In part 2, we learnt about the anatomy of a smartphone with the help of analogies like the automobile industry:
In this part, we shall go a little more in-depth into one of the parts of a smartphone and try to understand how Chinese OEMs (and hence Indian companies like Micromax) have been churning out low cost smartphones.
As discussed previously, the heart of a smartphone is its SoC (System on Chip), also called “Chipset” which comprises of the CPU (Central Processing Unit), GPU (Graphics Processing Unit), Modem, Communication processors like GSM, 3G, GPS, WiFi, Bluetooth etc. These chipsets are purchased by handset companies like Sony, Samsung, Motorola etc and integrated into their handsets. (Recollect the example from part 2 where we discussed about engine being manufactured by Fiat which in turn is purchased by Maruti & integrated into their cars. It is similar to such business model).
Since designing chipsets are highly complicated and require fabrication (high costs), only a handful of reputed companies like Qualcomm, Nvidia, Intel (and a few others) dominate this space and their offerings are usually expensive. However, over the last 3-4 years, this segment has been witnessing a disruption due to the advent of a Taiwanese company named “MediaTek” which has taken the industry by storm.
MediaTek was founded in 1997 as a computer chipset company which also offered chipset solutions for digital devices including CD/DVD players, digital TVs & low end mobile phones but by 2010, the company was in doldrums due to stagnating market of low end mobile phones and fierce competition. By 2011, MediaTek realized the potential of Android Smartphone market in the third world (developing nations which includes China, India, Taiwan, Brazil) and decided to venture into the chipset industry for smartphones to revive itself & capture this market:
In Feb 2012, MediaTek unveiled a new chipset designed for low end Android phones.
Due to its aggressive outlook, MediaTek took on reputed players like Qualcomm & Nvidia by surprise by offering similar chipsets for almost half (or even less) the cost. However, due to the quality & performance issues, MediaTek was perceived as a cheap knock-off company and hence serious cellphone makers like Sony, Samsung, Motorola and others continued to purchase chipsets from the old players like Qualcomm & Nvidia.
MediaTek was not disappointed because its potential clients & target market was somewhere else. In fact, it had to be created from scratch because the market did not even exist. Over the next few months, MediaTek got in touch with several Chinese OEMs who were assembling basic phones (feature phones) and provided them the necessary blueprint to enter into the smartphone segment. Apart from offering them chipsets at such low prices (less than half the price compared to others), MediaTek also offered necessary consulting services at almost no extra cost.
MediaTek took the industry to a completely new level by pioneering “Turnkey solutions for low cost smartphones” in which MediaTek would actually do most of the complicated tasks (like software coding, device drivers etc) and offer it as a package (along with their consulting service) so that even a Chinese OEM with just 10 engineers would be able to integrate it into a finished product (smartphone) and sell it in market.
This set the ball rolling and MediaTek had captured significant marketshare in Android handset within few months, with their major clients being OEMs like Gionee, Lenovo, Blu, ZTE etc while companies like Samsung, Sony, Motorola still continued to use chipsets from the reputed vendors like Qualcomm & Nvidia.
By the end of 2012, MediaTek had established itself as the one stop destination for Chinese OEMs and this was precisely the moment when Indian companies like Micromax upped the ante and partnered with such Chinese OEMs. In August 2012, Micromax created waves in the Indian smartphone industry by announcing a large screen, dual-core processor smartphone which was offered as a low cost alternative to high end & expensive smartphones like Samsung Galaxy S2/S3 and the likes for just 1/4th of the cost
With the penetration of low cost Android smartphones in emerging markets (India, China, Brazil and other developing nations) due to influx of Chinese OEMs & resellers like Micromax & Karbonn, the established players started feeling threatened because their low end smartphones could not compete on price. This was further provoked by a series of ads by Micromax ridiculing companies like Samsung throughout late 2012 and early 2013:
Video of one such marketing warfare:
Price was the USP (Unique selling proposition) and Micromax left no stone unturned in flaunting the affordability factor of its phones, including ads ridiculing iPhone as well.
Before it was too late, established players like Samsung decided to enter the cut throat ultra low cost smartphone segment (which was dominated by Micromax & Karbonn) but the only way they could cut costs was by using MediaTek chipsets and hence the plunge was taken as a last resort to survive in the low cost segment:
This way, MediaTek has managed to create a revolution in emerging markets & capture more than half the marketshare within 2 years, most of which caters to low end segment, due to which Indian companies like Micromax have been able to offer smartphones at such low costs.
The next natural question would now be “How does MediaTek manage to offer its chipsets for such low costs?”. We shall discuss this in the next part.
Part 4 is uploaded in the following link:
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