MediaTek (OTC:MDTK.F) has been a thorn in the side for Qualcomm (NASDAQ:QCOM) in the smartphone application processor (AP) market. The Taiwanese chipmaker's smartphone AP market share rose from 14% in 2014 to 23% by the first half of 2016, according to Strategy Analytics, at Qualcomm's expense.
The tables have turned in Qualcomm's favor
But the tables are turning now, as MediaTek's shipment growth reportedly stalled in the first quarter of 2017. Taiwanese website DigiTimes' industry sources indicate that the chipmaker shipped fewer than 100 million smartphone chips in the March-ended quarter, though the second-quarter outlook is slightly better at 110 million to 120 million units. The company reportedly shipped over 480 million chipsets in 2016, so the company looks unable to top that number in 2017.
DigiTimes Research also pointed out [subscription required] that Qualcomm's share of the smartphone AP market in China rose above 30% in the first quarter, thanks to its strategy of churning out mid-range chips for this market. MediaTek's market share, on the other hand, slipped below 40%.
How Qualcomm is winning China
Rosenblatt Securities analyst Jun Zhang believes that design wins at fast-growing Chinese smartphone companies such as OPPO and Vivo helped Qualcomm ship 28 million Snapdragon 835 chips into China last quarter. By comparison, the chipmaker shipped 8 million units in the year-ago quarter.
What's more, Zhang forecasts a 65% market share for Qualcomm in China this year, thanks to contract wins at Xiaomi, Vivo, OPPO, and Meizu, where MediaTek used to be the dominant supplier. For instance, OPPO has decided to use the Snapdragon 653 chipset in its latest flagship smartphone -- the F3 Plus -- while the previous F1 Plus was powered by a MediaTek Helio P10 processor. Vivo's flagship V5 Plus smartphone is also using a Qualcomm Snapdragon processor.
The design wins at OPPO and Vivo are a big deal for Qualcomm, since these two smartphone makers are aggressively growing their sales. More specifically, they accounted for around 46% of China's smartphone sales in the fourth quarter of 2016, up from a combined 20% in the prior-year period, according to IDC.
OPPO and Vivo are also making huge strides in the fast-growing Indian smartphone space, where they currently occupy a combined 16% of the market. The retail strategy of both these companies has translated into terrific sales growth, as they're spending big on advertising and focusing aggressively on distribution by tying up with multiple companies.
This is great news for Qualcomm, since both Vivo and OPPO could end up shipping over 300 million smartphones this year -- accounting for a fifth of global shipments -- according to supply chain checks from DigiTimes' sources.
Qualcomm is shutting MediaTek out
MediaTek was ruling the roost in the budget end of the smartphone market in China, but that wasn't helping its margin profile. For instance, its gross margin fell to 35.6% in 2016 from 43.2% in 2015, so the company decided to compete with Qualcomm in the premium end of the market, where margins are higher.
But the bad news is that MediaTek's premium Helio X30 chip is failing to find significant takers. The company's co-chief operating officer, Jeffrey Ju, believes that not more than 10 smartphones are going to use its high-end chip even though it's manufactured using the 10-nanometer process technology that Qualcomm uses for the Snapdragon 835.
Xiaomi and OnePlus are also reportedly going to use the top-of-the-line Snapdragon 835 processor to power their upcoming flagships, indicating that Qualcomm's resurgence in the smartphone AP market is set to continue at as MediaTek fades away.