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.
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
