TSMC’s founding in 1987 would launch two new types of semiconductor firms:
Foundries and design firms. Foundries and the complexities of semiconductor
manufacturing have been taking most of the headlines. If you are interested in that,
you can check out my TSMC YouTube playlist, linked below in the description. But the design firms
fabless are just as vital. They are the customers who keep the foundries fed.
Taiwan also has a thriving fabless semiconductor ecosystem. In this video, we are going to look at
the largest of those fabless companies: MediaTek or MTK. I will use both names interchangeably.
Over the years, the Hsinchu-based company built a place for itself designing and fabbing mobile
phone chips for developing markets. Qualcomm is the industry leader, and they make the sexy
super-fast chips that gadget enthusiasts lust for. But MediaTek has been doing quite well for itself.
MediaTek began in 1997 as a spinoff startup.
It had been a part of United Microelectronics Corporation or UMC. UMC was Taiwan's first
indigenous semiconductor company and had been operating as an integrated device manufacturer.
This means it designed, fabbed, and sold its own chips.
As I said in my video about how Taiwan created its semiconductor industry,
UMC came out of the same research institute as TSMC - ITRI. UMC had done okay at first
but TSMC leapt out of the gate with its innovative new business model. UMC decided
that in order to keep up, it needed to pivot and also adopt the independent foundry business model.
But customers could not accept UMC as an independent foundry unless they knew
that UMC would not compete with it. So to gain customer trust, they decided to spin
off their semiconductor design operations as multiple companies. Thus was founded MediaTek,
which had once been UMC's R&D department for multimedia devices. Ergo the name.
Current Chairman Ming-Kai Tsai had been a design manager at ITRI and joined UMC in 1983
as its Director of R&D. Over the years, he climbed the ranks and eventually oversaw
the development of UMC's memory and multimedia business units.
So he was the natural choice to lead this small multimedia startup.
True to its multimedia device roots, MediaTek began with the opportunity afforded by
the growing CD-ROM, DVD, and Blu-Ray market. Those devices needed controller chips to work.
That chip market was currently dominated by Japanese suppliers.
MediaTek defeated those incumbents by offering a cheaper, highly integrated system on a chip. They
contracted with independent foundries like UMC and TSMC to build this chip. Since the foundries took
care of the manufacturing, it allowed MediaTek to focus on the design and selling. This is the
crux of the fabless semiconductor model. It is also, as it turns out, very profitable.
Taiwan-based CD-ROM manufacturers like BTC and Lite-On adopted MediaTek’s solution first and
soon thereafter Hitachi, Sony and LG. They would win a 50% share of the CD market.
MediaTek followed up their CD success with DVDs. Their big breakout hit in that market
was supplying chips to Apex Digital, which made a cheap DVD player that sold very well in America.
Sony and Philips then signed on for their own DVD players.
Just four years after MediaTek's spinoff, the company was generating about $200 million
in annual revenue. It was already Taiwan's second largest fabless semiconductor firm.
But Tsai envisioned his company doing more than just DVD players and set upon a brand new market:
Mobile phones.
MTK began studying the mobile phone market in 2001,
long before the iPhone. So most phones back then were simple flip phones. I had one a long time
ago. They formally entered the market three years later, soon capturing 14% global market share.
MediaTek's style of business is to attack entrenched players in markets after they mature.
Their go-to-market strategy for doing so is to offer a "turnkey" solution
to their customers. That means that MediaTek offers for a particular device category
a "skeleton", called a reference design.
These MTK turnkey reference designs might be low-priced, but boast high quality features
like touchscreens, 5G connectivity and good cameras. They also come with well-tested software.
To help their customers best modify the reference design,
MediaTek also offers a development SDK as well as technical training.
Customers buy these designs and modify them to best suit their business strategy.
How so? It depends on the customer. One smartphone maker specialized in phones
for farmers. They modified their phones to have extremely loud speakers
so that the farmers can hear them ring while in the fields.
