Can chip companies win by involution?

"It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the age of trust, it was the age of doubt; it was the season of light "This is a dark season." This passage comes from "A Tale of Two Cities" by British writer Charles Dickens, which was published in 1859, but it is also very suitable for the current domestic chip industry.

More domestic chips are coming up, and more chip entrepreneurs are going to fall. The better and more mature the development of domestic chips, the fewer opportunities there will be for chip entrepreneurship. Entrepreneurs do not need to be pessimistic. We have worked hard for the country and ourselves. Natural selection is the law of survival and competition in nature.

No one wants to lose this once-in-a-lifetime opportunity to start a chip business. Every entrepreneur also knows that the upward space is unlimited and the downward space is limited. Going up is difficult and correct, but it cannot be achieved by hard work. The sustained upward movement must be backed by strong funds until it can get rid of involution. Going down is easy and correct. It is based on existing technology and market. If you don't live through involution, you will die through involution.

Can chip companies win by involution? What kind of companies can win by involution? How to correctly start the involution of chips? In order to get the answers, let's think about and analyze these three questions in light of the current situation.

The answer is yes, but the chances of winning by involution are getting smaller and smaller.

Some people may think that this is an era where the "leftovers" are king, and those left behind by industry involution are the kings. I don’t know if this is the case in other industries, but at least it’s not the case in the chip industry.

There is a phenomenon that can be observed . An industry that has experienced involution and formed a "leftover" industry is no longer a true high-tech industry, but at most a high-end manufacturing industry. Looking back at the photovoltaic industry and the LED industry, it is ultimately not technology that wins, but scale and cost, and this has been the case for many years. The fundamental reason is that without technological innovation, technology cannot subvert the original competitive landscape.

The chip industry has similarities and differences. The similarities are that homogeneous chips compete on scale and price; the differences are that chips are constantly upgrading and iterating, and continuous innovation is breaking the original pattern.

I have never seen any chip company grow bigger by sticking to mature market chip products and constantly polishing them. Chip companies all grow up in the process of technology upgrades and product upgrades. Can you find out which chip company is the winner? No. In the chip industry, there are no remaining companies, only companies that cannot catch up.

Source: Photo Network

Chip involution is not for the sake of remaining, but for competitors to lose their upward capabilities and opportunities. If this judgment is wrong, then involution will lose its direction and meaning.

In addition, it is difficult for the remaining businesses to make money through involution. The gap cannot be widened by reducing costs through R&D, design and scale. The only way to widen the gap is with low gross profit or zero profit. Only in this way will other competing manufacturers withdraw from those abnormal businesses and have to shrink the market.

However, as long as you dare to raise the price back to normal levels, competing manufacturers will rush back immediately. At the same time, because the price increase will also offend customers, there is a risk of being blacklisted. As for the internal competition, this is no longer possible in the domestic chip industry. Homogeneous chip products have blossomed everywhere. Wildfires cannot be extinguished, and spring breezes blow and they will grow again.

At present, the domestic chip industry has a high proportion of loss-making companies. After the company has experienced 3 to 5 years of marketization of chip products, a large proportion of companies in the industry are still difficult to make profits, which means that the development of the chip industry has encountered difficulties, or it can Think this industry is very "involved". Moreover, the greater the proportion of loss-making companies, the greater the volume of the industry.

We will think about when the internal competition in the chip industry will end, and what kind of chip company will eventually win?

It is difficult to predict when the chip involution will end. I used to think that the industry could be cleared in 2 to 3 years, but now I think it will take 3 to 5 years. Maybe the reality is longer than we thought. But the final result is predictable. There will be about 600 to 800 chip design companies left in China, including 200 to 300 listed companies.

Successes vary, but failures generally do. Those chip companies that are eliminated will eventually end up with no money to burn. Therefore, ensuring that the company has safe cash flow is the only magic weapon that chip companies can use to win.

