MediaTek (Part 3): Secret Sauce

By guest author Nalini Kumar Muppala

As its gross margins trail only those of industry leader Qualcomm, MediaTek is well-regarded by analysts and investors alike. Since its listing on the Taiwan exchange in 2001, MediaTek’s gross margin has usually hovered around the high 40s to the mid 50s. These days, it is close to 60%. However, unlike Qualcomm – which has essential IP that enables it to collect royalties on nearly every phone made – MediaTek’s success does not directly correlate to technological excellence or unique IP. Many companies offer similar chipsets; some even have more integrated combo connectivity chipsets. So how did MediaTek find more success than most other handset processor vendors?

MediaTek’s success can be attributed to several factors:

1. MediaTek being an ecosystem in itself: Unlike, say, Texas Instruments’s network of third-party vendors, MediaTek provides most of the software and helps with integration effort that goes into making a mobile phone. MediaTek provides a complete solution and acts a single point of contact for everything relating to using its parts and chips from other vendors.
2. MediaTek provides turnkey solutions: Such solutions have found huge uptake from low-cost handset vendors with little in-house R&D.
3. MediaTek’s concentration on Chinese manufacturers: Talk about being in the right place at the right time! MediaTek was fortunate to be supplying the Chinese cell phone market. Its fortunes have grown along with the incredible growth of the Chinese economy. Most major Chinese handset makers source from MediaTek.
4. The shan zhai effect: By reducing the barriers to entry into making a phone, MediaTek enabled the creation of 100 to 200 (by various accounts) white-label phone makers in East Asia. Such white-label phones account for the bulk of the phones sold in China and a big share of those sold in emerging markets outside China.
5. Location: A majority of the world’s cell phones are manufactured in the Far East, and MediaTek, being located close to the production lines, has been able to provide a far better support structure. Proximity to customers has meant that MediaTek has made it hard for Western companies to make a dent in the shan zhai market.
6. Lower cost of engineers: Western companies outsource design and production to locations where MediaTek is based. MediaTek does not have to deal with such issues as coordinating with remote sites just to save money. To be sure, MediaTek has design and development centers outside of Taiwan, but in this case it is truly for strategic reasons and not to save costs.
7. Acquiring ADI’s cellular business: This has enabled MediaTek to ride the rising tides in the TD-SCDMA market. Without much of a stretch, it can be said that MediaTek, along with other companies, helped to fuel the growth of TD-SCDMA.  In the process, it has enjoyed subsidies and support of the Chinese officials who would love to see this homegrown technology flourish elsewhere.

When the low-cost phone market was shaping up, ST-Ericsson (in its previous avatar), Infineon, and TI all had chipsets that catered to low-cost phone makers. In some cases, MediaTek’s offering was behind the cutting edge and technically not the most advanced, but due to its unique business model and understanding of the needs of local customers, MediaTek was able to serve this market better and keep others at bay.

While MediaTek grew on the strength of being the low-cost supplier of choice for GSM/GPRS handsets, it has invested heavily in developing products for more advanced technologies. In the next post, we will look at how its latest offerings will shape the company’s prospects in the near future.

This segment is part 3 in the series : MediaTek
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