Or they can decide not to modify anything, slap on a brand, and just sell the whole design as is.
MTK's reference designs were very popular globally, with many unique
features requested by customers for their own local market. For instance, Brazilians like
to switch between different telecoms, so their phones needed to have as many as 4 SIM slots.
With MTK, a phone vendor can now start their own phone brand without having to reinvent the wheel.
It cut the go-to-market time from 9 or 12 months
to just 2 or 3 months. Furthermore, the financial startup cost would be just half a million USD.
This "white labeling" business practice is not unfamiliar to Taiwanese electronics vendors. For
example, Acer's UniLoad system - best described as a skeleton desktop computer - was a modular
system that sold very well in Latin America. It drove much of Acer's growth in the 1990s.
The iPhone and the smartphone era it launched would upend the traditional desktop computing
paradigm. MediaTek quickly realized that they needed a smartphone offering of their own.
In 2012, the company rolled out their first Android designs.
They had actually started three years earlier in 2009 with Windows Mobile,
but nobody wanted that. It was a big flop and actually caused a dip in company revenue in 2011.
One example design is Mediatek MT6589, a quad-core chip manufactured on TSMC's 28-nanometer process
and released in December 2012. Phones using this ARM core would be priced at $150-$200
off-contract, but worked as well as the higher-end phones of the era (i.e. the Nexus 4 or iPhone 4S).
Many of MTK's designs went to China. It is the dominant mobile chipset in China,
with nearly 40% market share. The Chinese handset market back in those early years
were rough and tumble. Price and features was the main differentiators and an ecosystem of cheap,
low-end mobile phone makers sprouted to fill the need.
MTK's chipsets powered many of those early Oppo, Xiaomi and ZTE phones. It meant that MTK was in a
position to sell picks and shovels to the gold miners. When those domestic smartphone makers
took the China market away from foreign brands like Samsung and LG, MTK benefited handsomely.
MediaTek's fabless focus and its suppliers' manufacturing prowess meant that its chips were
often very good. The company wants their chips to be disruptors in the market. They bring once
premium features to the low-cost market and eat their way up to challenge the market incumbents.
MediaTek’s reliance on the China market means that this Taiwanese company depends very much
on friendly relations with the mainland. That means a few potentially thorny situations.
Here is one example that occurred in November 2015. That month, Zhao Weiguo,
CEO of Tsinghua Unigroup, visited Taiwan and lobbied the government to amend its law to
allow it to acquire MediaTek. MediaTek, along with many other Taiwanese semiconductor makers,
in 2015 was struggling from a weak economy.
Tsinghua had already purchased MTK’s biggest mainland rival - Spreadtrum. Merging with MTK
would have created the world's largest fabless semiconductor maker at the time
and a true rival to Qualcomm.
Careful of angering its valuable Chinese customers, MediaTek issued a cautious press
release saying that they were amenable to negotiations. But the Taiwanese government
would eventually decline to open up its semiconductor makers to Chinese acquisition.
Luckily for MediaTek and the Taiwanese government, Tsinghua soon fell to its own debt issues and so
nothing came of it. MediaTek would recover from its woes and more. In late 2020,
industry analysis firm CounterPoint found that MediaTek had been the world's leading
smartphone chipset vendor in Q3 2020, beating Qualcomm for the first time.
Taiwan's semiconductor and electronics makers are critical to its overall economy.
There are strong Taiwanese companies in other fields such as Giant for bicycles
or Formosa Plastics for plastics, but the heart and soul of Taiwan's economy is in electronics.
Taiwan's fabless design firms and foundries work together
in a harmony to push ahead and challenge integrated device manufacturers like Intel.
The foundries need the input of their customers to push them and keep them on their toes.
Each fabless designer benefits from the combined
investment and knowledge from many other designers like themselves. It helps keep
them at their very best and at the cutting edge of the ultra-competitive electronics space.