Asia Time Online - Daily News
Asia Times Chinese
AT Chinese

    China Business
     Apr 5, 2011

Battered MediaTek rearms with Android
By Sherman So

HONG KONG - MediaTek Inc, Taiwan's biggest chip designer, is mapping out a recovery plan tied to Android-based phones after seeing its near-total dominance of China's low-end mobile-phone market undermined by rival Shanghai-based Spreadtrum.

MediaTek used to supply 90% of the chips of the low-end mobile phone manufactured in China, said JPMorgan analyst Alvin Knock. Apart from the no-brand mobile phones, many local and foreign brands, such as Lenovo, Motorola, TCL and Sharp, also use its chips for their low-end models. About 30%-40% of the branded handsets sold in China have MediaTek chips inside them, Knock estimated.

Demand for affordable phones in places such as India and Latin America has made MediaTek one of the top five global suppliers

of all handset chips. In 2010, the company made over 500 million mobile phone chipsets, half of which were shipped to China and the remainder for the rest of the world.

So far, so sweet, but things started to turn sour at the beginning of last year when it was recognized that a new model of MediaTek was not sufficiently stable. "More correctly, its rival, Spreadtrum, after years of trial, finally, came up with a chip that is stable enough for phone manufacturers," said an industry insider, "With a price about 10-15% lower than MediaTek's, the Spreadtrum product quickly gained market share."

Together with Taiwan-listed manufacturer MStar, Spreadtrum previously held about 10% of the low-end mobile phone market. With a stable and a lower-priced product, its share increased rapidly to about 20-25% at the end of last year, the industry insider estimated. MediaTek's market share shrank to 70% while MStar held onto the remaining 5%.

Knock believes MediaTek's share of low-end feature phones will drop further, to 65-70%, this year as its rivals have also started to penetrate the export market.

The companies' share prices in the equities markets tell their own story. Taiwan-listed MediaTek's shares have tumbled about 40% in the past 15 months, from around NT$575 in January 2010 to as low as NT$343 on April 1. In the same period, Nasdaq-listed Spreadtrum has more than trebled to US$18.43 on April 1 from US$5.

MediaTek has reacted by cutting prices since mid-2010, so as to stop its market share, temporarily braking its slide in market share, but as competition intensified sales and profitability were hurt. Revenue dropped 22% in the fourth quarter of 2010 from a year earlier and profit plunged 56%.

To rebuild its long-term competitiveness, MediaTek is betting on smartphones running Google's Android operating system. At present, the majority of mobile phones in China are still feature phones - the target of most products from MediaTek, Spreadtrum and M-Star.

Smartphones accounted for only 16.7% of China's mobile-phone market at the end of last year, according to Data Center of China Internet. The Beijing-based research agency, however, expects this will change radically in two years and that smartphone penetration will climb above 54% by 2013. Android, which is open sourced - allowing developers to offer their own tweaks and applications - and is not tied to any one brand or telephone network, is expected to be one of the main operating systems for the smartphones.

"Now, there are very few brands that are able to come up with good Android phones," said Knock. Taiwan-based HTC, Motorola from the United States and South Korea's Samsung "pretty much dominate the market, as Android development requires significant research and development resources that smaller brands are lagging. A chipset vendor could add significant value if it could enable smaller brands to enter the Android market."

That is what MediaTek is doing, making a total solution, with hardware and software working smoothly together, so that small phone manufacturers can also make Android products. MediaTek's Android 2.2 solution has been gaining traction since it was launched last November.

It will have better and faster Android products coming out in mid-2011 and again in late 2011. Knock estimated, at the current pace of price drop, a retail price of US$100 could be reached for entry-level Android phones by the middle of this year. MediaTek hopes to sell over 10 million units of chipsets for Android phones in 2011.
An added benefit of going after Android products is higher profitability. Their semiconductor value "is more than three times higher than feature phones, as an application processor, touch screen controller, WiFi and GPS are going to be part of the standard package" for Android phones, said Knock, "Our checks suggest that the average selling price [for the chipsets] is more than US$15 currently, versus US$4-5" for feature phone chipsets.

Spreadtrum and M-Star have yet to introduce any Android products. "Spreadtrum and M-Star are more keen on eating into MediaTek's market share in feature phones right now," said the industry insider.

If its effort pays off, MediaTek could be the leading supplier of cheap Android phones in the mass market, helping it to regain profitability and its share price will rise again. JP Morgan's price target for MediaTek is NT$540, or 57% more than its current price.
But there are challenges that may hinder that rise. Touch screens, for example, are recently in short supply, and if MediaTek cannot secure a stable supply of these for its customers, it might not able to sell as many Android products as it wishes.

Moreover, although not totally related, third-generation (3G) links, allowing faster downloads, improve the experience of Android phones - with customers wanting to view videos or photos of their friends - and that requires high bandwidth.

However, China's 3G penetration is still low. Only 6.4% of mobile users were subscribing to 3G services by the end of February, according to China's Ministry of Industry and Information Technology. And the price of 3G packages from the three operators (China Mobile, China Unicom and China Telecom) is still too high for the mass market.

MediaTek's plan for making a comeback may require the rest of the industry to catch up with its ambitions.

Sherman So is a Hong Kong-based correspondent and co-author of Red Wired: China's Internet Revolution.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

OPhone fails to connect
(Aug 4, '10)

MediaTek rides high in bandit territory (May 26, '10)

1. Exposed: The US-Saudi Libya deal

2. Pakistan ready for Middle East role

3. There's no business like war business

4. Neo-Ottomans discover new Middle East

5. China tests Nepal's loyalty over Tibet

6. Japan Post's stalled sale a saving grace

7. Tripoli, the new Troy

8. Egypt moved by deep waters

9. Cambodia: No country for old men

10. Turkey learns rules of the game in Iraq

(Apr 1-3, 2011)


All material on this website is copyright and may not be republished in any form without written permission.
© Copyright 1999 - 2011 Asia Times Online (Holdings), Ltd.
Head Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East, Central, Hong Kong
Thailand Bureau: 11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110