How did MediaTek become a leader in mobile chips?

Nikkei Asia recently published a commentary discussing MediaTek's turnaround and comeback.

More than four years ago, when Cai Lixing took over as CEO of MediaTek, industry experts and investors thought he was holding a hot potato.

Subsequently, MediaTek, the world's second-largest mobile chip developer after Qualcomm in the United States, was caught in a fierce price war for 4G smartphone chips. The company's operating profit margin hit a record low and reported its first loss in its smartphone chip business. Worse, MediaTek's most important chip product in 2017 suffered a "failure" and few smartphone manufacturers adopted it.

In June of that year, at the first press conference after MediaTek founding chairman Tsai Ming-kai appointed Li-Hsing Tsai to save the troubled MediaTek, the new CEO faced a series of tough questions: "Are you going to lay off employees?" "What are you going to do about the company's shrinking profits?" Li-Hsing Tsai, the former TSMC CEO who was once seen as a possible successor to TSMC founder Morris Chang, vowed to regain MediaTek's market share and restore profits without laying off employees.

It seemed like an almost impossible task. But thanks to foresight and good luck, MediaTek bounced back. MediaTek is a supplier to leading smartphone and electronics manufacturers such as Samsung, Xiaomi, Amazon and Sony, and has surpassed Qualcomm to become the world's largest mobile processor maker in terms of shipments, with a market share of more than 40%, according to research firm Counterpoint. MediaTek also ranks first in areas such as core processor chips for Android tablets, Chromebooks and smart TVs.

MediaTek CEO Cai Lixing (left) and General Manager Chen Guanzhou promote the Dimensity 9000 5G chipset for high-end smartphones.

Image source: Nikkei Asia

However, it is not easy to do all this.

MediaTek General Manager Chen Guanzhou recalled: "I still remember that Cai Lixing kept telling us from the beginning when he joined the company that we should not be afraid to bet big on 5G technology and we must do it as early as possible. Looking back, this decision proved to be very correct. In total, we have spent at least NT$100 billion (US$3.6 billion) to promote 5G."

According to MediaTek's annual report, its overall R&D budget soared from NT$57.1 billion in 2018 to NT$77.3 billion in 2020.

At the heart of Tsai's approach is implementing the management style he brought from TSMC, which emphasizes precise execution and constant, detail-oriented review to ensure all plans and timelines are on track, according to executives interviewed by Nikkei Asia. Strategically, Tsai has vowed to help MediaTek shed its "budget" image, become a "globally relevant" chipmaker and eventually break into the high-end market long dominated by Qualcomm.

MediaTek took a big step into the high-end last year. After releasing a series of 5G chipsets for mid-range phones in early 2019, MediaTek launched the Dimensity 9000 for high-end smartphones in November last year. The chipset is produced by TSMC using its most advanced 4nm process technology - even more advanced than that used in Apple's iPhone 13 mobile processor.

Cai Lixing said that MediaTek will adopt TSMC's 3nm chip process. It is expected that this industry-leading technology will be fully available by 2023.

"Historically, MediaTek has been considered a lower-priced option, with their chips used in low-end smartphones," Kristine Lau, an analyst at Third Bridge, told Nikkei Asia. "However, this has changed over the past two to three years, with their efforts to break into the high-end smartphone market proving successful."

Investors seem to be pleased with Tsai's approach. As of January 3, MediaTek's stock price has soared from a low of NT$204.5 in early 2017 to NT$1,150, with a market value of more than US$64 billion, surpassing Europe's largest chipmakers Infineon and NXP. At the same time, its operating profit margin has increased from about 1% before Tsai took office to more than 22% in the July-September quarter. Tsai said the company's revenue in 2021 is expected to increase by more than 50% from a year ago to US$17 billion, more than double that of 2019, and its operating profit will increase fivefold from US$700 million in 2019 to US$3.8 billion.

Analysts and industry insiders attribute MediaTek's sharp rebound to Cai Lixing's expertise and MediaTek's ambition.

