China's 'Bandit' Cell Phones
The High-Tech Golden Egg with 'Taiwan Inside'
Cheap'bandit cell phones' have carved out a massive niche for themselves in China's burgeoning handset market, with Taiwan's chip, LED, PC Board and panel makers playing key roles in the process.
The High-Tech Golden Egg with 'Taiwan Inside'By Benjamin Chiang
From CommonWealth Magazine (vol. 411 )
Next to Beijing's Muxiyuan Bridge sits the Bohai electronics market, a symbol of China's electronics explosion, jammed with people looking to buy cell phones. Dialects from around China can be heard throughout the massive crowd, and wholesalers from Northeast and Southeast Asia, Russia and the Middle East can be seen lugging cloth sacks weighed down by the latest model handsets they have just purchased for resale in their home markets.
The commercial center's vitality reflects China's status as the world's largest handset market, which boasted more than 620 million cell phone users as of the end of September, according to figures from China's Ministry of Industry and Information Technology. Every month, China adds another 8.52 million new mobile phone users – roughly equal to Taiwan-based Chunghwa Telecom's entire mobile phone subscriber base – an indication of the startling pace of growth in China's handset market.
The'Bandit Phone' Opportunity
In the past year, China has been flooded in a new wave of self-branded or unbranded"white-box"handsets, known locally as"bandit cell phones,"which daringly utilize the latest technologies and stress low price, innovation and cool designs. These"bandit phones,"like the brave and skilled fighting bandits in the movie The Warlords, have burst out from their mountain strongholds and set a new single-year record for cell phone production in China at 250 million units.
Topology Research Institute chairman C.W. Chen estimates the output value of these"bandit phones"at NT$500 billion per year, representing an irresistible commercial opportunity for many high-tech firms.
“Fashion-conscious youth in China's countryside can finally get a cheap and very cool bandit phone,"says Manfred Wang, BenQ's chief design officer. The phones have swept rural areas like wildfire because they cater to the needs of the market's lowest-income segment, and then have relied on the momentum they generate in the countryside to penetrate urban markets.
Indeed, constant change is the fundamental spirit of these"bandit phones,"as technology shifts to a new course with each obstacle it encounters. The handsets rely on innovation to satisfy the needs of divergent niche markets in every corner of the country. This startlingly wide array of devices has been dubbed by the mass media with the all-encompassing sobriquet"bandit phones.”
One cell phone with seven speakers, for example, called the"farmer's thunder,"caters especially to farmers. Fearful that their cell phones will get dirty, farmers often set them down on footpaths in their fields, but that leaves them worried they won't hear the phone ring as they tend to their crops. This extra-loud thunder phone, which solves the farmers' dilemma, is also prized as a portable music player by students, who rely on the big speakers to blare their favorite songs.
Another of the bandit phones that have been popular sellers in rural areas is a model equipped with four ultra-bright LED lights that serves as a flashlight to help users navigate China's unlit country roads.
Highly popular bandit phones for the elderly are also one of China's unique high-tech trends. Cell phone vendors have created models targeting senior citizens with"big sound, big keys and big letters"that can be used sparingly for half a month without the need to be recharged. They also accommodate the living habits of the elderly, designing the phone to broadcast radio shows without requiring the use of an earphone. Every day early in the morning, you can see senior citizens in the park cupping their phones in their two hands listening to music.
The most critical technology in manufacturing handsets is the cell phone's chipset. The key player supporting China's NT$500 billion handset industry behind the scenes is Taiwan's MediaTek Inc.
“Ninety percent of the mobile phone chipsets (used in China-made handsets) come from Taiwan's MediaTek,"stresses one international investment firm analyst.
The Bandits' Secret Weapon: Taiwanese Technology
Standing in the bustling 81 Mall in Nanchang, Jiangxi Province, you may be surprised to discover when you open the bluetooth function of your cell phone that all the signals received read"MTK."Mobile phone shops in the mall aggressively push products made in China, but repeatedly emphasize that"the cell phones use a MediaTek platform."In China's handset market, the letters MTK, the shortened form of Mediatek, possess true brand power that is now deeply rooted in consumers' minds. Outside of Nokia and Samsung, it is the top cell phone platform choice.
In the 1990s, semiconductor giant Intel took high-tech branding to a new level with its initiative putting its"Intel Inside"label on the outside of computer products. In 2008, MediaTek is following suit in China's mobile phone market, forging an"MTK inside"mystique.
