TAIPEI — A little-known Taiwanese chip-design company is making waves in the cellphone business, grabbing market share from larger U.S. rivals and helping drive down phone prices for consumers.
MediaTek Inc. made its mark by providing smaller phone makers in China — the world’s largest cellphone market by users — with relatively simple and low-cost chips. Its chips have given rise to a fast-growing segment of mom-and-pop handset makers known as shanzhai producers, whose quirky designs and knockoffs of name brands now account for more than a fifth of China’s cellphone market.
That growth has helped MediaTek boost its market share rapidly in a business that has been dominated by established chip makers such as Qualcomm Inc. and Texas Instruments Inc., of the U.S., and Infineon Technologies AG of Germany.
Now, MediaTek is aligning with big names in the phone industry to extend its reach. Late last year, it began working with Motorola Inc. to produce seven cellphone models for emerging markets, to be priced at less than $150, making U.S.-based Motorola one of the first major handset makers to endorse MediaTek‘s technology. In February, MediaTek and Microsoft Corp. announced a partnership to develop multimedia smartphones for emerging markets.
MediaTek overtook Texas Instruments early last year as the world’s No. 2 maker of mobile-phone chips, and it is gaining on No. 1 Qualcomm Inc., according to market researcher iSuppli Corp. As of the third quarter of 2009, MediaTek had 24% of the global cellphone chip market, compared with Qualcomm‘s 37%, iSuppli‘s figures show.
MediaTek‘s revenue soared around 30% last year, while that of Qualcomm, which also has other business lines, shrank. For the first three months of this year MediaTek said its revenue rose 38% from a year earlier, boosted by surging demand for cellphone chips from China and other emerging markets.
“We are certain that we will continue gain market share,” said Mingto Yu, MediaTek‘s chief financial officer, in a recent interview.
MediaTek‘s rise shows how Taiwan’s technology industry, long adept at low-cost manufacturing, is shaking up areas such as product design, which have been dominated by companies from developed countries. Taiwan’s Acer Inc., for example, was the world’s second-largest personal-computer company in the fourth quarter by unit shipments, ahead of Dell Inc. and gaining on leader Hewlett-Packard Co..
While MediaTek isn’t known for cutting-edge innovation, it has been able to apply the nimble, cost-cutting approach of Taiwan’s contract manufacturers to the business of designing semiconductors, in which engineers use advanced software to lay out the microscopic circuits that make gadgets like cellphones function.
“MediaTek has brought down the cost significantly,” says Jessica Chang, an analyst at Credit Suisse Group AG, who says mobile-phone makers are increasingly drawn to MediaTek‘s products because of their functionality and low cost.
Founded in 1997, MediaTek experienced its first surge of growth making inexpensive chips for DVD players, which helped make the once-pricey machines increasingly affordable. It started moving into the cellphone-chip business about six years ago, targeting China’s vast market, where there are 757 million cellphone accounts.
Cellphones use several types of chips. Phone makers typically procured the chips separately and linked them together. By contrast, MediaTek offers chipsets that include most of the silicon innards of a phone, which makes it easier for manufacturers to develop new models.
Some analysts estimate that MediaTek‘s chipsets halved the time for developing a phone and could lower costs by 25% to 50%.
MediaTek‘s chips were a boon to shanzhai manufacturers — the hundreds of small producers that sell an eclectic mix of handsets, including knockoff Nokia Corp. models with built-in electric razors, to palm-sized “mini iPhones” that mimic the Apple Inc. best seller, to phones that look like cigarette packs. Shanzhai literally means “mountain stronghold”, a reference to the companies’ fringe status.
Generally scorned by established companies because of their reputation for stealing intellectual property, these small makers have mushroomed in China in recent years, helping drive MediaTek‘s sales.
MediaTek also assigned engineers to help larger Chinese companies build up their research and development departments. With its assistance, leading Chinese cellphone makers, including Beijing Tianyu Communication Equipment Co., have increased market share.
Mr. Yu said MediaTek has also helped Chinese clients develop phones for sale in other emerging markets, including models with louder speakers so Indian farmers in rice paddies can hear them ring, or others for Islamic markets with electronic compasses that point toward Mecca.
MediaTek now supplies about half of the chips used in phones made by Chinese companies, according to BNP Paribas Securities. The company says China contributes 90% about of its cellphone chip revenue. MediaTek‘s total revenue has risen an average of 24% annually for the past five years, reaching $3.6 billion last year. Net profit last year rose 91% to $1.2 billion.
MediaTek‘s challenge now is to translate its success into the market for more advanced “third generation,” or 3G, phones that account for a growing share of the Chinese market. In 2007 it acquired the communications division of Analog Devices Inc., a Massachusetts chip company, in part because it had helped China develop a 3G technology called TD-SCDMA that is being used by China Mobile Ltd. the country’s biggest wireless carrier.
MediaTek has earned grudging praise from some of its larger rivals. “MediaTek has been a respectable competitor,” says Eddie Chang, vice president of sales for Qualcomm CDMA Technologies. Qualcomm, the No.1 cellphone chip maker in the global market, has controlled most of the intellectual property for 3G technologies and also tried to come up with some low-cost chips for emerging markets. MediaTek and Qualcomm last year announced a “broad patent arrangement,” but didn’t disclose the terms.
Still, analysts expect competition with Qualcomm and other big cellular-chip companies to grow. “MediaTek is going to increasingly compete head-to-head with all of these big players,” says Flint Pulskamp, a wireless semiconductor analyst at market research firm IDC. “I think they are well-positioned.”
TING-I TSAI, The Wall Street Journal