The life that human beings yearn for is comedy, but it inevitably leads to tragedy. The meaning of tragedy lies in emotional comfort, and the meaning of comedy lies in emotional release. Both are essentially healing of the soul, but tragedy can enrich people's hearts.

Whether writing about the domestic chip industry's prosperity, rapid changes, and leading the way, or writing about the domestic chip industry's capital winter, involution, and difficulties, it can heal and enrich this industry just like comedy and tragedy.

Reread Yu Hua's masterpiece "To Live", and you can have a deeper understanding that living awake is the true sense of living, while sleepy and unconscious life is the same as death, or even worse than death, because the purpose of the evolution of the entire life is to achieve A completely clear and awakened consciousness.

As an entrepreneur, I must live soberly. A start-up is like a small sampan in the sea. It has few resources and weak ability to resist risks. It needs to pay attention to environmental changes, its own affordability and cash flow, etc. I yearn for spring, but instead of praising spring, I should praise every spirit and strength that strives and grows in winter.

The domestic chip industry is developing rapidly and has a bright future, but it is undeniable that domestic chip companies are in trouble in the short term.

Primary market and secondary market

The domestic chip boom is inseparable from the carnival of capital. Chip companies are blooming everywhere, talents from all over the world are gathering for innovation, and domestic chips are attacking cities and towns, climbing to the top and sounding the horn.

Capital has played an important role in the rise of the domestic chip industry. Primary market investment and secondary market investment complement each other and achieve mutual success. Investment in the primary market helps chip companies grow and go public, and investment in the secondary market continues after the primary market.

Capital has created Chinese chips and also created industry bubbles. There are several main reasons for this bubble:

1. Chips are high technology, industrial food, and have economic and strategic value.

2. National guidance, policy support, feelings of family and country, and serving the country with science and technology.

3. The advent of the Science and Technology Innovation Board and the registration system have allowed capital to see exit paths and opportunities.

4. Domestic substitution, market demand is large and strong, and the shortage of production capacity has allowed a few chip companies to grow rapidly.

5. The core reason is that some investors lack understanding and knowledge of the chip industry and invest blindly.

After 4 to 5 years of rapid development, the domestic chip industry has entered a new bottleneck period, and both chip companies and investment institutions are in trouble. Oriental Fortune Choice data shows that as of November 1, 151 listed semiconductor companies have disclosed their third quarter reports for 2023, achieving a total operating income of approximately 352.3 billion yuan, almost the same as the same period last year; a total net profit attributable to the parent company of approximately 19.3 billion yuan yuan, down approximately 54% from the same period last year. Among the 151 listed semiconductor companies that have disclosed their third quarterly reports, 70 companies have achieved positive year-on-year revenue growth in the first three quarters; 107 companies have achieved profitability, accounting for more than 70%; and 111 companies have net profits attributable to their parent companies year-on-year. There has been a decline, accounting for about 74%.

Among the domestic listed semiconductor companies, 70% achieved profits and 30% were at a loss. The overall net profit dropped by about 54%, of which 74% of the companies saw a decrease in net profit. The secondary capital market is not optimistic. As competition in the domestic chip industry continues to intensify, there will be a worsening trend in the following two years. Just looking at chip design, there are 3,243 chip design companies in China, and 55% of them have sales of less than 10 million. If they all want to develop and survive, there will inevitably be the most brutal market competition.

The real situation now is that it is difficult for chip startups to survive and go public. No matter how strong the design capabilities are, without the cost advantage of the supply chain, it is difficult to achieve company profitability. What should primary market investment institutions do? Making mid- to low-end chips is involution, and making high-end chips requires a long capital investment cycle. Primary market investment institutions dare not invest.

In the past, most chip investment in the primary market was based on stories and performance planning. Now, chip investment in the secondary market is still based on stories and performance planning. Real profitability cannot support these valuations. It is normal for domestic listed chip companies to have a gross profit margin of around 30% and a net profit margin of only around 7%. If they want to increase investment in pre-research and innovation and change the current competitive situation, they will face no net profit for a long time.

Many people are looking forward to and cheering for the recovery and growth of the semiconductor market in 2024. Even if the market grows by 20%, it will not help the profits of domestic chip companies. The overall production capacity is still excess, the market is still overly competitive, and chip gross profits continue to rise, go down.

The domestic chip industry's primary market investment and secondary market investment will not be able to get out of the woods in the short term.

Technological innovation and economies of scale

Lei Jun, founder of Xiaomi Technology, said: "In fact, more than 90% of innovative things will die. Innovation is nothing more than two types of things. One type of thing is something that others have done and failed to do, which is called innovation, or that no one has done. If you try to do something called innovation, then the success rate of these two types of things is extremely low. Often because of its high risk, only start-up companies without any resources are willing to do it.

This is also true. How many domestic chip listed companies are actually doing technological innovation? It's no longer easy to successfully go public and survive. We don't dare to take risks or invest heavily in innovation. It can be seen from the price-to-earnings ratio that secondary market capital has given them a high market value based on expectations and optimism for the next few years.

Most chip companies went public because of the opportunity of domestic substitution. Domestic substitution is not about innovation, but product engineering. As long as it is a project, the threshold and barriers are much lower. If you follow and imitate, as long as you work hard, the gap will not be too big. This is also the root of involution, swarming in to seize opportunities.

Statistics as of June 2023 show that there are 135 semiconductor companies listed on the Science and Technology Innovation Board and the Growth Enterprise Market, of which 39 are listed on the Growth Enterprise Market and 96 are listed on the Science and Technology Innovation Board. Among them, there are 22 material companies, 8 packaging and testing companies, 19 equipment and parts companies, 82 chip design companies, and 4 chip manufacturing companies. The total market value is 3.0825 billion yuan, less than half of Nvidia.

