Innovation Emerged from Following
Th is section examines how MediaTek established an innovative business model that led to it dominating the cellular phone chipset market in emerging economies. Th e fi rst subsection shows how Taiwan’s fabless com- panies have been growing by exploiting the advantage of backwardness.
Th e second subsection demonstrates how MediaTek adopted a strategy of following advanced companies, and how that strategy unexpectedly led to the creation of the innovative model, which allowed it to exploit potential markets in China and other emerging economies.
2.4.1 Growth of the PC Industry and the Rise of the Design Sector
In the 1990s, Taiwan’s design sector underwent rapid growth by producing application-specifi c standard products (ASSPs) for IT products. Taiwan’s OEM/ODM production of PCs had grown considerably, and the expan- sion in PC production had generated a huge market for integrated circuits (ICs) in Taiwan. Sam Lin, who established Weltrend Semiconductor in
1989, expressed his desire for import substitution, saying: ‘Th e scale of the domestic market already grew to about 120 billion NTD in 1993. … Th e future of Taiwan’s IC companies is full of opportunities and challenges’
( Bandaoti Gongye Nianjian , 1994, p. II14). Taiwan’s fabless companies had been able to break into PC production more easily because Taiwan’s OEM/
ODM makers not only took up contracts to manufacture PCs, but increas- ingly played important roles in product planning (Kawakami 2012 ).
Taiwan’s fabless companies have grown by adopting the follower strategy.
According to the vice president of Realtek Semiconductor, Taiwan’s fabless companies entered the market opened by advanced companies when the demand had reached its maximum and ‘supplied customers with a solution that was superior to that of its rivals in quality and price, utilizing the inte- grated supply chain in Taiwan’s semiconductor industry’. He said that by using this strategy, his company deprived Intel of a substantial market share in the Ethernet IC market ( Caixun , no. 254, 2003, pp. 159–60).
Th is idea has been widely shared in Taiwan’s design sector. For instance, M-K Tsai of MediaTek expressed an ‘S-shaped curve’, which was a con- cept similar to that of Realtek Semiconductor’s vice president (Tsai 2007 ).
Even today, most of Taiwan’s fabless companies continue the strategy of following advanced companies. According to the author’s interview on 24 December 2012, with a former employee of a fabless company, Taiwan’s fabless companies can produce ICs with the same functions as advanced companies’ products at reduced costs through their superior ability to shrink the die size and thereby deprive advanced companies of the market opened by them. Th ey can also satisfy rapidly swelling demand by com- pressing the time from planning to release by proximity to foundries and
‘rush work culture’ (Tseng 2009 ; Wang 2010 ).
2.4.2 How Can MediaTek Strike a Potential Big Market?
2.4.2.1 Development Process of MediaTek
MediaTek has been the leader of Taiwan’s design sector since the early 2000s. When UMC transformed itself into a pure-play foundry, it separated its design section and converted it into independent fabless companies, one of which was MediaTek.
MediaTek began with a compact disc (CD) drive chipset and then entered into the digital video disc (DVD) player chipset market.
MediaTek succeeded in rapidly catching up with advanced companies producing optical drive chipsets. M-K Tsai, the founder and chairman of MediaTek, said that initially MediaTek ‘followed the follower’, then became ‘the follower leader’, and now regarded itself as the leader in that particular market, aiming at entering the ‘leader group’ in the future ( Jingji Ribao , 22 January 2003).
With MediaTek’s continued growth in the optical drive chipset mar- ket, it initiated development of cellular phone chipsets as early as 2000.
At the end of 2003, it released a chipset for the second-generation stan- dard, General System for Mobile Communications (GSM), and started to ship samples of a chipset for the 2.5-generation standard, General Packet Radio Service (GPRS), in the third quarter of 2004. Th ese chipsets caused the rapid expansion of China’s so-called shanzhai market for low-end cel- lular phones, and thus MediaTek also experienced rapid growth. Shortly afterward, cheap cellular phones made with MediaTek’s chipsets permeated other emerging economies, which further boosted its business.
MediaTek received a license for technologies related to Wideband Code Division Multiple Access (WCDMA) from Qualcomm in 2009 and released chipsets for the third-generation technology. Although the company missed the early demand for smart phones because it misjudged the speed of the market growth and considered Windows Mobile more promising than Android as a smart phone operating system, it modifi ed its strategy and had a large market share in 2013. According to Bandaoti Nianjian 2014 , MediaTek was the world’s fourth largest fabless company in terms of sales in 2013.
MediaTek has been reducing its technological gap with advanced companies in cellular phone chipsets. Tsai said that MediaTek was 10 years behind advanced companies in releasing second-generation chipsets, 6–7 years behind in third-generation chipsets, 17 and 1–2 years behind in fourth-generation chipsets ( Lianhe Wanbao , 24 July 2013).
17 More specifi cally, the chipset of an advanced company for the third generation was composed of two chips, whereas MediaTek’s MT6268 chipset was still a combination of four chips in November 2009. Th e transmission speed for an advanced company’s chipset had already reached the 3.75- generation speed, whereas MediaTek’s chipset remained at the third-generation speed ( Jingji Ribao 21 November 2009).
