China's MCU Market: Price Wars, Involution, and the Path to High-End Breakthrough

China's MCU Market: Price Wars, Involution, and the Path to High-End BreakthroughOnce upon a time, amidst the global chip shortage, the MCU market boomed, attracting a flood of capital and talent. However, the current landscape is drastically different

China's MCU Market: Price Wars, Involution, and the Path to High-End Breakthrough

Once upon a time, amidst the global chip shortage, the MCU market boomed, attracting a flood of capital and talent. However, the current landscape is drastically different. The MCU market is fiercely competitive, plagued by constant price wars and severe involution. An engineer recently posted on an electronics forum about a new product requiring an MCU priced below $0.03, yet demanding comprehensive functionality detailed in a specification document over ten pages long. Incredibly, three suppliers offered free development to compete for this slim-margin project. Industry experts point out that the number of domestic MCU manufacturers in China has exceeded 400 in 2024, making the suppliers' "free" strategy understandable.

International Giants: Declining Market Share and Strategic Adjustments

STMicroelectronics (ST), once the leading MCU supplier and the preferred choice for many companies, now faces unprecedented challenges from the strong surge of domestic Chinese MCU manufacturers. Domestic MCUs leverage lower costs, with original factory pricing as low as $0.05, while traders even undercut prices to gain market share. ST MCUs, which once saw price increases of tens of times, are now losing ground in the price war, experiencing price inversion.

ST is not alone. Other international giants are similarly affected and are adjusting their strategies accordingly. STMicroelectronics' 2024 nine-month financial report revealed a 41.3% year-on-year decline in MCU sales, reaching approximately $2.58 billion, significantly lower than the $4.4 billion in the same period of 2023. CEO Jean-Marc Chery cited the decline in the Chinese market share as a major contributing factor. ST explained that non-cancellable and non-re-schedulable sales contracts signed in 2022 and 2023 led to customer inventory buildup, ultimately causing a significant drop in MCU sales in 2024. These contracts, initially viewed as a stability strategy, backfired due to geopolitical tensions, slowing global economic growth, and decelerated growth in the Chinese market, resulting in substantial inventory pressure, price risks, and significant losses. ST stated that inventory adjustments accounted for 60% of the MCU sales decline, with the remaining 40% attributed to market shrinkage and market share loss.

To revitalize its Chinese market share, ST announced a partnership with Hua Hong Semiconductor Manufacturing Co., Ltd. to jointly advance 40nm MCU foundry services. Choosing to manufacture chips in China highlights the recognition of the vast potential of the Chinese market. ST's performance over the past year confirms this: MCU sales in the automotive and industrial sectors have significantly declined, partly due to the loss of market share in China. Jean-Marc Chery frankly admitted, "China is the largest and most innovative market for electric vehicles. (Chinese companies) are developing faster. If you are not there, you might fall behind."

Other international MCU giants are also facing difficulties. Microchip's revenue for Q2 FY2025 plummeted by 48.4% year-over-year; NXP's Q3 revenue dropped by 5.4% year-over-year, with a pessimistic outlook for Q4; Infineon's FY2024 revenue decreased by 8.3% year-over-year, and operating profit fell by 44.5%. These international giants face severe challenges under the strong impact of the Chinese market.

Domestic MCUs: Involution and Retreat

Despite facing competition from international giants, domestic Chinese MCU manufacturers are not immune to challenges. Siruipu, a leading domestic analog IC company that entered the MCU market in 2021, is reportedly disbanding its MCU team, impacting approximately 80 employees, some of whom were previously part of Texas Instruments' dismissed Chinese MCU R&D team.

Siruipu planned to invest RMB 200 million into the MCU sector, leveraging its expertise in analog mixed-signal design to develop high-performance, highly integrated MCU products targeting smart homes, smart buildings, industrial control, medical devices, metering equipment, and communication. In late 2021, Siruipu mass-produced and launched the MCUTPS32 mixed-signal microcontroller family, comprising 26 products. In 2023, Siruipu also introduced competitive MCU products, such as MCUs integrating capacitive touch technology and MCUs with high-effective-bit analog-to-digital conversion technology.

However, the disbanding of Siruipu's MCU team reflects the excessive involution in the domestic MCU market. Despite significant investment in MCU R&D (its 2023 financial report indicated a total investment of RMB 500 million in its high-integration, high-performance MCU product series), the MCU business generated almost no revenue in three years. The domestic MCU market is primarily dominated by international manufacturers, with domestic manufacturers concentrated in the low-to-mid-range segment, resulting in severe product homogeneity and price-based competition. This signals an unavoidable phase in the development of domestic MCUs, suggesting that more domestic MCU companies may face similar challenges.

Q3 Performance and Inventory Status of Domestic MCU Manufacturers

In the first three quarters of 2024, the overall performance of the domestic MCU industry was under pressure, with most companies experiencing year-on-year declines in revenue and net profit, and many incurring losses, alongside high inventory levels. Competition remains fierce. However, among general-purpose MCU manufacturers, some saw revenue recovery due to the revival of the consumer electronics market and increased penetration of domestic MCUs in the automotive market. For example, GigaDevice's Q3 2024 sales reached RMB 2.04 billion, a year-on-year increase of 42.83%. Effective inventory management in the industrial and computing storage sectors was key to its recovery. The year-on-year revenue growth of both Chipsea Technology and Putian shares also exceeded 50% in the first three quarters.

Since 2023, MCU manufacturers have embarked on a protracted inventory reduction cycle. Currently, most MCU manufacturers are making good progress in destocking, with a significant decrease in inventory turnover days.

Domestic MCUs: Mergers and Acquisitions, and High-End Breakthrough

Faced with intense market competition, domestic MCU manufacturers face two paths: mergers and acquisitions, and breaking into the high-end market.

For smaller MCU companies, mergers and acquisitions are crucial for overcoming competition from larger companies and achieving breakthroughs. Independent development is becoming increasingly difficult; they struggle to compete with larger companies in technology R&D, manufacturing, and supply chain management, leading to shrinking profit margins and increased financing difficulties. Mergers and acquisitions can help these companies gain access to new technologies, new markets, and enhance product competitiveness.

Leading domestic MCU companies need to learn from international giants and push into the high-end MCU market. Currently, domestic MCUs are primarily concentrated in the low-to-mid-range market, while the high-end MCU market remains heavily reliant on imports. Developing high-end MCUs is significant; it reduces import dependence and yields higher profit margins, breaking through existing profit bottlenecks and building technological barriers and competitive advantages.

Currently, competition in the home appliance and consumer electronics sectors is already fierce. However, there is still a gap between domestic and international MCU manufacturers in automotive electronics and industrial control, with relatively few manufacturers capable of providing automotive-grade MCU chips. International giants hold significant market share in the mid-to-high-end MCU market, employing a differentiated strategy. In the automotive MCU market, 32-bit MCUs will become the mainstream demand. In recent years, some mainland manufacturers have entered the market through lower-end automotive-grade MCUs with less stringent safety requirements, gradually moving toward the development of high-end MCUs. Currently, GigaDevice, Chipsea Technology, Huahong Semiconductor, and BYD Semiconductor all have products that have passed automotive qualification tests.

The relatively low market share of domestic MCUs in industrial-grade and automotive-grade applications suggests that with product performance optimization, technological advancements, and cost control, domestic MCUs are expected to gain more market share in the high-end market. Capturing the high-end market is essential for domestic MCU manufacturers to achieve greater growth in the intense market competition.

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