China’s chip sector needs change after OPPO setback

Mystified staff members of Zeku – a fabless chip firm started in 2019 by OPPO, China’s third largest smartphone company – were told on the evening of May 11 that they should work from home the following day.

The next morning, with staff dutifully absent from the premises, the mystery was dispelled when OPPO chief executive Liu Jun announced the closure of Zeku. Even most director-level employees had not been given advance warning.

“The global economy and the mobile phone industry are currently in an extremely pessimistic situation, and the company’s overall revenue is far below expectations,” Liu told Zeku’s staff. “Under such circumstances, a huge investment in chip-making is beyond our affordability.” He stressed that the decision to shut down Zeku was made after a careful discussion. He also said it was not caused by any issues related to the performance of Zeku’s staff.

Citing Qing Dynasty novelist Wei Zi’an’s poem “Traces of Flowers and the Moon,” Liu said that “a romantic person is always left with regret, and it’s easy to wake up from sweet dreams.” He meant that OPPO should wake up from its chip-making dream in time to avoid any big cause for regret.

In August 2019, OPPO founded Zeku and vowed to invest up to 50 billion yuan ($7.1 billion) within three years to make its own semiconductors. But on May 12 this year, OPPO shut down Zeku and dismissed its 3,000 employees. It was a sudden move, as shown by the fact Zeku was still recruiting engineers in late April.

There’s considerable debate about what caused Zeku’s failure, with many commentators blaming US sanctions, but one dominant theme that has emerged in the aftermath is that Chinese smartphone makers should jointly develop their chips, instead of working – and in some cases failing – individually.

Market forces

Some Chinese commentators said the failure of Zeku was caused not by US sanctions but by slowing demand in the smartphone markets. However, some analysts said it’s strange that Zeku was closed ahead of a chip debut that had been scheduled for next month; they insist that OPPO does not lack the cash to run the unit.

Jiang Han disagrees with that analysis. “It costs a huge amount of resources to make chips but the success rate is low,” Jiang, a senior analyst at Pangoal Institution, a public policy think tank, says in an article. “And the current smartphone market cannot support such an operation.” 

He adds: “Even if OPPO has already achieved some technological breakthroughs, it remains far from having an advantage in the industry. In this situation, cutting losses now is a good option.”

The OPPO case shows “that it is very difficult for Chinese smartphone makers to develop their own chips individually; even the chip-making equipment giant ASML could only be built after key chip makers worked together,” Jiang says. “In the past, China Mobile, China Unicom and China Telecom jointly set up China Tower Corp to boost efficiency and lower the costs of infrastructure facilities. Why can’t Chinese chip-design firms collaborate with one another?”

Another view emphasizes bad luck. Zeku was founded at the wrong time, Shen Meng, chief consultant at Guangke Management Consulting, a unit of the Guangdong Polytechnic of Science and Technology, told Beijing Business Today. 

“When OPPO decided to invest in chip-designing in 2019, the pandemic had not yet broken out,” Shen said. “The Covid-19 epidemic did not only hurt the global demand for smartphones but also created a lot more challenges to the chip-making sector.”

Last year, China’s smartphone shipments fell 13.2% to 286 million units from 2021, according to IDC, a market data provider. It is the first time that the figure dropped below the 300 million mark in ten years.

Oppo’s shipment fell 28.2% for the period while its market share in China dropped from 20.4% to 16.8%. Honor replaced OPPO to be the second largest smartphone maker in China, following the number one player, Vivo. 

In the first quarter of this year, global smartphone shipments decreased 13% year on year to 269.8 million units, according to Canalys, a Singapore-based market analyst firm. Samsung’s shipments declined by 18% but Apple’s grew 3%. Xiaomi and OPPO saw their shipments down by 22% and 8%, respectively. 

How to identify the real problem

Shen Yiren, a former vice president of OPPO, wrote in a post that “A problem that can be solved by money is no big deal. One that cannot be solved by money is the real problem.” He then removed the post, which caused a lot of speculation.

Some netizens speculated that OPPO had been pressured by its US supplier Qualcomm or Taiwanese partners TSMC or MediaTek. Some said the time when OPPO finally realized that it is not economically up to making its chips came after its 4-nanometer application processor (AP) chip failed in the “tape out” process, which makes a prototype before mass production.

In February, media reports said Zeku’s AP chip would enter the “tape out” phase in the second quarter and mass production in the third quarter. 

In a smartphone, there are two kinds of high-end processors, namely the AP and the baseband processor (BP). AP refers to the central processing unit (CPU) and graph processing unit (GPU). BP is like a modem that receives wireless signals and transforms them into digital data.

According to Statista, Qualcomm had a 55.7% share in the BP chip market, followed by MediaTek (27.6%), Samsung (7.4%) and others (9.3%) in 2021. Huawei’s HiSilicon Technologies had for a time achieved a 16-18% share with its 5G BP chips but it started fading out from the market once TSMC was ordered by Washington to stop producing chips for Huawei in September 2020. 

US sanctions

Chinese IT experts have recently discussed whether the US sanctions played any role in the shutdown of Zeku.

An IT columnist says in an article published by China’s NetEase.com that OPPO is not lacking money judging by the fact that it compensated Zeku’s staff generously, spending about 500 million yuan on severance packages. He says, Zeku may have burned only 10 billion to 13.5 billion yuan over the past three years, far below its planned budget of 50 billion yuan. 

He says Zeku’s AP chip has not failed in the “tape out” process as the result will only be released in mid-June. Besides, he says, MediaTek also felt surprised as it had to stop a BP chip project related to Zeku’s AP chip.

While “the sudden dismissal of Zeku staff remains a mystery, it is normal that some netizens think OPPO is deeply scared of the curbs imposed on the Chinese chip sector in recent years,” he says.  

In a report published by the Powerhouse, a media unit of Jiemian.com, an unnamed analyst says that it is a conspiracy theory that Zeku was shut down because of the US curbs.

“If there is any potential risk against Zeku, TSMC would be the first one to notice it,” the analyst says. “But over the past month, there had not been any such signal. TSMC was only told after Zeku was dissolved.”

A Zeku employee says OPPO can only blame itself as its previously-launched MariSilicon X and Y chipsets have failed to receive positive responses from the markets. He says Chinese consumers only care about the user experience, not about whether the chips are designed in China. He points out that OPPO did not promote its own chips in its own marketing campaigns. 

The Powerhouse report says the fall of Zeku has raised an alarm among other Chinese mobile phone makers, such as Xiaomi, which invested heavily in chip design.

OPPO launched its first chipset, called MariSilicon X, a 6nm imaging neural processing unit (NPU), in December 2021. The company then unveiled MariSilicon Y, a 4nm bluetooth audio system-on-a-chip (SoC), last December.  

While it remains unclear what was the straw that broke the camel’s back, some observers said Xiaomi Corp, a Beijing-based smartphone maker, could be the next to close its chip design division as its sales dropped 22% year on year in the first quarter of this year. But Xiaomi said on May 18 that it will continue to make its own chips.

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Follow Jeff Pao on Twitter at @jeffpao3