First with chips to help mine Bitcoin, AIchip gets a second boost to its business with chips for AI uses.
Taiwan-based Alchip Technologies has risen on the crest of two of the hottest tech trends in the past decade: cryptocurrencies and artificial intelligence. The fabless chip design company focuses on high-performance chips that are essential in both sectors. First founded in 2003, the company toiled in relative obscurity for a decade selling chips to Japanese consumer electronic companies such as Sony and Panasonic for use in digital cameras, televisions and gaming consoles. It was a steady but low-margin business for the company cofounded by electrical engineer Johnny Shen and computer engineer Kinying Kwan, both from Taiwan.
Then came bitcoin and the cryptocurrency craze. Alchip’s newer high-performance, yet energy-efficent, 16-nanometer chips (nanometer reflects the density of transistors on a single chip) were ideal for mining bitcoin and other cryptocurrencies in 2015, just as the price of bitcoin rose from around $300 to hit an initial peak of over $14,000 in late 2017. Sales took off as demand for computers to mine cryptocurrencies exploded around the world—and unlike previous chips, the more complex design could be sold at higher margins.
While still serving Japanese customers and cryptominers, Alchip also began to expand into the mainland Chinese market and the U.S. market as well, helping propel growth as the bitcoin bubble popped in 2018. “Some of the Japanese companies like Sony and Yamaha still contribute good revenue. The market is there, but the growth cannot be compared to the U.S. and the Chinese markets,” president and CEO Shen, 52, says in a virtual interview.
AIchip has seen five consecutive years of revenue growth.
Alchip has seen five consecutive years of revenue growth, benefiting from increased demand as advanced chips find their way into new products and applications, mostly recently AI. Last year, the company’s sales were $460 million, a 24% rise over the previous year, while net profit was $77 million, a 23% increase over the previous year. Almost half of 2022 revenue came from designing AI chips; other contributors were networking and consumer electronics. The company’s stock has climbed 288% between the start of 2020 and 2022, and it gained another 160% since the start of this year alongside investors’ growing appetite for AI stocks. “Choosing the right market, having a good track record, and flexibility in assigning our design resources are a few key areas why the company can continue to be profitable,” Shen says.
The two cofounders bring deep expertise to their roles. Shen spent over two decades honing skills in the integrated chip business and management. Prior to Alchip, he worked for Altius Solutions, founded by Kwan, who is now Alchip’s chairman. Shen graduated from the University of California, Los Angeles, with a B.A. in electronic engineering. Kwan graduated with a B.A. in computer engineering from the University of Illinois. He stayed at Altius after it merged with California-based software supplier Simplex Solutions in 2001; a year later the combined entity was sold to the U.S. chip firm Cadence Design Systems for $300 million.
Still Climbing
Alchip Technologies has recorded revenue growth for the past five years.
As Alchip delves deeper into more leading-edge chip design, those at the 7nm or below level, it is also building a moat around its business that presents high barriers to entry, with the increased complexity and cost in creating such chips. The company currently has no direct competition, with perhaps only five companies making similar products, such as mainland China’s Global Unichip and the U.S.’s Marvell Technology. Sales of chips in the 7nm or lower category contributed 68% of Alchip’s revenue last year. To stay ahead of the competition, Alchip invested about $69 million in research and development in 2022 and 2021.
According to Alan Priestley, an analyst at researcher Gartner, the barrier to entry to the leading-edge segment is very high as chips get smaller. For advanced applications such as AI, a company can now spend around $350 million to develop a suitable chip, while a chip for a simple application such as in a toy might only cost $10 million. “It can be resource intensive and challenging … to develop such chip designs,” Priestley says.
The company currently has
no direct competition.
All has not been completely smooth sailing for the company. It experienced a setback when one of its biggest customers, China’s Tianjin Phytium Information Technology, was blacklisted by the U.S. government, saying it was involved in developing weapons of mass destruction for the Chinese government. After the announcement, Alchip’s stock price fell 50% in five days, wiping out around $460 million in market value. Alchip immediately stopped accepting new orders from Phytium, and has since replaced the lost revenue with orders from new customers, many from the U.S.Alchip’s path is still not entirely clear since there are still some challenges ahead. Tensions between the U.S. and China continue to simmer, forcing Alchip to shift away from the mainland China market, one of its biggest. “Some of the U.S. customers require us not to use Chinese resources from China, so we have increased our resources in Japan and Taiwan. We have also started to build a subsidiary in Southeast Asia,” says Shen.
Last year, the United States accounted for about 40% of Alchip’s sales, a 14% rise over the previous year. China was the second-largest revenue contributor with 27%, followed by Japan with 14% and Taiwan with 10%. The company launched its North American operation in October 2019 and recently relocated to a larger location in San Jose, California, to accommodate increased market demand last year. Shen anticipates that the U.S. market, propelled by the AI sector, will continue to be the company’s largest revenue contributor in the next three to five years, with a share that might reach 80%. China, he feels, will have limited growth due to the ongoing political tensions.
Alchip Technologies recently relocated to a larger location in San Jose, California.
Courtesy of ALCHIP
Alchip’s chips are known as ASIC, or application-specific integrated circuit, customized chips. According to a recent Allied Market Research report, the global ASIC market, valued at $15 billion in 2018, is projected to reach $28 billion by 2026, with a CAGR of 9% between 2019 and 2026. Shen also plans to expand more in the automotive sector, with chips used for autonomous driving in electric vehicles for the U.S. and China markets. The auto business is expected to contribute up to double digits to the company’s sales this year. Analyst Priestley says the spread of self-driving vehicles will drive demand for AI chips. “By 2027, more than 20% of new vehicles will include an AI chip, up from less than 5% in 2022,” he says.
Alchip anticipates that its revenue will expand by a double-digit percentage this year as demand from the rise of AI technologies booms. “We will continue to focus on the leading-edge technology. We [will also] try to expand more partnerships with major suppliers. For us, we focus on design services, and we will never make products that compete with our customers,” Shen says.
