Intel Corp. (INTC:US) and Qualcomm Inc. (QCOM:US), the two largest U.S. chipmakers, are under threat in the fastest-growing part of the tablet market from a band of upstarts with names like Allwinner Technology Co. and Fuzhou Rockchip Electronics Co. that are little known outside southern China.
Allwinner, based in Zhuhai near the manufacturing center of Shenzhen, became the No. 2 tablet-processor maker behind Apple Inc. in 2012 as demand for cheaper tablets stoked sales of its low-cost chips, according to IDC. Qualcomm ranks third, while Intel comes in at No. 6, following Rockchip.
The Chinese chipmakers’ rapid rise has been fueled by their quick response to a shift in the tablet market toward budget machines, which are providing many consumers in emerging regions with their first access to the Internet on a larger screen. The young companies have jumped on that trend by providing the devices’ manufacturers -- many of them based around Shenzhen -- with low-cost components based on ARM Holdings Plc designs, the same technology used by many of their more established rivals.
“It’s really thrown open the competitive stakes,” said Michael Palma, an analyst at market researcher IDC. “It’s a sizable chunk and it’s growing the fastest -- so much of this market is going for this good-enough solution.”
The new entrants owe their rapid start to the availability of ARM’s technology, which dominates in chips for the tablet and phone industries. They’ve also benefited from their access to chip foundries such as Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co., which provide contract-based use of some of the most advanced production facilities.
Success at Allwinner, which was founded in 2007, and Rockchip, established in 2001, is being driven by increasing demand for inexpensive tablets in their home market, where some devices sell for as little as $50, and in other developing economies. Sales of tablets that retail for less than $150 and don’t carry a brand name will rise 36 percent this year, IDC estimates, driving a 22 percent increase in total tablet shipments. The market for tablet processors grew 32 percent in 2013 to $3.6 billion, according to Strategy Analytics.
Local chipmakers benefit from their proximity to the device manufacturers because it bolsters their ability to anticipate and react to new features that are in demand, said Ben El-Baz, head of U.S. marketing for Allwinner.
“Shenzhen is really the electronics hub for the world,” El-Baz said in a phone interview. “We are so close to the market that we’re able to come out with new solutions faster than our competitors. We can do it at lower cost.”
Allwinner accounted for 18.2 million of the 88.3 million tablet processors shipped in the fourth quarter of 2013, IDC said. That was more than three times what Santa Clara, California-based Intel, the world’s largest chipmaker, shipped in the same period. Rockchip sold 9 million.
Rockchip representatives didn’t return messages for comment.
The closely held Chinese companies’ ascent reflects the broader shift of consumer computing to mobile gadgets, away from Intel-powered personal computers sold by U.S. companies. While Apple, which designs its own chips, has bridged that transition, others such as Hewlett-Packard Co. and suppliers like Intel have failed to deliver products that have made an impression.
Intel Chief Executive Officer Brian Krzanich -- who has made catching up in mobile computing a priority since taking over the company in May -- said he’s aiming to quadruple tablet-chip sales to 40 million this year and processors from his company will make their way into devices costing less than $100. To speed adoption, Intel will provide tablet makers with subsidies -- what it calls “contra revenue” -- to make the cost of its chips competitive. That will cut into profitability this year.
Kathy Gill, a spokeswoman for Intel, said the company is “absolutely accelerating” its roadmap for its Atom line of low-power, low-cost processors for phones, tablets and budget laptops.
The surge in cheaper devices hasn’t gone unnoticed by more established computer makers. Hewlett-Packard this year began selling the HP 8, a $170 tablet that runs on an Allwinner quad-core processor.
The Chinese companies are following a trail blazed by their neighbor, Taiwan-based MediaTek Inc. (2454), which some analysts say is best placed to challenge Qualcomm for leadership in the smartphone-chip market. MediaTek, which now provides about 40 percent of the chips that power lower-end phones with limited features, projects its smartphone business will surge 50 percent to 300 million units this year.
Like MediaTek, Shanghai-based Spreadtrum Communications Inc. is building on its relationship with handset makers serving the China market and exporting from there. The company, founded in 2001, supplies both processors and modems for smartphones that can retail for as little as $25, said Diana Jovin, a U.S.- based vice president at Spreadtrum.
Her company, which is owned by the Chinese government, has learned that quickly providing adaptable solutions is needed to succeed in a rapidly changing market, she said.
“A significant part of the mobile-handset ecosystem is centered in China,” Jovin said. “We’re the only vendor located in China serving those customers. We’ve expanded our portfolio quite rapidly and have the breadth and depth to compete effectively on a global basis.”
Spreadtrum, which has supplied chips used in Samsung’s Galaxy Star model and HTC Corp.’s Desire, is looking to build on its China base just as Qualcomm, the largest maker of semiconductors used in phones, is trying replicate its worldwide market dominance in that country, the biggest global mobile-phone market.
Qualcomm has already responded to the demand for lower-cost devices made in China with new chips, said Cristiano Amon, the head of the company’s chip division.
The adoption of a faster wireless-data technology called long-term evolution, or LTE, particularly by No. 1 wireless carrier China Mobile Ltd., will open the door for Qualcomm, the San Diego-based company says. While other companies including Intel, MediaTek and Broadcom Corp. (BRCM:US) have announced LTE-capable chips, Qualcomm has been in the market for more than two years and has 100 percent market share in devices that have integrated modems, according to IDC.
Qualcomm’s advantage in LTE modem chips will be tough to beat. Unlike for stand-alone processors, there’s no source of off-the-shelf modem designs, and building one takes years of experience, testing and qualification work with phone-service providers, according to Will Strauss, an analyst at Mesa, Arizona-based Forward Concepts Co.
In processors, “everybody can get in, thanks to ARM and the ease of implementing your own applications processor. They’ve lowered the bar,” Strauss said. At the same time, “the barrier for entry for LTE modems is still very, very high.”
Still, Chinese companies have created an obstacle that their more established rivals may struggle to overcome, said Jim McGregor, an analyst at Tirias Research. While the volumes are huge in China and emerging markets, the devices’ low prices leave little room for profits -- particularly for companies like Qualcomm and Intel that have shareholders who are accustomed to wide margins, he said.
“We are not just talking about a billion here, but several billion units,” McGregor said. “It’s foolish to avoid that kind of market. The problem is with a publicly traded company, it’s against their instincts to go for it.”
To contact the reporter on this story: Ian King in San Francisco at email@example.com
To contact the editors responsible for this story: Pui-Wing Tam at firstname.lastname@example.org Jillian Ward, Reed Stevenson