Until last week, Tsai Ming-kai, the Taiwanese billionaire once known as China’s “bandit phone king”, was on a roll.
The founder and chairman of chip design house MediaTek had already seen his personal wealth jump by 80 per cent last year. The launch of the company’s “Dimensity” chipset for 5G smartphones and Washington’s blacklisting of Chinese technology group Huawei from buying from US chipmakers had sent MediaTek’s shares soaring.
This year, things looked even brighter. The US in May barred chip manufacturers from selling to Huawei any custom-made semiconductors produced with US equipment. For Huawei, the most obvious solution was MediaTek’s off-the-shelf smartphone chipsets, a development that would have boosted the Taiwanese company’s fortunes immensely.
But that dream was shattered last week when the US Department of Commerce closed the loopholes in its May sanctions against Huawei by prohibiting the sale without a licence of chips made using US software or equipment to the Chinese company. Given the prevalence of US technology in the semiconductor industry, this would include chipsets sold by MediaTek.
“If the May rules had played out, MediaTek would have been the beneficiary, at least in the short run,” said Phelix Lee, an analyst at Morningstar in Hong Kong.
Mediatek’s second-quarter 2020 revenue
He estimated that MediaTek could have sold 60m-70m chipsets to Huawei next year under the May rules, boosting its share in the market for “system on a chip” — in which one chip performs all the different functions for a device — for Android by about 50 per cent.
Instead, MediaTek’s shares have dropped about 14.6 per cent since the US closed the loophole last Monday, shaving NT$8.4bn ($286m) off the value of the 5 per cent combined stake Mr Tsai and his wife own in the company.
Washington’s latest move has rattled Taiwan’s entire tech industry. Despite a global rally in tech stocks in recent weeks, the country’s Taiex semiconductor index is down nearly 5 per cent from an all-time high in July, with half of the component stocks in the red for 2020.
There remained some uncertainty about the full impact of the rule changes because the US government could still issue licences for certain suppliers to continue selling to Huawei temporarily if vital US interests were at stake, analysts said.
They also said that even if the sanctions did drive Huawei out of the smartphone business, part of the vacuum would probably be filled by Chinese rivals such as Oppo, Vivo or Xiaomi.
However, those smartphone brands were expected to use the Dimensity 700, a lower-end version of MediaTek’s 5G chipset, rather than the more expensive variety that Huawei had been expected to use.
Tsai Ming-kai, the founder and chairman of chip design house MediaTek © Brent Lewin/Bloomberg
Industry experts also warned that if the ban on Huawei devastated its telecom infrastructure equipment business as well, it would delay the rollout of 5G networks worldwide.
“That would make all our expectations about smartphone sales from the second half of this year obsolete,” said an executive at another semiconductor company. “Everything would slow down.”
Taiwan Semiconductor Manufacturing Corp, the world’s largest contract chipmaker, raised its business outlook only late last month partly due to rosy expectations for 5G-driven smartphone demand.
MediaTek has more at stake than many other Huawei suppliers, not least because it has bet on China much more aggressively than many peers. Spun off from Taiwanese chipmaker United Microelectronics Corporation in 1997, the company built its business designing chips for CD drives and later DVD drives, before moving into chips for TV sets and finally mobile devices.
It has since grown into Taiwan’s largest and the world’s fourth-largest chip design company, with NT$67bn in revenues and NT$7.3bn net earnings in the second quarter this year.
Its biggest break came after it started offering a turnkey solution for mobile phones in 2004 that enabled scores of no-name workshops manufacturing knock-off handsets — “bandit phones” — in the southern Chinese city of Shenzhen to produce more sophisticated products.
The platform, which included a chipset and reference designs for phone features that the small factories would not have been able to develop themselves, earned Mr Tsai the nickname of the “bandit phone king”. It also helped create a breed of Chinese companies that would later morph into formidable rivals for multinational brands such as Apple and Samsung in China and other emerging markets.
Adapting its turnkey chipset business model to the smartphone era was difficult but MediaTek again managed to build a strong emerging-markets position on the back of China’s rising handset brands.
In 4G, MediaTek was weaker than it had been in the previous generation of mobile services technology. But it promised a comeback in 5G. The Dimensity’s price tag is expected to be significantly lower than that of Qualcomm’s latest Snapdragon chip, with long battery power and high energy efficiency.
With this week’s Huawei shock, those expectations have been pared back dramatically. Said Morningstar’s Mr Lee: “It is a rollercoaster for them.”
Additional reporting by Hudson Lockett in Hong Kong