MediaTek rides high in bandit territory
By Sherman So
HONG KONG - The Chinese call them shanzhai ji, or "bandit phones", and
the proliferation of the cheap mobile-phone handsets has moved MediaTek - a
Taiwan-based designer of chips that make the gadgets work - towards a dominant
market position, even as sales in China by Nokia, the world's biggest mobile
phone-maker, stall.
The secret of MediaTek's success is that its products go into both branded
mobile phones such as Motorola and non-branded devices so cheap they are almost
given away. That demand drove the company's first-quarter profit up 59% from a
year earlier to NT$11,134 million (US$343 million) as sales jumped 36.8%.
MediaTek's share price has jumped 24% on the Taiwan Stock Exchange in the past
year, far outpacing the 8.7% gain in the
benchmark TSEC weighted index in the same period.
Bandit phones are made mainly by small factories dotted around Guangdong
province in the south of China, their low prices and superb functionality
making them ideal for students, factory workers, soldiers or anyone else
without much cash. They now come in such a prolific variety of styles and
shapes, sometimes identical to world-famous brands, sometimes quite unique in
their functions and style, that the term "counterfeit" hardly seems
appropriate. Yet it is possible in China to buy what is to all appearances and
functions an iPhone for US$100, and it works. They are also exported to Russia
and India by small traders in China.
As researcher Karl J Weaver of Newport Technologies explains, the Putonghua
word shan means mountain, zhai means fortress or hideout, and ji
is the short form of shouji, or mobile phone handset. "Shanzhai Ji
is, therefore, bandit handset."
About 100 million bandit phones were sold in China last year, JP Morgan analyst
Alvin Knock estimates, while industry insider Wayne Zhang suggests a more
conservative 50 million, with the difference possibly accounted for by exports
by small traders to the likes of Russia and India. That compares with 176
million branded cell phone sales, according to the Ministry of Industry and
Information Technology. About 90% of all bandit handsets use chips from
MediaTek.
As MediaTek, led by chairman Ming-Kai Tsai, thrives in bandit territory, Nokia,
the world's biggest mobile phone-maker, is struggling. In the past three years,
mobile phone sales in China have jumped 22%, from 220 million units in 2007 to
250 million in 2008 and 270 million last year. In the same period, Nokia's
sales have stagnated at 71 million units in 2007, 71 million in 2008 and 72
million last year, according to Knock.
"All the incremental growth was taken by MediaTek phones," said Knock.
Founded in 1997, Forbes by 2007 ranked it as one of the Asia's Fab 50
companies. It has overtaken Texas Instruments as the biggest supplier of
integrated circuits in low-end handsets in China. Among companies that farm out
the actual fabrication, or manufacture, of chips that they design (fabless
companies) it is the world's fourth-biggest.
MediaTek, which originally focused on making chips for DVD players, switched to
designing mobile-phone chips after recognizing that cheap locally made phones
from China's Ningbo Bird and DBTel of Taiwan could not match the functionality
of Nokia and Motorola, which 10 years ago dominated the China mobile handset
market.
MediaTek's response was to create "complete solutions" for mobile phones - the
so-called "system-on-a chip". It integrated the handset's motherboard with
other major components and the software for practically any desired feature
onto a single circuit board. Most important, the products were extremely cheap.
According to industry insiders, a set of such systems sells for as little as
100 yuan (US$12.50) to 200 yuan.
Practically all that is then required to produce a mobile handset is the
addition of a battery and a casing to hold MediaTek’s "semi-product". The
combination of innovative Taiwan technology and mainland China's low-cost mass
manufacturing makes such handsets available at less than a third of the price
of branded rivals.
"MediaTek revolutionized how cell-phone handsets are made in China," said
Zhang, formerly a general manager of Motorola’s Mobile Software Solutions Group
for Asia-Pacific and now president of Yostar.net. "It makes it possible for toy
factories to manufacture mobile phones."
Many of these phones are imitations of major branded products, with similar (or
the exact) functionality and style. But a lot of innovative handsets are also
produced - mobile phones with seven speakers, for students to reproduce dance
floor or boom-box music environments; handsets with four bright LED lights to
serve as a cell phone and a powerful flashlight. For senior citizens, devices
have big displays, big keys and a loud sound. For people who work outside in
the fields, there are handsets with longer battery life. There are handsets
with two sim-card slots for people traveling between different cities -
allowing use of, for example, both a Hong Kong number and a Beijing number.
Some are even equipped with a reader to check whether cash is counterfeit.
Others look like a pack of cigarettes, or have a built-in laser pointer, a
global positioning system, or a TV signal receiver.
The adaptability of small manufacturers also means that whatever is the latest
trend - a new iPhone design, for example - can be almost immediately matched by
a bandit version.
Big-name Chinese phone-makers such as TCL, Lenovo and Konka are now using
MediaTek chips for their products, followed more recently by foreign brands
like Motorola and Sharp for their low-end products.
"The local Chinese phone-makers made huge losses in 2005-06 due to the rise of shanzhai
ji," said Knock of JPMorgan, to the extent that the top 20 local
Chinese brands have used MediaTek chips for their phones. "The mobile phone
companies have outsourced their R&D [research and development] to MediaTek
and now focus on marketing and manufacturing only."
In 2008-09, US giant Motorola restructured its global operation, significantly
cutting back its R&D department. "That is when Motorola started to use
MediaTek chips," said Knock, "In this way, Motorola only needs to keep a
research team for cutting-edge technology, leaving MediaTek to work on the more
mature or mainstream technology research."
MediaTek has now captured about 30-40% of the branded handset market in China,
estimates Knock. Moreover, demand for affordable phones in places such as India
and Latin America has made it one of the top five global suppliers of all
handset chips. Last year, only about half of the 360 million phone mobile chips
made by MediaTek were shipped to China, with the remainder going to the rest of
the world.
With Apple having shown with its iPhone Apps Store how availability of handset
applications, often designed by independent software creators, can help boost
popularity of a handset, some companies in China have already set up similar
online stores for MediaTek-based applications. Leading the way is SKY-MOBI in
Hangzhou, with more than 1,000 applications covering the likes of games and
music. Zhang's Yostar.net is also building an apps store platform for
MediaTek-linked products.
Soon they will face competition from MediaTek itself. In March 2009, the
company invested in a small apps store platform operator, Vogins Technology
(Shanghai).
"Although Vogins is small, MediaTek plans to use it to standardize the app
store platforms," said Knock. "MediaTek knows that if there are many different
platforms, application developers will have difficulties. They don’t know which
platform they should choose. Therefore, MediaTek wants to unite the market.
Just like the Apple Apps Store, there should be only one app store for MediaTek
phones."
When that becomes fully operational, the Taiwanese company can expect to see
those already stellar profit figures climb ever higher.
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