applying preferential policies and directing
investment to promising companies to foster domestically developed but
internationally competitive technologies.

"We've wanted to develop world leading technologies and target the global
market since our very first day of operation," says Tom Zhang,
vice-president and one of the founders of Vimicro.

Vimicro was founded in 1999, with the Ministry of Information Industry
(MII) investing about 10 million yuan (US$1.25 million) as a "seed fund."

"The government played a big role in the early development of Vimicro,"
says Zhang.

The MII was managing 100 million yuan (US$12.5 million) at the time, a
fund allocated by the Ministry of Finance to support Chinese high-tech
firms. The MII registered a venture capital firm overseas to manage the
fund, a dramatic departure from how it had previously supported domestic
high-tech firms.

"Government support is crucial to Vimicro. But the government does not
intervene in our daily operations," says Zhang.

Vimicro later managed to absorb several rounds of venture capital from a
number of foreign companies, which diluted MII's stake to 10.9 per cent.

Vimicro became the first Chinese semiconductor firm to trade shares on
the NASDAQ when it went public on November 15. It raised US$87 million
and the MII sold its 10 per cent stake.

"The government is changing the way it helps the high-tech sector," says
Zhang.

The Chinese Government launched "Project 909" in 1995 to develop the
semiconductor industry, which it saw as the lifeblood of the high-tech
sector. It contributed registered capital of 4 billion yuan (US$250
million). The State Council and Shanghai municipal government later
injected an additional US$100 million and launched foundry enterprise
Huahong in 1996.

At that time, 85 per cent of chips used in China were imported. The
country's IC (integrated circuit) manufacturing technologies were three
generations behind foreign technologies.

The pioneer of the project and the Minister of Electronics Engineering at
the time, Hu Qili, was also appointed chairman of Huahong to further
highlight the importance of the programme. In early 1980s, Hu was also a
member of the Standing Committee of the Political Bureau of the Communist
Party of China Central Committee.

The 10-year development of "Project 909" unearthed a number of tough
lessons, Hu says in a book released in January. When introducing some
production lines, for example, the government focused too much on closing
technical gaps with advanced global technologies, but did not address
customer demands effectively enough. That underscored the importance of
establishing space between the government and company operations.
Business-savvy executives needed to be developed to lead market-driven
companies.

"I think technological developments in the private sector also need to be
accompanied by innovative government policies," says Zhang.

Spending on research and development in 2004 stood at 196.63 billion yuan
(US$24.3 billion), accounting for 1.23 per cent of the country's GDP
(gross domestic product). The government planned to expand this figure to
360 billion yuan (US$44.4 billion) by 2010, accounting for 2 per cent of
the GDP.

The government might set up a fund valued at 500 million yuan (US$61.7
million) in the coming years to accelerate development of the chip design
industry. Yet some observers are calling for the government to help
improve the ability of design firms to raise capital through means other
than direct allocation of funds.

Between 2000 and 2004, investment in China's semiconductor industry
amounted to US$14 billion, four times the total in the past 20 years,
statistics show. Only a small portion of this was associated with chip
design firms, however.

Chip design is the highest value-added business in the semiconductor
industry, accounting for 40 per cent of the value chain. Compared to
manufacturing, assembling and testing, chip design also requires smaller
investments and costs. By 2004, there were 421 chip design firms
throughout the country, with total annual revenue of 8.15 billion yuan
(US$1 billion).

Vimcro's NASDAQ-listing was followed by an initial public offering (IPO)
by Actions Semiconductor Co, another Chinese chip design firm. Both IPOs
fell below expectations, highlighting that it will likely take time for
investors to understand the profitability of Chinese chip design
eneterprises.

Zhang says Vimicro's prospects are bright, however.

"Applications related to multimedia entertainment are on a roll, and an
increasing number of devices will be powered by multimedia chips," he
says.

"That is a big trend promising enormous business opportunities."

According to US-based research firm IDC, the global multimedia chip
market will be worth more than US$4 billion in 2006, up considerably from
US$1 billion in 2004.

Vimicro now employs nearly 500 people.

"We hope to hire up to 2,000 in the coming years," says Zhang.

(For more biz stories, please visit Industry Updates)

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