Foreign and domestic producers are currently waging a handset war in China, with local models gradually eroding the market share of their international competitors. Nokia, the world's biggest handset vendor, saw sales in China decline in the third quarter of 2008, while homegrown brands K-Touch (made by Beijing Tianyu Communication Equipment Co.) and Lenovo experienced growth between 10 and 30 percent. K-Touch and Lenovo both use MediaTek chipsets in all of their mobile phones.
With a more than 90 percent share of China's mobile phone chipset market, MediaTek is simply riding the wave to prosperity. The company shipped 160 million chipsets for cell phones in 2007, accounting for 60 percent of its total revenues. Of those chipset revenues, 95 percent came from orders from Chinese customers.
Mediatek's chipsets, around the size of a small fingernail, are waging a disruptive innovation revolution in the mobile phone industry, rewriting the rules of the game for a sector that produces 1.2 billion handsets a year.
“It was highly unlikely that Taiwan would have a company with an opportunity to disrupt the global handset industry's supply chain, but Mediatek actually did it,"says the chairman of one IC design house.
Behind Mediatek's success is its supply of a cheap and easy-to-develop SOC (system on chip) that integrates the software for all of a mobile phone's complex functions on a single chip. The company even offers a menu of hundreds of functions to choose from, making it easy for handset makers to tailor the chipset to their product's design requirements.
With its innovative chipset, Mediatek has lowered the threshold for producing handsets to a minimum, to the point that DVD player and MP3 manufacturers can all jump into the fray and produce mobile phones.
The guts of the 250 million China-made handsets in the market share one thing in common: almost all of the major components and assemblies are supplied by Taiwanese vendors.
In fact, Taiwanese companies have served as the driving force behind the partial revolution in China's cell phone market, creating an unprecedented phenomenon –"Taiwan inside."From Giantplus Technology Co.'s small- and medium-sized panels, Plotech Technology's printed circuit boards, Harvatek Inc.'s LEDs and Elan Microelectronics Corp.'s chips to Premier Image's and Altek Corporation's camera modules, WPG Holdings' electronics component services, and Foxconn's finished phone assembly, Taiwanese companies have built the world's biggest handset industry in China.
“This is the first time that Taiwanese technology 'inside' has been integrated with China's advantageous market and manufacturing environment, creating an emerging market trend of 'good quality, fair price',"stresses Topology Research Institute's Chen.
A Chipset's Disruptive Innovation
The Chinese media describes MediaTek chairman Ming-Kai Tsai as the"godfather of bandit cell phones."
But Tsai, wearing his trademark oversized square-frame glasses, asserts that the term"bandit phones"is"too simplistic and too low value"to describe China's handset industry. The topic wipes the smile off Tsai's face, and for the next half hour he explains in a serious tone that China's handset vendors in fact possess strong capabilities in the areas of industrial and mechanical design, and network and inventory management, and excel at expanding their scale and getting their product to market quickly.
Tsai's complaints over being branded as the leader of a"bandit"trade are not without some justification, as few people have looked deeply into how MediaTek changed the global handset industry's environment within three years.
For many years, the big handset brands controlled the design and manufacturing of cell phones from start to finish, and monopolized the setting of handset specifications and standards. The big players also had full command of the operating systems and chipset designs at the core of every mobile phone, making it difficult for Taiwanese companies to move beyond their limited roles in the supply chain.
Mobile phone manufacturers in Taiwan and China all followed the standards set by the big international vendors and were limited to using Qualcomm, Texas Instruments or Infineon operating system platforms.
“Relegated to serving as OEMs for big vendors, local companies have spent a lot of time developing products but have had no way to obtain critical technologies,"notes the chairman of one multinational company's China branch.
MediaTek broke through the gauntlet after a decade of research and preparation. The company threw itself into mobile phone chipset development in 2000, at a time when many did not think it was a good idea, launching a process of disruptive innovation that has bridged the chasm between handset manufacturers and handset chipset makers.
“MediaTek beat out big brother Texas Instruments, forcing TI to pull out of the middle- and low-end mobile phone chipset markets, and forcing Nokia to expedite its development of handsets that could satisfy the needs of China's market,"says Yang Xiaqing, the vice chief editor of Beijing-based publication China Computerworld.
