Launching a phone brand used to require a $100 million R&D budget and two years; MediaTek packaged the entire chip-to-firmware stack into one kit and cut that down to a few million yuan and four months.

the problem

a huge upfront R&D investment locks an entire industry to a small number of large players

background

the move

Starting around 2004, Taiwan's MediaTek sold a fully integrated 'turnkey' solution: a single chip bundled with pre-written firmware, reference hardware designs and testing support, so a manufacturer needed only to choose features, design a case, and assemble the phone. A workshop with essentially no in-house engineers could go from an empty room to a shippable phone in as little as four months on a budget of a few million yuan, sourcing components like cases and cameras separately and letting MediaTek's kit handle everything electronic underneath.

the payoff

MediaTek's China chipset volume grew from about 3 million units in 2004 toward a projected 300 million by 2009, roughly a hundredfold increase in five years, and the company came to control around half of China's feature-phone chipset market with over 60 percent gross margins on roughly $1.6 billion in annual handset-chip revenue by 2009. The resulting 'shanzhai' phone industry, centered on Shenzhen's Huaqiangbei district, produced an estimated 145 million phones in 2009 alone, close to 30 percent of China's total domestic phone market that year, sold for well under $100 each with features like dual SIM slots that established brands didn't offer.

what came after

MediaTek's turnkey model is studied as a Harvard Business School case ('Shanzhai! MediaTek and the White Box Handset Market') and cited in innovation-economics literature on 'good-enough innovation' as a clear example of an enabling-technology supplier collapsing an entire industry's barrier to entry from an R&D problem into an assembly problem. The shift also proved temporary: MediaTek's own China handset-chip revenue fell nearly 40 percent year over year in early 2011 once the transition to 3G smartphone operating systems moved the barrier back toward software MediaTek didn't yet control.

references

1. [1]Battling For The Brains Of CellphonesForbes, 2009forbes.com
2. [2]Upwardly mobileGlobal Times, 2011globaltimes.cn

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