Aug 6th 2009 | HSINCHU, TAIWAN
How a Taiwanese firm became one of the world’s fastest-growing chipmakers
MOST technology firms fall into one of two brackets: those that sell individual components, such as Intel, a chip giant, and those that offer finished products, such as Apple of iPhone fame. MediaTek sits somewhere in between: it sells most of the innards of mobile phones in a single package, but not the phones themselves — a strategy that has made it one of the world’s fastest-growing chipmakers. On August 4th it said its second-quarter profits were 80% higher than a year before, at NT$9.16 billion ($277m).
Although no household name, MediaTek makes products used by most consumers in rich countries. The Taiwanese firm is a “fabless” chipmaker, meaning that it only designs its chips, while subcontracting production. It started life in 1997 making chips for CD-ROM drives, and eventually took to building the brains of all sorts of consumer devices. Today MediaTek is the leader in these markets, equipping more than 50% of DVD players, for instance.
Yet these have become commodity businesses with low margins. So in 2004 MediaTek expanded into higher-value territory by making the bundles of chips, or “chipsets”, on which mobile phones rely. Being a latecomer, the firm opted to sell processor-, radio- and other sorts of chips together with the necessary software. This “total solution” makes it much easier for phonemakers to produce handsets.
MediaTek’s technology has revolutionised the manufacture of mobile phones in mainland China. A handset firm there used to need 20m yuan ($2.9m), 100 engineers and at least nine months to bring a product to market. Now 500,000 yuan, ten engineers and three months will do. As a result, Chinese handset-makers now number in the hundreds. Many churn out shanzhai (or “bandit”) phones: knock-offs of established brands, labelled “Nckia” or “Sumsung”. Others are true innovators, making handsets with big speakers or with two slots for SIM cards, so that one handset can be called on two different numbers.
This has thrust MediaTek’s revenues from $1.2 billion in 2004 to nearly $2.9 billion in 2008, when it sold about 220m chipsets to China. It became the world’s third-biggest fabless chipmaker by revenue in the first quarter of this year, behind America’s Broadcom and Qualcomm.
So far MediaTek only makes chips for low-end phones. Other developing countries, which already import 40% of all handsets made in China, are a huge opportunity, says Jon Erensen of Gartner, a market-research firm. But the firm is even more ambitious: later this year it will start selling technology for smartphones. Whether MediaTek can compete with Qualcomm and ST-Ericsson, Europe’s new champion for wireless chips, remains to be seen. Of the well-known handset brands only LG, a South Korean electronics giant, sells phones with MediaTek chips inside.
A more fundamental question is to what extent the industry structure spawned by MediaTek’s chipsets and software in China will spread across the globe. Lawsuits will thwart blatant knock-offs in rich countries. All the same, the barriers to entry for new handset-makers are getting ever lower. And Western consumers like variety as much as Chinese ones.
Source: The Economist / MediaTek and mobile-phone chips Fabless and fearless