Taiwan’s IC Designers Hit Their Stride

Despite decreased technology demand and geopolitical challenges, domestic chip designers, led by MediaTek, are posting strong sales while navigating U.S.-China tensions.

Taiwan’s semiconductor firms are often referred to as “chipmakers” because many manufacture the computing brains of electronic devices. But some of the island’s most ascendant semiconductor companies do not make any chips at all: Instead, they design them.

While the U.S. remains dominant in chip design, led by companies such as Qualcomm, Nvidia, and Broadcom, Taiwan is starting to catch up. In the first quarter of the year, the U.S. had five companies among the world’s top 10 chip designers by revenue, while Taiwan had three: MediaTek, Novatek, and Realtek, according to Taipei-based research firm TrendForce.

The three leading Taiwan integrated circuit (IC) designers all recorded solid annual revenue growth in the first quarter of 2022. Novatek’s revenue jumped 38% to US$1.28 billion on the back of display driver ICs and system-on-a-chip (SoC) sales. Despite somewhat weak demand for consumer products, Realtek managed to increase its revenue by 27% to US$1.04 billion “through its dynamic commercial product portfolio” that includes Ethernet chips, switch controllers, and Wi-Fi chips, according to a research note from TrendForce. Meanwhile, MediaTek’s revenue rose 32% to US$5.01 billion, buoyed by robust demand for its Dimensity series processors.

In fact, MediaTek posted a record quarterly profit of NT$33.41 billion in the January-March period, an increase of 29.6% over the same period a year earlier. The Hsinchu-based chipmaker has benefited from growing demand for chips used in the latest handsets. It is a key supplier to most smartphone brands using Google’s Android operating system, including Samsung, Oppo, Vivo, and Xiaomi. “MediaTek has increased chip prices while optimizing its product mix in response to strong 5G smartphone chip market demand,” says Cheng Kai-an, a senior industry analyst at the semi-governmental Market Intelligence & Consulting Institute (MIC).

Using cutting-edge technology, MediaTek has proven itself to be a rising star among Taiwan IC designers. The company now looks to build a more resilient supply chain through strategic partnerships.

MediaTek’s growth is propelled by the fact that the company has become one of the preferred customers of Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker. “MediaTek’s Dimensity 9000 and coming Dimensity 10000 system-on-a-chip chipsets use the cutting-edge TSMC process technologies for 5G smartphones and are considered world-class products,” says Samuel Tuan Wang, research vice president for semiconductors at Gartner, a consultancy based in California. These chips are evidence that MediaTek “is close to matching Qualcomm” as a global IC designer, a feat that no other Taiwanese company is close to accomplishing, he adds.

Indicative of MediaTek as a rising star is its newfound strategic partnership with Intel. Under an agreement announced in late July, Intel’s Foundry Services (IFS) will manufacture chips designed by MediaTek on its advanced process technologies for use in a variety of smart edge devices. Intel aims to reestablish leadership in semiconductor manufacturing by 2025, and views partnering with MediaTek as integral to its prospects in the foundry business. Of course, the partnership has benefits for MediaTek, too.

“The agreement is designed to help MediaTek build a more balanced, resilient supply chain through the addition of a new foundry partner with significant capacity in the United States and Europe,” Intel said in a statement.

The China factor

Intel’s statement is noteworthy in that it refers explicitly to supply chain balance and resilience. While MediaTek has been highly successful in recent years, one market has been the main driver of that progress: China. If not for the voracious demand of Chinese smartphone makers like Xiaomi, Oppo, and Vivo, which are all among the world’s top-10 handset makers, the fabless Taiwanese IC firm would not be the industry juggernaut it is today.

Yet given Beijing’s ambitions to build a complete domestic semiconductor supply chain – it has invested tens of billions of dollars in this endeavor – MediaTek’s reliance on the Chinese market has risks. Gartner’s Wang notes that China’s fabless IC companies receive significant government support and are encouraged to work with local fabless customers. “Many consumer products will be switched over to use chips designed and manufactured by local Chinese companies,” he says.

Semiconductor self-sufficiency is being driven at the highest levels in China, where chips are referred to in officialdom as part of “core technology.”  In 2018, Chinese leader Xi Jinping said that “dependence on [foreign] core technology is the biggest hidden trouble for us.” In August 2020, he said that China must “vigorously improve our independent innovation capabilities and make breakthroughs in key core technologies as soon as possible.” Given the ambitions of China’s leadership, it is clear that its ruling Chinese Communist Party will want domestic firms to eventually design most of the country’s chips.

As Xi Jinping aims to reduce dependence on foreign technology, semiconductor self-sufficiency has become a national priority in China.

But that may be easier said than done, especially considering the intense U.S.-China technology race. TrendForce analyst Galen Tseng notes that China is currently hamstrung by a number of U.S. bans on its semiconductor sector, including restrictions on equipment purchase, electronic design automation (EDA) software, and IP authorization, constraining its ability to develop advanced process ICs. Taiwan’s foundry and packaging and testing sectors are also significantly ahead of China’s, enabling the island’s IC designers to develop freely and, therefore, possess more complete product portfolios, he says.

