MediaTek's low-key chairman Tsai Ming-kai does not own a single house. Despite his impressive wealth, he lives in company housing in the Hsinchu Science Park . When he appears in public, he says little, and even at private gatherings, sitting at the head of the table, he is never the most vocal, nor does he control the discussion. Yet he launched one of Taiwan 's most successful and exciting product development campaigns in recent years.

This extraordinary offensive changed the face of handset semiconductors. The odds were against MediaTek when it took the plunge into the mobile phone chip market relatively late in 2001 without any foundation in the business. But within seven years, it earned an impressive 12 percent share of the global market, surpassing well-established semiconductor giants Infineon and NXP.

‘Disruptive Innovation' as Commercial Strategy

“I can honestly say that competitors really respect and fear MediaTek,” says Eddie Chang, senior director of the Taiwan branch of world leading IC design firm Qualcomm.

Founded a mere ten years ago, MediaTek has not only come to dominate the VCD and DVD controller markets, but has also seized the vast unbranded cell phone market in China , using the method of “disruptive innovation,” with low-grade, high-integration cell phone chipsets. Last year, it churned out as many as 100 million cell phone ICs, and this year is expected to achieve a 12 percent global market share.

“Disruptive innovation” was the core concept of innovation guru Clayton Christensen's groundbreaking The Innovator's Dilemma , published in 1997. He argued that market leaders often concentrate on pursuing technological excellence to satisfy the most demanding customers and earn higher profit margins. That leaves challengers an opening to enter the market with cheaper items that meet consumers' basic technology needs, with those products later gaining traction and delivering a jolt to the market leader. The book cited past commercial battles to illustrate how late entrants first gained a steady foothold in the market and then attacked the leader's position. Tsai read the book carefully, and wrote a foreword highly recommending it.

The cell phones offered by the five big handset brands include a wide range of functions. They all need at least two ICs to support basic call functions and add-ons like MP3 and mobile cameras. But MediaTek incorporated many of the fundamental functions into a single chip to supply unbranded cell phones in China with an “integrated multimedia baseband chipset.” It enables China 's handset suppliers to expedite assembly and delivery and gain an edge in their domestic market, the world's fastest growing with the highest demand.

Aiming for World Leader in IC Design

Since 2000, MediaTek's earnings per share (EPS) have only fallen below NT$20 once (to NT$ 18.60 in 2004), and its market capitalization now exceeds NT$600 billion.

Analysts believe that MediaTek's biggest challenges for the future will be its international operations capability and ability to upgrade its technological level. This September, MediaTek announced the US$350 million acquisition of U.S.-based ADI's cellular chipset operations, giving the company the solution for its next step forward. Besides counting top-five cell phone brand LG among its clients, ADI has also developed technology for TD-SCDMA , China 's 3G standard, a key asset in Mediatek's future expansion plans.

MediaTek also excels at finding international partners with whom it can jointly create cutting-edge technologies. On October 22, the company announced that it had developed a revolutionary new wireless service in partnership with IBM research, the world's most advanced technology research unit. The project brought together IBM's millimeter wave wireless radio technology and MediaTek's influence in the wireless communication chipset market. Their service will enable consumers to wirelessly transmit large multimedia files from their homes or offices at high speeds. Where it used to take 10 minutes to download a 10G video, it will only take 5 seconds with the new technology.

“This will enable a world where you can have your entertainment when you want and where you want it,” said Dr. T.C. Chen, vice president of science and technology at IBM Research.

High-ranking executives at MediaTek privately describe Tsai's greatest ambition and sense of accomplishment as making his company the world's leading IC design house. What ultimately is the strategic map Tsai is following? In the following highlights from an interview with CommonWealth Magazine , he offers some answers.

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Q: Taiwan 's IC design revenues ranked second in the world with an 18 percent global market share. What do you think is the Taiwanese IC design sector's competitive edge? Can it break through the 18 percent barrier in the future?

A: We have accumulated a lot of management capability in the commercialization, marketing and positioning of high-tech products in the computer and semiconductor industries and in dealing with the major fluctuations in the technology sector.

Also, through the commercial ties developed with economically advanced countries over the past 30 years of economic growth, society now demands quality. It expects things to be done more efficiently and has compelled the service industry to pay attention to customer satisfaction. So in terms of high-tech management and work and service quality, there is a good base. Other competitive advantages are being close to customers and providing a complete value chain, upstream and downstream.

Q: How do you see the global competitive situation for IC design? What position does Taiwan have in the market?

A: In the past, Taiwan used the OEM and ODM model to successfully forge our booming high-tech and semiconductor industries. In the future, only by evolving from a manufacturing-intensive to a research-intensive model can Taiwan move toward the next wave of industrial development.

IC design competition is global. In an age of globalization, people, materials and capital are more conveniently obtained. Enterprises must consider the integration of global resources from a higher and broader plane, adopting a “world is flat” mentality to figure out where their niche and product differentiation lie.

Q: What do you think are the strengths and weaknesses of Taiwan 's IC design houses? Can South Korea and China overtake Taiwan ?

