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MediaTek Chairman Tsai Ming-kai

Breaking the Taiwan High-tech Mold

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Breaking the Taiwan High-tech Mold

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MediaTek Inc. ranked third in CommonWealth Magazine's survey of "Most Admired Companies" this year. And for good reason, as "MTK Inside" has become a third force in the smartphone industry behind only Samsung and Apple.

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Breaking the Taiwan High-tech Mold

By Hsiao-Wen Wang
From CommonWealth Magazine (vol. 533 )

In 2009, IC designer MediaTek Inc. stood at the top of the "white label" cell phone (low-end, non-branded handset) market, its earnings per share of NT$34 the highest in its history. But caught off guard by the smartphone craze, which jolted the ground it stood on, the company went into a tailspin.

In 2011, MediaTek's earnings shrank by a third, and its share of China's white label phone market fell by 20 percent. His company having hit bottom, humbled MediaTek chairman Tsai Ming-kai took it on himself to visit customers and also closely monitor progress in his company's development of smartphone chips, ignoring the lack of belief in him among outside observers.

The 63-year-old Tsai, his neatly cropped hair graying around the edges, calmly reflects on those dark days.

"I think that when we were on top, we lost a little of the entrepreneurial spirit we had and were not customer-oriented enough," he explains. Once MediaTek achieved a leading market share position for 2G feature phones (mobile phones with more functions than a regular handset but not as expensive or sophisticated as smartphones), it focused mainly on expanding its share of a market it knew by pursuing higher-end feature phone customers.

"You don't know what you don't know," Tsai says, tacitly acknowledging that he did not foresee the smartphone wave surging so quickly.

Two years later, MediaTek has made a comeback.

Yesterday's 'Bandit' Goes Mainstream

Some 7,000 MediaTek engineers quietly put their heads together and once again threw the existing commercial order into disarray from their base in Hsinchu, forcing several powerful electronic component suppliers, including Texas Instruments, ST Ericsson, and Renesas Electronics, to abandon the smartphone chip market.

Establishing a dominant position in the smartphone chip market despite its late start, MediaTek shipped 100 million smartphone chips in 2012, powering its army of customers and its "MTK Inside" slogan into a position of strength trailing only Samsung and Apple. This year, it is expected to double its shipments to 200 million smartphone chips.

Even more importantly, amid the declining fortunes of Nokia and Blackberry, MediaTek was successfully able to lead its feature phone customers into the smartphone world and move up in the supply chain.

Two years ago, white label handsets carrying MediaTek chips sold for roughly NT$3,000, but now the phones of those Chinese brands sell for upwards of NT$10,000.

Through this upward mobility, MediaTek's customer base has evolved from makers of "bandit phones," (cheap knock-offs of branded products) and relatively anonymous companies like Tianyu Communication Equipment to world-class brands such as Lenovo, Sony, Huawei and Amazon.

Its shift from the periphery to the mainstream, from being a follower to being a transcendent force, from supplying "bandit" phone makers to supplying brands, has shown MediaTek's ability to take on and conquer the inherent challenges faced by most Taiwanese tech companies.

Unable to match the technology advances made in the West, Taiwan's high-tech suppliers have generally specialized in a "Fast No. 2" strategy, focusing on emerging markets and acting as contract manufacturers to the big brands to grab a small share of the electronics market pie.

But Tsai had other ideas, and he set out to gain a leadership position in his field.

"The only strategy that Taiwan's tech companies have is to lower costs. But MediaTek has been able to evolve from cost innovation when it first started, to business model innovation during the white-label era, to technological innovation today," says Kenneth Kin, an associate dean of National Tsing Hua University's College of Technology Management who joined MediaTek's board last year.

Kin says that the company's ability to buck the downward trend of cutthroat pricing competition represents a positive upward force in the industry.

Of course, that ability to challenge one's destiny requires the greatest courage, a trait Tsai has never lacked.

MediaTek went public in 2001 and quickly became known as a "millionaire-making machine." That same year, Tsai made his first bold decision – to begin developing chips for mobile phones.

Key Decision No. 1: Developing Handset Chips

What may seem like an obvious move today was a big risk at the time. MediaTek had annual sales of NT$15.3 billion and 300 employees, yet decided to take on Qualcomm Inc., which was five times as big. Many people advised Tsai to give up his vision and consolidate his company's 80 percent global market share of the DVD chip market, but the MediaTek chairman stuck to his convictions, albeit quietly.