In Taiwan's semiconductor industry in the last 30 years,"only TSMC's Morris Chang and MediaTek's Ming-Kai Tsai have initiated disruptive innovation,"says the former CEO of an international firm's China branch.
The latest book featuring innovation guru Clayton Christensen, The Innovator's Guide to Growth, contends that many innovators are searching for solutions that transcend existing ones, but the path to victory followed by true disruptive innovators is to play the game of innovation through differentiation. Their goal is to disrupt existing markets by offering simple, convenient, affordable innovations that appeal to mainstream customers.
Breaking the Mobile Phone Chipset Monopoly
The chipset platform Chinese cell phone manufacturers receive from MediaTek is already a semi-finished product. They only have to do some additional processing to roll out a completely new mobile phone model.
“We've taken making handsets from'high-tech' to simply'tech,'"Tsai says, stressing that MediaTek not only competes in technology but at the deeper level of technology services.
The development process of a new cell phone, from R&D and circuit and mechanical design to tooling and mass production, normally takes a minimum of nine months to a year.
But MediaTek's handset system chipset platform integrates complex technical devices such as digital cameras, video cameras, MP3s, radios, PDAs and electronic book functions all on one chip, and has built more than 100 different modules for customers to choose from.
Not surprisingly, Chinese handset makers have swarmed all over MediaTek's chipset platforms to develop diverse functions.
“It's as though businesses are at a restaurant ordering a meal. On the cell phone function'menu,' they check off the functions needed for their new products. Mediatek's salespeople immediately quote a price, and a few days later you have a customized chipset and software,"says Steward Shyu, the CEO of Beijing-based L Labs International Inc., China Branch.
With MediaTek's new technology, a handset maker only needs to spend between one and three months to develop a new mobile phone, dramatically reducing the time it takes to bring it to market.
Handset manufacturing margins usually fall below 5 percent, something MediaTek understood. By helping Chinese phone vendors strengthen their software integration capability, it enabled them to concentrate their resources on developing new applications and functions rather than spending time on developing handset software and hardware.
In building their products around MediaTek chipsets, handset vendors streamlined the product design process. There are now hundreds of small- and medium-sized handset design companies in Beijing and Shenzhen that can deliver orders of 20,000 to 30,000 mobile phones in as quickly as 45 days.
MediaTek has ultimately created a completely new turnkey operating model, observes Wu Zongqi, the president of Beijing-based Hong-Plus Education and Technology Co., Ltd."MediaTek transformed itself into a customer service-oriented software company. We don't just sell chips, but service too,"he says.
Using this model, MediaTek focused the energies of China's scattered"bandit"troops, transforming them into a big battalion ready to directly challenge the established armies of Nokia and the other big multinational players.
Leading the Way to Emerging Markets
Aside from building a huge, intricate handset industry supply chain in China, Taiwan's high-tech sector has also joined together to help Chinese phone vendors develop presences in emerging markets around the globe and penetrate lower end markets that the international brands have ignored.
In 2004, MediaTek set up a branch in India and began to systematically introduce its Chinese customers to the Indian market. The company's emerging market team has acted more as a matchmaker in emerging markets, arranging introductions for Chinese handset customers and helping telecom operators in many countries connect with mobile phone vendors from China.
The cell phone market on Shenzhen's Huaqiang North Road seems like the worldwide mobile phone industry's outdoor wholesale market, and has given Shenzhen its reputation as a global handset DIY base. Anybody with a wad of cash can find a mobile phone design company to help develop a new product. Mobile phone wholesalers from Central and South America, Southeast Asia, Russia and the Middle East can be seen rushing around different outlets to stock up on goods for their home markets.
The result of this frenzy is that in China, mobile phones have essentially replaced MP3 players, radios, telephones, digital cameras and televisions, and the phenomenon is spreading to emerging markets.
“Chinese-made cell phones provide an excellent opportunity for Taiwan's IT industry. There are no opportunities left for companies that only manufacture,"MediaTek's Tsai says with conviction.
That conviction is leading many Taiwanese companies to try to capitalize on this wave of Chinese domestic demand and the efforts of Chinese cell phone makers to aggressively expand into emerging markets, hoping to create another"Taiwan inside"miracle.
Translated from the Chinese by Luke Sabatier
Chinese Version: 台商搶攻5千億手機市場