MediaTek (Part 2): The Shan Zhai Effect

By guest author Nalini Kumar Muppala

Shan zhai refers to businesses based on producing fake or pirated versions of established brands. These businesses often start from close to nothing and can evolve at a breakneck speed to serve local markets by leveraging their understanding of the local culture and local market needs. Most of the time, shan zhai refers to cheap imitations of established brands, but in some cases shan zhai firms have built on their initial success to go on to create successful IP and product portfolios. The most successful of these defy conventional wisdom and innovate their way past the competition.

Many small handset vendors chose this path in part to escape the stringent regulations that must be met to enter this segment in China. Mobile phones originating in the shan zhai market are classified as white-label phones. According to various estimates, there are 100 to 200 handset vendors that fall into this category. While most of them will fade away, some might  become low-cost alternatives to established brands.

Linley Gwennap estimates that the shan zhai market accounted for 150 million baseband chips in 2008. MediaTek is known to have provided the bulk of these and has thus helped to create a market segment of its own – one that serves the needs of cost- and value-conscious consumers in emerging markets. Owing to the shan zhai market, sales of mobile phones are now being reported by many analysts and firms by two figures: sales from top vendors and sales from top vendors plus the MediaTek ecosystem.

These small firms lack the resources and scale to justify internal R&D teams to design phone platforms. MediaTek fills this void by providing turnkey solutions. The offering includes chipsets, firmware, application software, and integration support — all in one place. This has enabled MediaTek to charge premium prices.

A mobile phone is the only mode of communication for many in low- and mid-income countries. A population that sometimes finds it hard to make ends meet realizes the need for communication and understands the importance of being connected and informed. Much of this market lacks a formal, accountable credit system and there is thus no arrangement of carriers subsidizing phone purchases and recouping costs over extended service contracts. Because they have to pay the full cost of a phone, the consumers in this segment tend to be highly price-sensitive and in most cases do not care about which brand they have. The white-label phone companies that flourished in part because of MediaTek fit the bill perfectly for these customers.

Together, China and India form the world’s largest handset market, bigger than even Western Europe or North America. White-label phones have seen a good uptake in these two countries, and MediaTek’s relationship with the carriers Vodaphone and Spice in India helps explain why. But expect some setbacks in this area as the security authorities and government officials in India and other countries intensify their crack down on this gray market; such phones lack a traceable IMEI code, making it difficult to trace terrorist and antinational activities.

In spite of the huge uptake of its chips for white-label phones, it was essential for MediaTek to gain some big-name handset vendors for continued growth and market share gain. It was also necessary to expand beyond the 20% worldwide market that it served. MediaTek has found some recent success in reaching out to customers beyond China and the shan zhai market. As I discussed in the first post, MediaTek now boasts Motorola and LG as customers. In addition, Garmin selected MediaTek’s GPS chipsets for some of its outdoor navigation devices. Although all of MediaTek’s design wins at tier-1 handset makers are for low- cost phones, the company hopes to move up the ladder based on its continued technological advances.

To be sure, MediaTek supplies to other handset makers as well. By some estimates, only about 10% to 20% of MediaTek’s chipsets are used in shan zhai phones.

MediaTek’s products are not unique. In fact, many companies offer similar solutions; some even have more integrated combo connectivity solutions. But MediaTek has found more success than others. In the next post, we will see what makes MediaTek click.

This segment is part 2 in the series : MediaTek
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