MediaTek has burst into the market for smartphone chips as the fourth biggest maker with around 10% market share; Domestic smartphone brands’ share in China has soared from 25% to 70% in the past two years, as the market has expanded more than fivefold

MediaTek has burst into the market for smartphone chips

Aug 24th 2013 | HSINCHU |From the print edition

TAIWAN has a paradoxical claim to fame. The island of 23m people is home to many leading information-technology companies—few of which are well known abroad. Most of the world’s personal computers are made by Quanta, Wistron or some other obscure Taiwanese firm, though they bear the names of Dell, HP or Lenovo. The processors in your smartphone or tablet may have been made by Taiwan Semiconductor Manufacturing Company (TSMC) and its touch-screen by TPK. And, especially if your device is Chinese, there is a good and growing chance that the chips were designed by MediaTek.The firm entered the smartphone-chip market in 2011. That year just 10m smartphones were shipped containing its technology. Last year the number jumped to 110m. This year it expects 200m, plus 15m-20m tablets, which in all should account for 40-50% of revenue. In the first seven months of 2013, revenue was 35% higher than a year before, at NT$70.5 billion ($2.4 billion). Its profits for the first half were up by more than 60%. “We are very confident that in the next three to five years we will be in the top two vendors of systems-on-a-chip for smartphones,” says Ming-Kai Tsai, the founder and chairman.

Mr Tsai is well on the way. Stuart Robinson of Strategy Analytics, a research firm, says MediaTek is already the fourth-biggest maker of smartphones’ application processors (or “brains”), with a shade less than 10% of the market, a few points behind Apple and Samsung. America’s Qualcomm is far out in front with almost half.

MediaTek sells more than just a set of plans for making a chip: it also provides “reference designs”, a collection of drivers and other software that optimise the way a smartphone’s other components work with the chip. “We supply beef, they create the dish,” says David Ku, the chief financial officer. Clients can use the reference designs to rustle up basic fare, or create fancier recipes, for instance incorporating 3D screens or higher-quality sound.

Many of those clients are Chinese phonemakers almost unheard of in the West, such as BBK, Gionee, OPPO and Xiaomi. In China they are anything but unfamiliar. Domestic smartphone brands’ share has soared from 25% to 70% in the past two years, as the market has expanded more than fivefold, according to Gartner, another research firm. But MediaTek’s chips can also be found in phones elsewhere in Asia, in the Middle East and Africa, and increasingly in the West.

In bursting into the smartphone market MediaTek is doing what it has often done before. Its method, explains Willy Shih, of Harvard Business School, has been to make technology simpler to use, lowering entry barriers for both itself and its customers. Founded in 1997, MediaTek began with controllers for CD-ROMs. It soon came up with a design needing one chip rather than several. Taiwanese manufacturers took it up; Toshiba, Sony and others followed. By 2000 it had captured more than half of a market once dominated by Japanese firms. That Mr Tsai is keen on the work of Clayton Christensen, author of “The Innovator’s Dilemma” (and a colleague of Mr Shih’s), comes as no surprise.

MediaTek moved on to chips for DVDs, televisions and, in 2004, basic mobile phones, for which it claims to have sold 500m units in 2010. It built the relationships with Chinese makers of cheap phones that have allowed it to break into smartphones so quickly.

Low prices are essential. In developing economies people do not enjoy the handset subsidies routinely offered by operators in rich countries, and cannot afford expensive phones. But both Mr Tsai and Mr Ku, who proudly shows off clever but cheap phones made by customers, insist that “low price does not mean low-end.” Last month MediaTek announced a design using inexpensive but state-of-the-art technology licensed from ARM, a British company whose ideas underlie the chips in most smartphones and tablets.

Despite its rapid growth, MediaTek can expect opposition. It faces direct competition from Spreadtrum, a designer based on the mainland, in Shanghai. And the giant of the chip-design business, Qualcomm, is wise to the threat. It too has been selling reference designs, mostly to Chinese manufacturers, allowing them to develop Qualcomm-powered devices quickly—and thus strengthening itself in the mass market. Mr Tsai may not unseat Qualcomm, but he is on course to become its closest challenger.