Recent electronics industry surveys highlight one startling figure: the mushrooming of chip-level design houses in mainland China. Early last year, we heard the number has impressively surpassed 500 outfits. But then a little while later, we learned that most of these IC design companies were struggling to survive. Sounds like a semiconductor incarnation of the dot-com flameout?

Listen to what the top designer at Shanghai Fudan Microelectronics says if you don't sense déj?vu yet. According to CEO Shi Lei, after Fudan's successful IPO in 2000, more than 100 design houses jumped in the fray, thinking it must be easy to make a killing in the IC design business.

Indeed it's not difficult to design a chip, but it's hard to market and sell it, thus filling in the holes in larger silicon supply chain. Moreover, relationships with system houses are critical. As Lei would put it, it's like marriage; what's the big deal if it can't last?

Comparing a system design house to a tree and IC design to a leaf, Lei said that in mature markets like the U.S., the tree is very strong, making it easy for leaves to grow. So markets like mainland China have to plant strong trees to develop their own core technologies.

Taiwan has successfully taken this path of nurturing symbiotic relationships among chip- and system-design firms over the last two decades.

There's a lack of good system houses in the mainland as many of the small system companies have been doing mostly high-end assembly work without much investment in design expertise. Some chip-design firms are now moving up the design value chain while their counterparts at the system level achieve better R&D means.

The way chip- and system-design houses align with fabs and IP vendors is also crucial. Again, Taiwan brings a valuable case study in assembling such distinct design elements to create an effective supply chain.

In application-specific areas like analog/mixed-signals, which require new ideas and lots of creative energy, mainland designers have an edge, however. Such leverage can lead to a brand-new chip.

And there're going to be ample opportunities in terms of new applications. Mainland's ascent to digital TV, in wake of Olympics 2008, is just one example of how new applications could impact IC design scene in the territory.

Although the number of IC design firms has grown exponentially in the mainland, it merely represents the phenomena of an expanding market where everybody sees the opportunity. Majority of these 500-plus design houses are quite small and they're too focused on doing design in certain ways.

Though a significant number of these IC designers are now involved in original work, they provide mostly low-cost design substitutes. Being cost-competitive doesn't necessarily translate into bigger growth opportunities.

The semiconductor industry is highly competitive, with innovation being the key. Chip designers in the mainland seem to come to terms with this realization as they strive to move up the design value chain in 2005.

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