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The Future Of MTK

|Includes:Qualcomm Inc. (QCOM)

Does MTK Have A Bright or Gloomy Future?

In short term, MTK has a very bright future because of robust growth of smartphones in China market and MTK's local advantages. In mid-to-long term, it is a hard question to answer. In my view, Qualcomm is a bit more likely to win.

Why Does MTK Have A Bright Future In Short Term?

Firstly, the smartphone shipment in China market in 2012 is expected to reach over 150 million, tripling the number last year. Consumers in China are more sensitive to prices over quality than those in USA and Europe. This lends support to MTK when it lags behind Qualcomm in technology.

Secondly, MTK understands China market much better than Qualcomm. Some people argue that Qualcomm can also launch low-price turnkey chipsets. However, they underestimate the negative effect of organizational inertia. Qualcomm's organizational structure serves B2B model and developed markets while MTK's serves B2(small)B and developing markets. Qualcomm's product center in US cannot respond quickly to fragmented and countless "micro innovation" in China market, high-cost and limited service teams cannot serve hundreds of small handset companies, and inflexible accounting system adds the cost of QRD.

Thirdly, MTK has a wise strategy. Number one, MTK would rather tolerate lower profit margin and pursue growth of market share than yield to capital market. Number two, MTK has established a strong sales team in china which not only sells but also collects rapidly changing industry news everyday and responds quickly to the headquarter for decision reference. Number three, MTK has successfully supported the growth of Lenovo and become popular in non-Tier 1 makers. Number four, MTK has started to build local ecosystem, embedding cloud application engines into its chipsets and cooperating with all Chinese telecom operators.

What Could Be Long-term Dangers of MTK?

Firstly, Qualcomm is very impressive in the aspect of implementation and adaption. Qualcomm noticed the potential threat of MTK's business model quite a few years ago and paid more and more attention to the construction of Chinese local teams. Although QRD and other mechanisms are still defective, Qualcomm is highly likely to finish localized transformation within three years.

Secondly, the personnel structure of MTK in China mainland cannot support sustained growth because of inadequacy of localization. How to build a faithful and motivated team mostly made up of local salespeople and engineers is a key challenge.

Thirdly, local chipset makers in China mainland are growing rapidly, imposing long-term threat on MTK.

Fourthly, service providers and chipset makers are expected to be two largest giants in the industry of mobile internet. This implies that chipset makers must be good resource integrators. MTK's company history and DNA of Taiwan manufacturing worry investors.

Fifthly, white-brand companies can bring tremendous short-term money for MTK but cannot support sustained growth of MTK. How to transform company infrastructure to serve big-brand companies is another challenge.

How to Build Long-Term Advantages of MTK?

Firstly, build a real strong strategy division which is responsible for the making of 3-5 year strategy planning, discovery and cultivation of strategic customers, integration of industry resources and construction of local ecosystem, transformation and streamline of company structure, competition policy of strategic rivals, and identification of strategic opportunity and threat.

Secondly, construct a wide moat within three years to realize "enjoy in the middle" rather than "stuck in the middle". Number one, discover and cultivate strategic clients. The trend of handsets in two different directions of commoditization and fashion will reshape the competition situation. New giants which are expert in fashion and marketing will benefit from big wave of servitization of manufacturing, keeping away from red sea and earning high margins. Look at the fact that Qualcomm has invested in Xiaomi, a company with DNA of internet. Number two, build a closely inner-connected ecosystem in which Chinese local internet companies feel MTK can understand what they need deeply and respond timely. Number three, MTK may sponsor some show performances to make itself more exposed to common people.

Written by Patrick Zhou on August 25th, 2012.

Email: patrickzhou2010@gmail.com

Announcement: The short article only represents the viewpoints of the author rather than any organizations and is only used for the exchange of industry insights with industry and financing professionals rather than any direct business purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: QCOM