The Shift to Custom Silicon: Why Companies Are Designing Their Own Chips

Xiaomi has announced its self-developed mobile chipset, XRING 01, manufactured using TSMC's 3nm process, positioning them alongside Apple, Samsung, and Huawei as the fourth global smartphone brand with its own core processor. This move exemplifies the growing trend of companies designing custom silicon to enhance performance, control costs, differentiate their products, and secure their supply chains, impacting traditional chip suppliers like Qualcomm and NVIDIA while benefiting foundries like TSMC and IP providers like Arm; current US export controls do not prevent Chinese companies focused on the consumer market from accessing global foundries for advanced nodes.

Analysis

Xiaomi's announcement of its self-developed XRING 01 mobile chipset, reportedly utilizing TSMC's advanced 3nm process, marks a significant development, making it the fourth global smartphone brand after Apple, Samsung, and Huawei to design its own core mobile processor. This initiative, supported by a 1,000-person team, underscores a broader industry trend towards custom silicon, where companies design chips tailored to their specific needs for enhanced performance, power efficiency (especially for AI workloads), cost control, product differentiation, and supply chain security. This trend extends beyond consumer device makers like Apple (A-series, M-series chips) and Samsung (Exynos) to hyperscalers such as Google (TPUs since 2016), Amazon (Trainium, Inferentia), Microsoft, and Meta, who are investing heavily in custom chips for their data centers. The rise of custom silicon presents a direct challenge to traditional fabless chip suppliers like Qualcomm, which faces increased competition in mobile SoCs, and NVIDIA, which could see some displacement of its high-margin GPUs by custom AI accelerators in data centers. However, this trend simultaneously bolsters the strategic importance of pure-play foundries like TSMC, which provide the advanced manufacturing capabilities (e.g., 3nm, 2nm nodes) essential for these custom designs, and IP providers like Arm, whose licensed architectures (e.g., Cortex-X925 CPU, Immortalis-G925 GPU used in XRING 01) accelerate development. Notably, Xiaomi's ability to leverage TSMC's 3nm process highlights that current US export controls are targeted and do not broadly restrict Chinese consumer-focused companies from accessing advanced global foundry services, unlike the more severe restrictions faced by entities like Huawei. The custom silicon trend is anticipated to persist and expand, driven by the proliferation of AI and the pursuit of competitive advantages through hardware optimization, further reshaping the semiconductor industry landscape.

Key Decisions for Investors

• Investors should monitor traditional chip suppliers like Qualcomm and NVIDIA for potential margin compression and market share shifts as major customers increasingly develop in-house silicon solutions.
• Consider exposure to advanced foundries such as TSMC and key IP providers like Arm, as they are positioned to benefit from increased demand driven by the custom silicon trend.
• Evaluate companies investing in custom silicon (e.g., Apple, Amazon, Google, Microsoft, Xiaomi) for potential long-term competitive advantages stemming from enhanced product performance, cost efficiencies, and supply chain control.
• Assess the nuanced impact of export controls, recognizing that while some entities face significant restrictions, others in the consumer sector may still access advanced manufacturing, but remain vigilant to evolving geopolitical and regulatory landscapes.