The company's development of mobile phone chips, seen as the major catalyst of its second wave of growth, was conducted in secret behind closed doors for five years.

"Courage is brought out by fighting battles," says Liang-Gee Chen, National Taiwan University's vice president for academic affairs and a long-time acquaintance of Tsai, seeing courage as something that has always been in MediaTek's blood. Just two years after its inception, for example, MediaTek took on major American IC supplier Genesis Microchip Inc. in a patent battle, leading it to actively pursue patents at a time when it had annual revenues of only NT$500 million a year.

"That was a bloody battle. Had we lost, we would have become a low-margin contract manufacturer," Chen recalls Tsai telling him. Tsai has always insisted that his company be technologically autonomous to keep it on solid footing, Chen says.

Several similar turning points in the company's past have fostered an often unseen steely courage.

Key Decision No. 2: Acquiring MStar

Nobody anticipated, for example, MediaTek's acquisition of MStar Semiconductor last year. The normally conservative Tsai decided to invest NT$115 billion in a stock swap and cash deal to buy the world's digital TV chip market leader.

In one fell swoop, the biggest merger in the history of the IC design sector turned MediaTek's enemy into its partner.

"He dared to make a decision. Acquiring MStar was quite a feat and required sacrifices by MediaTek itself," says Fang Shin-jou, the former CEO of Ralink Technology Corp., which was bought by MediaTek in 2011. He adds that he has never seen a CEO better able to combine courage and wisdom than Tsai.

At a time when Taiwan's five major contract manufacturers are engaged in fierce pricing battles to compete for orders, with nobody willing to back down, Tsai was able to take a longer-term view in deciding to merge with his arch-rival.

MStar has a 65 percent share of the digital TV chip market, compared with MediaTek's 15 percent, while MediaTek dominates in the mobile phone/smartphone chip category, making the two companies highly complementary.

MStar's nearly 1,000 smartphone R&D engineers will make MediaTek even more powerful once the merger is finalized in February 2014. The deal has been delayed by antitrust regulators' concerns that the merged company would have a virtual monopoly on LCD TV chips, but Chinese regulators finally gave the merger a conditional green light in late August.

"Taiwan is small, and its talent pool is only so big. Isn't it absurd to use talent to try to destroy one another? The 20 percent conversion premium (in the swap for MStar shares) was worth it," says one MediaTek executive.

The acquisition will make MediaTek the world's third largest fabless IC design company, giving it more size and strength to take on Qualcomm.

"He has the chance to come out ahead in his international battle," Taiwan Mobile co-president Cliff Lai says in admiration of Tsai. What will validate MediaTek's courage in the future is how it handles its most severe challenge – penetrating mature markets and getting into branding.

Key Decision No. 3: Building a Brand to Take on Qualcomm

"MediaTek has already won the battle for emerging markets. Next we will see how MediaTek approaches developed markets," says Barclays Capital analyst Andrew Lu. The only "question" remaining is when MediaTek will overtake Qualcomm, Lu says.

The two will battle for the top spot in a NT$2 trillion market, and there are already signs that MediaTek is gaining ground.

Over the past two years, the company has scored unprecedented breakthroughs, beating Qualcomm into the market for quad core and eight-core smartphone processors, an indication that its technological strength has caught up with the global smartphone chip king.

To prepare for the challenge, MediaTek has undergone a complete organizational shake-up, with changes to its board and business organization that reflect Tsai's painstaking efforts.

Over the past two years, Tsai has recruited Kevin Jou, who holds dozens of patents used in CDMA-based 3G cellular systems, luring him away from Qualcomm to become MediaTek's chief technology officer. He has also hired Johan Erik Lodenius as chief marketing officer after acquiring the Swedish company that Lodenius founded, Coresonic AB, a leader in digital signal processor technology.

It also added marketing president positions in North America and Europe to strengthen its marketing efforts to major telecom operators and mobile phone customers.

MediaTek's revamped board, elected in June 2012, will guide the company's management and bring its marketing, human resources and international operations to world-class levels.

"They are all pretty demanding," Tsai says of the new board members.

From the chorus line to the limelight, from trailing behind to taking the lead, MediaTek has moved from the underworld of white labels to the big league of international brands. Showing courage in overcoming obstacles, it has cut an ever broader path for "MTK Inside."

Translated from the Chinese by Luke Sabatier

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