http://www.businessweek.com/articles/2012-12-13/chinas-smartphone-makers-profit-from-low-cost-chips

Mobile & Telecom

China's Smartphone Makers Profit From Low-Cost Chips


China's Smartphone Makers Profit From Low-Cost Chips

Photograph by Carlos Casariego

In China, the smartphone era has finally begun. Thanks to the proliferation of low-cost Android handsets with price tags below $150, the number of smartphones shipped in China in the third quarter of the year topped 60 million, according to IDC. That figure, a record high, was 38 percent more than the previous quarter.

As more Chinese consumers make the switch to smartphones, local companies are gaining in popularity at the expense of such foreign brands as Korea’s Samsung Electronics (005930:KS) (which currently sits at No. 1). Companies such as PC maker Lenovo (LNVGY) and telecom equipment vendors ZTE (763:HK) and Huawei Technology (002502:Shenzhen) have moved aggressively into the smartphone business and are now among the top five vendors in China. So, too, is Coolpad, a brand controlled by Shenzhen-based China Wireless (2369:HK). “The scale of the PRC smartphone market just blows you away,” IDC senior market analyst Wong Teck-zhung said in an IDC press release last week. The rise of Chinese brands such as Lenovo, Coolpad, and ZTE show that “it is not impossible for Chinese vendors to surpass international vendors.”

The Chinese have been able to come on so strong thanks in part to a good partner in Taiwan. MediaTek (2454:TT) is a chip-design company based in the Hsinchu science park, the hub of Taiwan’s tech industry. It’s the biggest fabless chip designer in Taiwan and a few years ago carved out a niche for itself by providing designs to mainland phone companies making relatively simple feature phones. With MediaTek doing most of the hard work, the Chinese could avoid spending big sums on research and development and instead focus largely on sales and marketing. That led to the growth of China’s white-box phone industry, known colloquially as shanghai, or bandits.

The arrangement worked for a while. But then MediaTek’s big competitor, Qualcomm (QCOM), caught on to the Taiwanese company’s strategy and started doing the same thing, outflanking MediaTek in growth markets such as India. While MediaTek could do well with low-end 2G phones, the company wasn’t able to compete as well in smartphones running on 3G networks.

The Taiwanese are back in the game, though. On Dec. 12, MediaTek unveiled an innovative quad-core system on a chip for mid-to-high-end smartphones. While Qualcomm has a quad-core chip, too, MediaTek’s is about half the price, says Warren Lau, an analyst in Hong Kong with Kim Eng Securities.

MediaTek in the coming months “is likely to take significant market share” among Chinese smartphone makers, Lau says. While MediaTek only has 30 percent of the Chinese market now, “we are very optimistic” about the company’s chances of taking share away from market leader Qualcomm in China, he says. “At least at this moment, MediaTek has the upper hand.” The new chip is already a hit with investors: MediaTek’s Taipei-listed stock price, which has jumped 22 percent this year, hit a 52-week high the day after the announcement.

Ghost_image
Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus