Domestic chip startups are entering the final life-and-death test phase. In the “Chip Product Manager Alliance” group in China, a member raised a question: “Why are there still so many chip startups when half of the chip investment institutions have disappeared?”
How should we view this question? First, we need to confirm whether the statement “half of the chip investment institutions have disappeared” is true. If it is, the probability of chip startups surviving on financing is greatly reduced, leading them to focus on doing business well and pursuing profitability.
Through market and industry communication, it can be seen that competition is becoming increasingly fierce, and gross margins are decreasing. A rational judgment is that if chip products do not have pricing power, gross margins will only decline year by year.
Mature standard chip products should not focus on gross margins but rather on scale; only scale can potentially create profits. What are mature standard chip products?DIE area and layers have been minimized, the cheapest wafer processes and packaging/testing factories have been chosen, and performance is sufficient without the need for upgrades or iterations. Over time, there will be more and more such chip products in China.
The gross margin of mature standard chip products is generally around10%, and it will not exceed20%, nor will it be lower than the cost. The more mature standard products a chip company has, the lower its profitability. For chip companies with low gross margins, open source is ineffective in offsetting high operational costs, ultimately leading to negative profits.
In a previous article, I calculated that it is very difficult for a chip company to achieve profitability if it cannot reach20% gross margin. Therefore, we can conclude that for chip companies with gross margins above20%, open source is more important; conversely, cost reduction is more important.
Thus, based on this conclusion, one can directly assess whether the chip company you are in or the companies around you have a future.
Today’s chip entrepreneurs need to have financial awareness and financial thinking, with financial thinking becoming the highest form of thinking in the company. Recently, in a conversation with a consulting firm, I mentioned a concept: every chip startup has a corresponding cash burn budget. If the leader and the startup team are not capable, this cash burn becomes a bottomless pit. The amount of this cash burn budget depends on the chosen chip track and competitive environment, as well as the capabilities of the leader and the startup team.
Constantly changing tracks can lead to previous R&D investments becoming worthless. If one product fails to take off and another product also fails, these are sunk costs, and the investors’ money becomes zero, turning into trial-and-error costs. When chip financing was easy, entrepreneurs and investors did not pay much attention; what mattered was valuation, and a high valuation meant that investors were making money on paper. However, now that chip financing is very difficult, investors will only give you one chance for trial and error; failure means the end.
Essentially, the current chip startup environment is better, with fewer disruptive startups; otherwise, they would take money and hire people at high prices, creating a60 point product and selling it below cost, causing chaos in the entire industry.
Now it is different; everyone can calm down and think carefully about direction, focus on technology and products, and find their target market and target customers. If you cannot calm down, there is only one reason: you have run out of money.
With financial thinking, I will consider the open source and cost reduction of chip startups. In the early stages, when there are no products or products do not generate sales profits, my cost reduction awareness is very strong. My colleagues in the company know that I am very frugal, and investors also know that I am very frugal; I save wherever I can and do not allow waste. The only area where waste is allowed in the company is the R&D department. I paraphrase the saying, “No matter how hard it gets, we cannot let the children suffer; no matter how poor we are, we cannot let education suffer,” thus proposing that “we cannot save on R&D.”
However, in product planning, I cannot allow myself to make any mistakes; errors in product planning are the biggest waste for the company. I often reflect and review myself, and I encourage my colleagues to give me feedback and criticize me.
For a company to develop, cost reduction is not the direction; open source is the direction. In a chip company, if open source is more important than cost reduction, then this company is truly on the right track and will have good development; development is the hard truth.
To embark on the correct path of “open source,” a chip company must achieve an average gross margin of20% or more. Given the current state of competition, it is conceivable, but most domestic chip companies cannot achieve this. When chip technology does not create a gap, and technology homogenization leads to product homogenization, the only solution to this problem is the chip product manager.
The chip product manager can find a relatively advantageous direction based on the company’s technical route and R&D strength, as well as the competitive situation in the market, identify industry trends and application pain points, define and position new products, and must have pricing power. Once new products create new market opportunities, other manufacturers may follow suit, continuously lowering prices to block competitors, ensuring that latecomers gain no profits or that their profits are far less than their investments. After multiple educations, subsequent competitors will not dare to follow suit; they must be ruthless and hit hard. In the past, this approach was ineffective; some chip companies only cared about sales and not profits, as the costs were borne by others, specifically the investors, using investors’ money to subsidize the market.
There are fewer and fewer chip investors willing to be such fools; they only look at sales and higher valuations, thinking they have made money, but in the end, such chip companies are worthless. This is also one of the reasons I am not optimistic about chip mergers and acquisitions. The value of a chip company must be based on profitable chip products. Based on this thinking and the Boston Matrix, and considering the current state of domestic RF chip tracks, I have classified and planned chip gross margins:
1、10% gross margin chip products: severely homogenized and competitive chip products
2、20% gross margin chip products: competitive chip products
3、30% gross margin chip products: chip products with pricing power
Generally speaking, I will plan for chip products with “pricing power” 2-3 years in advance, with a development cycle of at least one year, and market research and internal project initiation taking at least six months. The reason I mentioned that chip startups lack time, not money or people, stems from this. When there are market opportunities and high gross margins, there will definitely be competitive manufacturers following suit, and after a certain period, gross margins will become the second tier of20%, and whether they will eventually become10% products depends on market scale and competitive manufacturers.
Why do chip products with10% gross margins exist? Either the market scale is large, allowing for rapid sales growth and supply chain optimization, or the technical barriers are low, requiring little investment in R&D and mass production, making it easy to produce.
Cost reduction is not the goal; open source is the correct direction. As a chip product manager, I need to continuously plan and define chip products with pricing power. Only with pricing power can we qualify for30% or more gross margins.