Closure of chip design unit Zeku sparks speculations

Chinese smartphone giant Oppo’s sudden move to disband its in-house chip design unit, Zeku, has triggered heated speculation on the mainland on the factors behind this action, which involved dismissing nearly 3,000 engineers in what could be one of the largest semiconductor industry lay-offs in the country.

Oppo last Friday announced Zeku’s shutdown through a brief statement, which blamed “uncertainties in the global economy and smartphone market”, and called it a “difficult decision”.

“The obvious factors at this point are the economic slowdown and the need to retain profits,” said Shobhit Srivastava, a senior analyst at tech research firm and consultancy Omdia.

“It is not an easy task to maintain a chip division [because] its takes significant investment as well as partner support for success.”

But there has also been speculation among Chinese analysts about non-financial factors as reasons for shutting down Zeku, including an effort to avoid potential US trade sanctions.

While there has been no talk or reports of Oppo as a blacklist target, Washington has already made struggling telecommunications equipment manufacturer Huawei Technologies Co, which runs advanced semiconductor design firm Hi-Silicon, an example of how trade restrictions could damage businesses.

Huawei finally ran out of in-house-designed semiconductors for its smartphones in December last year, as US trade sanctions effectively cut the company’s access to advanced new chips, according to a report by Counterpoint Research.

Many engineers from HiSilicon had joined Zeku, as US sanctions continued to impact Huawei’s operations, according to industry sources.

In an 18-minute video of his meeting with employees last Friday, Zeku chief executive Liu Jun said the weak smartphone market was the main reason behind Oppo’s decision to close the four-year old chip design unit.

“The company just can’t afford such a huge investment in chips,” said Liu, who appeared to suppress his tears on the video as he explained the situation to employees.

Shuttering Zeku marked another blow to China’s semiconductor ambitions and goal to become self-sufficient in this hi-tech field, as US trade sanctions continue to disrupt the operations of major domestic firms in this sector.

Before last Friday’s announcement to shut down its operations, Zeku had been aggressively recruiting semiconductor talent from among new university graduates in China and other Chinese chip firms with attractive pay packages.

It published a recruitment notice only two weeks ago, looking for chip engineers to join its offices in Shanghai, Beijing, Chengdu and Xian.

Oppo established Zeku in 2019 to design chips that could help the performance of its smartphones and other gadgets.

Over the past four years, Zeku rolled out two semiconductor designs: MariSilicon X, an imaging-dedicated chip in December 2021, and MariSilicon Y, an audio-processing chip that was launched late last year.

Zeku has offered all its employees so-called N+3 severance packages, with N representing years of service. N+3 will be multiplied by an employee’s 12-month base salary and bonus average, which is a generous compensation by industry standards.

New graduates who had earlier been hired have the option to either work for other departments at Oppo’s head office in Dongguan, a city in southern Guangdong province, or to take the N+3 package, according to a notice by Zeku.

Oppo’s establishment of a semiconductor unit with 3,000 employees appears to be a strategic mistake because that number was too big even for a chip design start-up, according to an industry source.

Oppo was the world’s fourth-largest smartphone vendor in the first quarter, behind Apple, Samsung Electronics and Xiaomi Corp, according to data from Counterpoint Research. Oppo shipped 20.8 million smartphones last quarter, down more than 10 per cent from 30.9 million units in the same period in 2022.

Total smartphone shipments for Oppo, which includes OnePlus and Realm, took a hit in 2022, when it declined 20.7 per cent year on year to 107.6 million units. That reduced Oppo’s revenue last year by 23 per cent to US$38.2 billion, according to Counterpoint. South China Morning Post