Currently, the technological gap between MediaTek and Qualcomm, the leader in cellular phone chipsets, is markedly reduced. 18 However, the gap still exists, as shown by the fact that Qualcomm has a greater share than MediaTek in the market for fi rst-tier cellular phone producers.
2.4.2.2 Extension of the Follower Strategy and Its Unexpected Results
MediaTek generating a potential market in the emerging economies was signifi cant. However, the market was not MediaTek’s original target, and hitting it was unexpected.
MediaTek has adopted a strategy of following advanced companies, as have other Taiwanese fabless companies. It initially applied this strategy to the optical drive chipset market and horizontally extended it to the cellu- lar phone chipset market, although more sophisticated technologies were required. Moreover, MediaTek expected to reproduce Taiwan’s successful experience in semiconductors for PCs. Th is intention was clearly demon- strated by Tsai’s following remark: ‘[L]arge foreign companies are coming to Taiwan and looking for OEM/ODM manufacturers of cellular phones.
Th ese facts suggest that similarly to the development model of the PC industry, it is becoming advantageous to Taiwan to possess its own tech- nology for mobile communication chips’ ( Jingji Ribao , 27 August 2002).
Observing that the OEM/ODM of cellular phones was happening in Taiwan, MediaTek supposed that Taiwan’s market for cellular phone chips would expand as the market for PC chips had. 19 In reality, however, MediaTek failed to sell their products to major OEMs/ODMs. Th e rea- son was that their customers, the majority of which were cellular phone producers in advanced countries, did not allow the subcontractors to use MediaTek’s chipsets because of its limited track record ( Gongshang Shibao , 27 January 2004). At that time, MediaTek’s backwardness was a restraint.
18 MediaTek succeeded in developing a processor with eight cores earlier than its global rivals.
However, Qualcomm maintained that the phone’s performance did not necessarily depend on the number of cores.
19 Th is kind of view was widely shared at the time in Taiwan (Chao 2001 ).
However, MediaTek’s cellular phone chipset created a huge low-end market in China, which had not been its main target. Th e most impor- tant factor in generating the low-end market was providing its chipsets with software and reference designs as a total solution, as existing studies have shown. Even if the producers’ development capability was limited, following MediaTek’s total solution, they were able to develop their own products. As a result, fi erce price competition occurred among products that were developed with MediaTek’s total solution and were far less dif- ferentiated, bringing about further price decreases and market expansion.
MediaTek maintains its leadership in the low-end market, off ering superior service to Qualcomm and other competitors who started to provide total solutions following MediaTek (Wang 2012 ). MediaTek is now regarded as a platform provider in the low-end cellular phone market, similar to Intel in the PC market and Qualcomm in the high-end cellular phone market (Kawakami and Sato 2014 , pp. 77–8).
Th e total solution was not invented to target China’s low-end market.
Th is business model was inherited from MediaTek’s experience in the optical drive chipset business. When MediaTek launched that business, it formed a close alliance with Taiwan’s optical drive makers, particularly Lite-On IT. 20 Th ey were also latecomers and lacked development capabil- ity. MediaTek supported their development by providing a total solution (Shintaku et al. 2005 , p. 8). After collaborating with MediaTek, Lite-On IT grew to a world-class optical drive maker in a short time, which increased MediaTek’s growth. Based on this experience, MediaTek rec- ognized that total solutions are essential for latecomers when they enter the cellular phone chipset market ( Gongshang Shibao , 28 August 2002).
To summarize, because MediaTek recognized itself as a latecomer, it could create a business model characterized by total solutions, and thus it was able to open the potential low-end market in China. Advanced companies did not need to provide their main customers, who had signifi - cant capability for product development, with total solutions; therefore, advanced companies could not access that market.
20 Lite-On IT, on the one hand, procured almost all chipsets from MediaTek until the early 2000s ( Gongshang Shibao 24 July 2003). MediaTek, on the other hand, made 21.25 % of its total sales from transactions with Lite-On IT in 2000 ( Gongshang Shibao 31 August 2001). Lite-On IT was merged into Lite-On Technology in 2014.
Th ree additional factors led MediaTek to open China’s low-end market.
Th e fi rst factor is characteristics of the cellular phone market. Substantial demand remained for the second- and 2.5-generation technologies for a long time after third-generation cellular phones had been commercialized.
As a result, MediaTek could begin with the second- and 2.5- generation technology, which a latecomer could produce more easily than third–
generation products. 21
Second, MediaTek has diversifi ed aggressively. According to Tsai, most of the past leading fabless companies ended as ‘a temporal champion’
(Tsai 2007 , pp. 146–52). In other words, Tsai thought that it is diffi cult for a fabless company to develop big sellers continuously. MediaTek itself tends to develop new business aggressively so as not to meet that fate.
Th ird, MediaTek strategically avoids markets where there is an estab- lished hegemony. Th is originates from Tsai’s experience in UMC. He attempted to enter the CPU market, which was Intel’s core product, and the challenge failed (Chang and Pan Wen-Yuan Foundation 2006 , p. 307). Th erefore, initially, MediaTek chose CD drive chipsets because Intel had less infl uence in that segment ( Jingji Ribao , 29 May 2001).
Tsai’s remark showed that he considered the standard was becoming more open for the second- and 2.5- generation technology and therefore room was growing for a latecomer to enter the cellular phone chipset business (Jingji Ribao, 27 August 2002). 22