How to ensure that chip companies have safe cash flow can start from the following three aspects:

(1) Have strong financing capabilities

Some people say that the next chip entrepreneurship will not be a competition between entrepreneurs, but a competition between investors . The competition is the financial resources and courage of the investors, and whether the investors dare to continue. blood transfusion. In the past few years, the chip industry was not short of money, but it was short of people; starting from this year, the chip industry is no longer short of people, but it is really short of money.

A phenomenon has emerged in the industry. Some chip startups have been unable to raise funds, and previous investors have no choice but to continue investing and save themselves.

(2) Earn profits through industrial chain integration

In the mid-to-low-end homogeneous chip market, chip design alone can no longer achieve sales profits. Only through integration up and down the industry chain can there be an opportunity to realize chip product profits. Some chip companies choose to take the IDM route, and some choose Fab-Lite, with the purpose of minimizing chip production costs and ultimately realizing product sales profits.

(3) Expand other product lines or businesses to support the company

Nowadays, chip companies are all showing their magical powers. Some chip companies are actively developing more product lines and seeking new opportunities; some chip companies are extending downstream to make modules or complete machine products; some chip companies have begun to provide external chip design services and sell IP. In a word, make money wherever you go.

In 2023, the domestic chip industry began to collapse. I had some regrets and finally reconciled with myself. I visited industry teachers and friends many times to seek advice and answers from them. The answer is either roll up or leave.

Yes, this is the best of times and the worst of times. The chip industry has entered the era of involution. There are a lot of chip companies working in every direction. Although the work we do is valuable to the country and society, how to realize the value of the company and individuals, and how to correctly open the posture of chip involution.

My thinking is that there are things to do and things not to be done, and things to be involved in and things not to be involved. To be successful, chip companies must eventually move towards high-end and differentiation, and get rid of involution, because there will be no involution king in the chip industry. The involution of the chip industry is just to suppress the development of opponents and widen the gap between technology and products.

Combining the current situation of the industry and personal experience, let’s talk about how to correctly open the involution posture:

(1) Protect cash flow

Involution is a war of attrition, and the prerequisite for participating in involution is to protect cash flow. In 2022, I predicted that chip involution was coming, so I made a cash flow plan in advance. I also predicted that the capital winter would come along, and that adding insult to injury would accelerate the elimination, and the industry would be cleared by 2025. It turned out that I was overly optimistic and underestimated the courage and resilience of investors.

So the advice I give is, if you have more money, roll more, if you have less money, roll less, and if you don’t have money, don’t roll.

(2) Suppressing competitors with price

The chip industry is now facing a price war and price involution. There is no minimum, only lower prices.

Some companies charge low prices in order to gain market share, increase the company's influence, and pave the way for subsequent products; some companies expand sales through low prices to reduce supply chain costs; and some companies charge low prices to become customers in order to raise funds, exchanging market for funds, and then exchanging funds for market.

The best price suppression is to allow competitors to make zero profits, and the next best thing is to suppress the gross profit margin of competing manufacturers to less than 10%. It is difficult for a chip company to make a profit with a gross profit margin of less than 20%, and it has no money to invest in new product research and development, so it can only rely on continuous capital infusion. To achieve price suppression, we must start from both R&D and supply chain.

(3) Reserve resources for high-end and differentiated development

The shopping mall is like a battlefield. If you know yourself and the enemy, you will never be defeated. In a price war, if you kill 10,000 people, you will lose 8,000. Therefore, there are two reasons for choosing a price war: one is to have a 20% absolute advantage in cost and dominate the market through price war; the other is to block the war and implement the market strategy formulated by the company. To achieve the company's strategic goals.

We need to realize that more and more chip products are no longer high-tech products. Only products that meet high-tech characteristics are high-tech products. High-tech characteristics have three obvious attributes:

Perhaps involution is a necessary stage of development, but involution cannot lead to the development of high technology. In the future, domestic chip companies will be divided into two types, one is manufacturing and the other is high technology. To become a high-tech company, it must set aside resources for high-end and differentiated development and get rid of involution as soon as possible.