“Before, MediaTek might have been content to be the No. 2 supplier, which could offer better prices and faster adjustments than market leader Qualcomm, but now they know they need to invest more in technology,” said Mark Li, a senior semiconductor analyst at Sanford C. Bernstein who has covered MediaTek for many years.

Li also said that MediaTek's bet on 5G has also proven to be a big help to its revenue and profits: 4G mobile chipsets sell for about $8-10, but the average selling price of a set of MediaTek's 5G mobile chips could be as high as $30.

Tsai’s relationship with TSMC has proven valuable amid an unprecedented global chip shortage that has affected everyone from auto companies to smartphone and appliance makers.

MediaTek places all orders for its advanced chips at TSMC, unlike Qualcomm, which often splits such orders between TSMC and Samsung. According to Third Bridge's Lau, the "strategic alliance" between the two Taiwanese companies makes MediaTek a more reliable supplier to its customers during supply crunches. "This advantage, especially as the global chip shortage is expected to persist, makes production capacity and supply reliability increasingly important in the selection criteria of equipment manufacturers."

Cai Lixing himself acknowledges the importance of economies of scale. "In an era of tight supply, it is very challenging for chip developers to operate without economies of scale. Why can we grow the market share of mobile processors from 20% to 40%? Because we have a clear strategy and guidance on how to move forward, and we execute well," Cai Lixing said at the year-end press conference on December 16.

Industry peers said that Cai Lixing relied on his unique expertise to bet on the right technology and put MediaTek back on track.

Mobile chipset global market share data source: Counterpoint

Source: Nikkei Asia

"After the setbacks a few years ago, the management team realized the only way to succeed was to build some capabilities that were irreplaceable and globally significant," one executive told Nikkei Asia.

MediaTek General Manager Chen Guanzhou said CEO Cai Lixing has been telling the management team that MediaTek must be a participant in the global technology supply chain.

After four years of hard work, MediaTek now faces the challenge of how to continue to grow in the mature smartphone market and determine its future.

One concern Tsai has often raised is the decline in the number of students majoring in STEM (science, technology, engineering and mathematics) fields in Taiwan, which has fallen from about 40% of all graduates in 2005 to about 30% in 2020. After several years of cautious hiring, MediaTek has decided to step up its recruitment efforts in Taiwan, promising a $9,000 bonus for anyone who joins the company by the end of 2021.

But another executive familiar with MediaTek told Nikkei Asia that MediaTek also recognizes the need to decide where its future expansion will take place.

"MediaTek is actively expanding its workforce in Taiwan, but this raises the question of whether relying on talent from a single region is sustainable," the executive said. "If it launches aggressive recruitment around the world, can the Taiwanese chipmaker easily manage a diverse global workforce?"

MediaTek has about 17,000 employees and about 50 overseas offices in the United States, Europe and India, but its most important R&D base is still in Taiwan, China.

Regarding how MediaTek can maintain strong annual growth in the future, Cai Lixing promised a compound annual growth rate of at least 10% in the next few years. Most industry insiders believe that MediaTek may continue to ride the 5G wave as the ecosystem flourishes in 2022. However, some are still cautious about its "slow" diversification in markets other than smartphones.

In fact, MediaTek's growth guidance is slightly lower than Qualcomm's forecast of at least 12% growth by 2024.

“Once 5G penetration peaks, smartphone growth will also peak, which could be in 2022 or 2023,” Gokul Hariharan, senior semiconductor analyst at JPMorgan, said in a research note.

Qualcomm, meanwhile, has been working to significantly reduce its reliance on growth in the mobile and smartphone-related chip markets, Counterpoint's Gai told Nikkei Asia, adding that the U.S. company is looking ahead to new battlegrounds for chips such as automotive.

"As Qualcomm moves to another level and bets big on automotive applications, whether MediaTek can find new growth catalysts as soon as possible will be one of the keys to ensuring its rapid growth."