The various U.S. sanctions on China’s semiconductor sector, which began in 2018 and intensified during the final years of the Donald Trump administration, changed the market dynamics. The U.S. in May 2020 banned Huawei’s chipmaking division HiSilicon from accessing U.S. chip design software and equipment used to make semiconductors, a move that effectively crippled HiSilicon. Its share of the global chipset market has fallen to just 1% from 23% in 2020, while MediaTek now leads with 38%, according to global industry analysis firm Counterpoint Research. 

“Although China’s Unisoc is trying to catch up, their current mobile phone SoC specifications still lag behind the prior Huawei HiSilicon specs and current MediaTek specs,” says Tseng. He reckons that “if the United States continues to put pressure on China’s advanced semiconductor manufacturing processes, Taiwan’s SoCs can continue to lead China.”

Stephen Su, a senior vice president at the semi-governmental Industrial Technology and Research Institute (ITRI), expects that “this trend of divided science and technology alliances due to geopolitics” could continue until 2030 and through the development of 6G communications.

But in certain product segments, including TV SoCs, automotive ICs, AI ICs, Wi-Fi SoCs, and Bluetooth ICs, China is becoming more competitive. Chinese brands Xiaomi, Oppo, and Vivo have also begun developing their own chips. Nevertheless, Tseng reckons that “the proportion of Chinese products with properly planned roadmaps is still not high. After all, after an IC is designed, subsequent product portfolio and product sustainability capabilities cannot be ignored.”

Navigating headwinds

Taiwan’s IC sector will likely face some adversity in the short term, given the volatile state of the global economy. In late July, the International Monetary Fund (IMF) said it expects the world economy to grow just 3.2% this year, compared to 6.1% in 2021. Taiwan’s largest export markets are all showing signs of weakness, from China and the U.S. to Europe and Japan. DBS Bank recently cut its forecast for Taiwan’s 2022 GDP growth to 3.4%.

In the second half of the year, Taiwan’s fabless industry will continue to face pressure from downstream system manufacturers, agents, and brands set to cancel orders, while foundries are adjusting down the volume of wafer production, notes TrendForce’s Tseng. 

When facing a shortage of chip manufacturing capacity, IC designers must typically obtain chip capacity by either raising prices or signing long-term contracts, MIC’s Cheng observes. However, when downstream demand declines and orders are reduced or delayed, IC designers’ inventory and costs will increase. Meanwhile, high prices in wafer foundries will further exert pressure on IC designers, raising their operating costs. The degree to which consumer demand for electronic devices falls may be “significantly affected by external factors such as changes in the pandemic, the Russia-Ukraine war, and global inflation,” he says. “It seems that the demand situation in the third quarter is not promising, and the situation is likely to continue into the fourth quarter. It remains to be seen whether demand will rebound next year.”

Despite the challenging macroeconomic environment, the long-term outlook for Taiwan’s fabless design sector remains bright. Analysts expect Taiwan-based IC designers will gradually expand into new international markets for both economic and geopolitical reasons, a process that has already started for at least one company. 

In addition to its new partnership with Intel, MediaTek is expanding its U.S. footprint by collaborating with Purdue University. The newly established partners announced in late June that the fabless chipmaker would open its first semiconductor chip design center in the Midwest at Purdue University’s College of Engineering.

MediaTek’s collaboration with U.S. universities on advanced chip research is more than a decade old, but the tie-up with Purdue marks the first time a research center is located directly on an American college campus. The project aims to give students the opportunity to contribute directly to product design and solutions for a global team during the course of their studies.

“We believe strongly that being in Indiana means we’ll have access to some of the best engineering talent in the world,” Kou-Hung Lawrence Loh, corporate senior vice president of MediaTek Inc. and president of MediaTek USA Inc., said in a press release. “Not just at Purdue, but West Lafayette is only four hours away from nearly a dozen of the top engineering schools in the country.”

“As TSMC beings to expand its manufacturing base in the U.S., more IC design companies from Taiwan should begin to set up R&D centers there as well in order to leverage the abundant talent pool while being closer to their customers for better service support and joint collaboration,” says ITRI’s Su.

Europe also presents opportunities for Taiwan’s fabless design houses. In June, Deputy Minister of Economic Affairs Chen Chern-chyi said that ITRI would share its experience and expertise with Lithuania as it develops its semiconductor industry, including IC design.

When asked about the possibility of Taiwan working with Lithuania in IC design, Su shares a valuable lesson Taiwan learned when it began developing its semiconductor industry. He notes that in the mid-1970s, Taiwan sent a group of researchers from the fledgling ITRI (established in 1973) to the RCA Corporation in the U.S. for training. These researchers returned home to conduct technology transfer and begin pilot chip production, and they later became the core team of TSMC. “As talent cultivation is a fundamental but highly impactful step towards semiconductor industry development, Taiwan could help European countries, including Lithuania and others, to train young talents in IC design via course teaching and lab experimentation,” Su says.