Chip design companies have to plow a high proportion of revenue back into research and development (R&D) in order to catch up with competitors or to just stay ahead of them. The more a company spends attracting the best researchers and licensing the best tools, the more likely a company is able to innovate, keep up with Moore’s Law, stay ahead of the competition, and win the most market share. If a company doesn’t spend enough and falls a generation behind competitors, then it will end up either having to burn money to catch up — or find something new or niche to do.
Stewart Randall is Head of Electronics and Embedded Software at Intralink, an international business development consultancy which helps western tech businesses expand in East Asia.
Spending 18% of revenue on R&D for a long time has been considered a healthy share. For the semiconductor industry as a whole, this share may even be 22% now, perhaps making it the industry where the most is spent on R&D as a percentage of revenue. But are Chinese companies keeping up with this? Some state-backed chipmakers are attempting to help fulfill Beijing’s ambitious goals of replacing much of the nation’s imported semiconductors with homegrown products. Are they spending a larger proportion of their revenue to catch up with their international peers?
Looking at the numbers, we see that most Chinese chip companies are spending about 18% of their revenue on R&D. That’s on par with the global norm. But since their revenue tends to be smaller, you would expect they’d have to spend an even higher percentage to catch up.
US vs China fabless R&D spending
The US Semiconductor Industry Association estimates that US chip companies, on average, spent about 20% of their revenue on R&D in 2019. Some spend much more: Marvell spent around 40% in 2020, Nvidia 26%, and AMD 23%. Microchip Technology, however, spent only 16.6% in 2019.
Looking at Chinese fabless companies listed in Shanghai and Shenzhen, we can see the average is around 23% of revenue in 2020. Removing the one obvious outlier, Cambricon, which spends 167% of revenue on R&D (it’s in the burning-money-to-catch-up stage and should be counted as a startup in some ways, despite being listed), this percentage drops to 17.5%. That is almost the aforementioned healthy 18% share, but less than what we are seeing in the US.
But hang on a minute, if Chinese fabless companies are spending similar percentages or less than US counterparts, how does this compare in pure dollar terms? How large is the gap? Let’s compare a few similar US and Chinese companies.
The largest disparity is between two designers of graphic processing units (GPUs): Nasdaq-listed Nvidia and Shenzhen-listed Jingjia Micro. While Jingjia, founded in 2006, clearly has no plans to replace Nvidia anytime soon, it does promote itself as the creator of a domestic GPU/domestic graphics card. It also spends a healthy 27% of revenue on R&D, slightly more than Nvidia’s 26%.
Jingjia and Guoxin
As you can imagine, the two companies’ revenues are quite different. Jingjia’s revenue was $100 million (RMB 645.6 million) in 2020, while Nvidia’s was $10.92 billion. In other words, the $27 million Jingjia spent on R&D was equivalent to less than 1% of Nvidia’s R&D budget for the same year. Despite its best efforts and even adding in some government investment, it isn’t likely Jingjia is ever going to compete with Nvidia. Instead, it will likely maintain a niche within China and win some government-related business.
Guoxin Micro is a bit of a mixed bag. It designs microcontrollers, field-programmable gate array (FPGA) IP, and smart card chips, among other things. Let’s take Shenzhen-listed Guoxin as an example of a Chinese FPGA company—a company that makes chips that can be configured after they are produced. Guoxin provides the FPGA intellectual property (IP) for Pango Micro, a Tsinghua Unigroup company. It currently only spends around 11% of revenue on R&D and that is split between various products, not just FPGA IP. For the benefit of the doubt, let’s say all 11% is invested into FPGA R&D; that works out to $55 million. Xilinx invested 27% back into R&D in 2020; that works out to $195.2 million, meaning Guoxin’s investment is around 28% of Xilinx’s. In short: China’s FPGA efforts right now lag far behind and will struggle to catch up if this remains the case.
Okay, so maybe these are two extreme examples, but who seems to be doing better? Well, while Taiwan’s application-specific integrated circuit (ASIC) maker GUC is larger than China’s Verisilicon in terms of revenue ($475 million vs. $260 million), GUC is spending around $89 million, or 19% of its revenue on R&D, while Verisilicon is spending a whopping 35%, or $91 million. It seems as though Verisilicon wants to match GUC’s dollar R&D spend, a wise decision given GUC is essentially part of TSMC, the world’s largest contract chipmaker. Shenzhen-based Goodix, famous for its fingerprint sensor chips, is spending around 26% on R&D, which equates to $260 million, clearly world-leading in this area.
Conclusions: spend more
While R&D spend as a percentage of revenue and total R&D dollar spend are things we can look at to determine how innovative a company may be, they are not everything. Many of these companies will have other sources of money for R&D spending, such as VC investment or government funds that may not show up in these statistics.
Also, a large proportion of any R&D budget is spent on salaries, and while we see headlines of huge salaries being handed out by some companies in the Chinese semiconductors industry, most companies cannot afford to pay them. On average, salaries are below those in US, European, and Taiwanese counterparks. This means some of these R&D dollars may go further in China than they might in other countries. Indeed, the majority of these companies are expanding their R&D teams quite significantly each year. Goodix added 578 people to its R&D team in 2020, for example, while Verisilicon added 168.
In conclusion, these listed Chinese companies are far behind international competitors when it comes to R&D spend. Only companies with considerable backing such as Cambricon can afford to run at a huge loss in order to reach world-beating status. Many will stay in their corner of the domestic market, largely because that’s all they ever intended. And that’s fine. Yet for Chinese companies that have higher aspirations to catch up with or even surpass foreign competitors, it is essential that they crank up their spending on R&D.