A: Although Taiwan 's IC design sector is still growing, there are some concerns. I think the biggest threat to Taiwan 's chip design sector is that its advantage of “proximity to the customer” is quickly disappearing. In the past, Taiwan was the king of computer production, and because IC design houses were close to their customers, the industry grew rapidly. But now the manufacturing of computer systems is moving offshore and there are no new products to take their place, so the advantage that existed in the past is no longer there.

But while that edge no longer exists, Taiwan 's IC design sector actually still is competitive in terms of management, strategy, technology commercialization, and other derivatives of marketing. For IC design houses to succeed, aside from having product, they also need to have the symmetrical skills of marketing and technology commercialization. Those are the strengths of Taiwan 's companies.

Actively Moving Closer to Customers

Furthermore, if you want to do advanced research, you probably still have to go to the United States , Europe and even South Korea and Japan to put together a team.

In deploying your resources, you also have to go global. Taiwan has not sufficiently internationalized its operations, and this is an area we have to strengthen. If you look at U.S. chip companies, even though they also lack international-level consumer electronics system companies, they actively move closer to their customers, so they don't suffer from regional limitations. That's why I always stress the importance of internationalization for chip companies; people's thought processes should not be focused solely on Taiwan .

In recent years, the new companies emerging in South Korea are all in the communications technology field. South Korea 's handset industry is strong. Samsung is the world's third largest cell phone maker, and LG is the fifth. Also, the government puts a lot of energy into providing support. That environment has spawned many IC design companies, involved in products such as mobile phone cameras and TV, which have reported good results. China is also rapidly catching up, with MP3 and camera IC design houses emerging.

But as I said before, Taiwan still has the edge in areas like management, strategy and technology commercialization. Taiwan 's education system has also been highly successful, in teaching students to absorb knowledge, interact with others and solve problems. It has produced many outstanding people who have contributed to business and society. Taiwan should continue to invest in and upgrade its education system. That said, there are diminishing opportunities for local professionals to hone their skills on the international stage, and how to grasp those opportunities and broaden international exposure is a crucial task.

Q: What is Mediatek's competitive position relative to the leading U.S. companies?

A: American companies use innovative products with cutting-edge technologies to enter the market and pursue high profit margins. Once the product's market nears maturity and margins fall, U.S. companies will consider pulling out of the market or authorizing an outside firm to make the product.

Asian companies look for markets with high-volume demands, using relatively mature products as access points. There is little risk, but consequently margins are also lower.

In recent years, U.S. companies have not only been technologically advanced but have also accumulated production experience that has made them more competitive in low-cost production processes. As a result, MediaTek must also push forward to the next stage in terms of how it approaches markets and products.

Q: Could you elaborate a little more on these competitive strategies? Over the past 10 years, MediaTek has always successfully identified the next big market driver. What accumulated skills and judgment has the company relied on to stay ahead of trends, develop strategies, and ultimately see those strategies through?

A: These competitive advantages include clear market segmentation, a successful product differentiation strategy, the ability to commercialize technology at reduced costs, finding comprehensive systematic solutions, and providing effective on-site assistance.

With wireless communications, for example, that means providing a complete solution that consists of a line of multimedia wireless terminal chipsets and corresponding software and platforms. Products that have an even higher integration level consuming even less power and incorporating more multimedia functions cut down customers' time to market and raise the competitiveness of their products, enabling them to compete with the world's leading brands.

Before setting our R&D strategy, the most important thing is to first consider positioning in the market. For example, handset specifications are constantly evolving. MediaTek got in at 2.5G , and then went to 3G , 3.5G and WiMax. Even the market penetration rate differs by region. When we first entered the China market, 2.5G had less than a 30 percent penetration rate, and was still waiting to explode in a market that is especially big.

Contrast to handset chips, MediaTek got involved in TV chips relatively early, but we still cannot be considered a leader compared to many European and American companies because they entered the digital TV market a few years before us. However, when enterprises have the chance to develop more advanced products, they should push forward; when companies reach large scales, they must get into the game even earlier if they want to achieve success.

Q: The biggest problem IC design companies face is how to develop the next star product. How do you address building up MediaTek's R&D capability, and how do you evaluate markets with development potential?

A: To build R&D capability, you have to build the ability and recognition among your people to perform different tasks at different stages of product development. This is knowledge that is gained incrementally in any company as part of theresearch management process. Peter Drucker said R&D had three major components.

First, you need constant upgrading. This is a continuous task that cannot be interrupted.

Second, you need the proper management evolution. Take a new product, process or service and produce an even newer product, process or service.

Third is innovation. Systematically use change to create moments of opportunity and product breakthroughs. Winning products are not necessarily solely the result of innovative technologies. They often depend on the integration of R&D and marketing and constant upgrades.

In terms of evaluating markets, how to take widely available market surveys and industry information and find future product opportunities has always been a challenge. But a company's overall positioning and its ability to notice subtle but profound changes in markets are the two important foundations that every company must have.

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