China investors see long-term positives in demise of Oppo's chip unit

“It will have a positive impact on the industry. In the current cellphone ecosystem, if one phone maker produces chips for its own use, it can hardly achieve economies of scale. It is better to leave the opportunity to independent start-ups," said Alex Banh, a managing partner at IPV Capital, which specialises in semiconductor investments.

"Additionally, this development proves that the domestic chip industry cannot be established quickly founded through high-cash-burn strategies."

Oppo, which was the fourth-largest smart phone manufacturer globally based on shipments last year, launched Zeku in 2019 to generate an in-house supply of key chips. At the time, Oppo’s founder, Mingyong Chen, announced plans to invest CNY 50bn (USD 7.2bn) in the initiative.

On May 11, the company's 3,000 staff received an email instructing them to work from home the following day to allow for IT systems upgrades. They were informed of the closure on that day. Zeku CEO Jun Liu said at a farewell meeting that the global economy and the cellphone industry are in poor health. With revenues well below target, the company decided it could no longer afford to make substantial investments in chip development.

Worldwide smart phone shipments amounted to 1.21bn units in 2022, down 11.3% year-on-year. It is the lowest annual total since 2013, according to International Data Corporation (IDC). Oppo's shipments fell 22.7% - of the top five manufacturers globally, only local rival Vivo posted a sharper decline. Oppo's market share fell from 9.8% to 8.6%.

China shipments were down 13.2% at 285.8m units. Oppo's shipments dropped by 28.2%, leaving it with a 16.8% market share. However, the company appeared to have stemmed the tide in the first quarter of 2023. It was the market leader with a 19.6% share as shipments declined 8.8% versus an 11.8% drop for the market as a whole.

It has been reported that Chinese chip designers are struggling to find manufacturers amid restrictions on US exports of advanced chips and chip-making equipment to China. It is also suggested that overseas shipments of Oppo's smart phones might be banned if they contain the company's own chips. Oppo was planning to carry self-developed chips from next year.

Uncertainty appears to have spooked private equity investors in the semiconductor space. Deployment rose from USD 7.2bn in 2020 to USD 16.2bn in 2021 before slipping to USD 11.3bn last year. Barely USD 1bn has been put to work in 2023 to date, according to AVCJ Research. More than 5,700 chip companies went out of business in 2022, a 70% increase from the previous year.

However, several investors suggested that Zeku's demise could ease costs for semiconductor start-ups by returning talent to the job seeker pool. The entry of large players such as Oppo and Alibaba Group is said to have increased costs because these companies want to expand quickly and were able to pay above-market salaries.

“This marks a return of rational thinking to the market,” said one investor who has backed several Chinese chip start-ups. “While it will impact investor confidence and hurt valuations in the short term, it is not a bad thing for the long-term development of the industry. It reduces noise and unnecessary competition.”

Wei Yu, a partner at Oriza Rivertown, added in a post on WeChat Circle that broader technology companies enter the chip space looking to protect patents, ensure supply chain security and deliver differentiated products. However, it is not necessarily so straightforward in practice.

"It can be difficult to measure these soft gains and justify the reduction in the company's input-output ratio [or return on investment]," he said.

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• Topics
• Greater China
• Technology
• Expansion
• Early-stage
• China
• semiconductor
• IPV Capital