After a domestic chip company successfully goes public, it faces two choices: technological innovation or economies of scale. I can't say it's 100%, but most chip companies have chosen economies of scale. Is it driven by short-term interests or limited capabilities? It may be both. Once a company goes public, it becomes financially driven. The company's revenue and profit growth will be announced to the public every quarter, affecting the company's stock price and market value. Once the issue price falls below the issue price and losses occur, team shareholders cannot reduce their holdings.

Therefore, listed chip companies can only work hard to make money, make quick money, increase market share and overall profits through economies of scale, and further worsen market competition. They are not pursuing the stars and the sea, they are pursuing the current reality and interests.

After chip companies go public, they gain brand awareness and recognition, gain market influence and talent attraction, and have more sufficient funds. They begin to intervene in more subdivided tracks with low thresholds and use their supply chain negotiation capabilities. To keep costs to a minimum and seize more market segments. The segmented tracks that were previously looked down upon and the market segments that were not taken into consideration are now gone.

There are less than 100 domestic chip design companies listed on the market, but the number of domestic chip design companies in 2023 will be 3,451, and the more than 3,300 that are not listed will not sit still. It is simply that listed companies have low gross profit margins, and startup companies have no gross profits or even negative gross profits.

In the short term, neither listed chip companies nor start-up companies have the conditions to pursue technological innovation (excluding micro-innovation). Economies of scale have become a common pursuit of chip companies. Reduce supply chain costs through scale, kill low prices through low costs, and achieve low prices through low prices. Price kills competitors.

Listed companies and startups

Outside of China, how many chip design companies are there in the world? How many listed chip design companies are there in the world?

There is no official specific information on the above, and it can only be estimated through industry information. There are about 100 listed chip design companies in the world (excluding China), and there are less than 300 global chip design companies (excluding China).

You can refer to the information from the SIAC official website. Currently, SIAC has 64 member companies, including technology giants such as Amazon, Apple, AT&T, Cisco, General Electric, and Google, as well as chip design companies such as AMD, ADI, Broadcom, Nvidia, Qualcomm, and MediaTek. Chip manufacturers such as Core, IBM, Intel, and TSMC, as well as semiconductor upstream IP, electronic design automation (EDA) software and equipment suppliers such as Arm, Cadence, Synopsys, Applied Materials, ASML, and Nikon, etc. The organization "is composed of members of the U.S. Semiconductor Industry Association (SIA), other companies in the semiconductor industry chain, and major downstream users from a range of important industries."

In contrast, the number of listed chip design companies in China is equivalent to that of foreign countries, and the number of unlisted chip startups is more than ten times that of foreign companies. In the end, how many chip design companies can survive in the Chinese market is a question that must be faced head-on.

Survival of the fittest is always the main theme of market competition. Listed companies and start-up companies compete with each other and eliminate each other. Listed companies compete with listed companies in an evenly matched manner; listed companies compete with start-up companies in an asymmetrical competition.

Domestic listed chip companies are expanding their product lines based on the existing domestic market. Wherever they go, a bunch of chip companies are entering or fighting. The company went public to raise funds again and gained short-term security, but low-price competition left the company with thorns in its back and a fishnet in its throat. Faced with an unfavorable market and financing environment, start-up companies must find a way out and successfully go public. This challenge lies in front of every chip entrepreneur.

How many other chip companies have the opportunity to go public? I don’t know, but more than 3,300 existing chip design companies are moving towards listing. As long as they take money from primary market investors, their goal and mission is to go public.

Born for listing, live for listing. There is a fire burning in the hearts of chip entrepreneurs, and they use passion to ignite more people, create value, win the market, and achieve success. Making chips costs a lot of money, but it also burns the entrepreneur's mind and tempers his habits. Those chip projects that are opportunistic and impetuous will be completely burned when they lose money and fail.

Faced with the impact of such a large number of chip startups, the life of listed chip companies will not be too smooth. When a tiger fights against a pack of wolves, victory or defeat is hard to say.

In the short term, it will be difficult for chip startups to be eliminated through market elimination. Even if investors stop investing, chip startups will exist in an invisible way. Mid- to low-end mature and stable chip products will continue to enter the market in the form of new brands. There is no upfront expenditure, no R&D investment, just a production cost, and they will compete in the market at extremely low prices.

Whether it is a listed company or a startup, if you want to ultimately succeed, you can only go to the high-end of the chip industry. Mid-range and low-end chips will always be a quagmire, and you can't get out if you get stuck in it. Therefore, as a chip start-up company, you must first ensure that cash flow survives; secondly, technology and products must keep up, continue to move towards high-end, increase research and development efforts as much as possible, and build competitiveness; thirdly, market strategy and sales capabilities must match , according to its own actual situation, formulate appropriate price strategies and marketing strategies. A good strategy enables the weak to defeat the strong and the small to defeat the many.

Objectively speaking, it is currently difficult to widen the gap in technology and products between listed chip companies and startups. The biggest gap is the threshold for large customers and supply chain prices. This is a long-term battle that will be difficult for everyone in the short term.

The road to entrepreneurship is a song of bitterness and joy. Sometimes it has a beautiful melody, sometimes it has a low twist. In the ups and downs of the journey, keep a heart that never gives up.

Today, chip companies are in trouble, Hanxiang is in decline, but plum blossoms are still blooming. After the snow, there will be spring, and when spring comes, hundreds of flowers will bloom.

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