Abstract

Besides the support provided by the Chinese government, one of the key factors behind Spreadtrum's rapid growth was the experience that the company's founders had gained working at mobile phone design houses. This experience, combined with the availability of low-cost R&D resources in China, contributed to Spreadtrum's successful development of baseband chips for GSM/GPRS mobile phones.

With the rapid increase in the number of mobile phone subscribers in China, there is considerable room for further mobile phone sales growth in the economically less developed regions. In these regions, the leading mobile phone brands' distribution networks are less extensive than in developed regions and brand awareness is relatively low. Several Chinese electronics manufacturers and distributors have been exploiting this latent demand by using turnkey solutions to produce low-priced, multi-function "black mobile phones" for sale in rural areas through their own distribution channels.

Spreadtrum has also found customers among China's mobile phone vendors, whose limited R&D capabilities, relatively small size, and lack of bargaining power have pushed them to look for IC suppliers that can provide them with a high level of support.

As a result, Spreadtrum has leveraged its two main sources of competitive advantage - low prices and the ability to provide support and services from close at hand - to secure a substantial share of the two market segments described above. Although its share of the market as a whole is still relatively low, Spreadtrum has already established itself as China's largest mobile phone IC supplier.

Spreadtrum still has several challenges to overcome in the future. One is related to its customer portfolio, and the other is related to the company's product line. On the customer side, as Spreadtrum provides SoC solutions, the mobile phones developed by its various customers using these solutions tend to be rather homogenous. This situation has resulted in an intensification of competition between the companies concerned, which poses a great challenge for Spreadtrum to choose between brands or distributors as its customers.

As regards Spreadtrum's product line, the main cause of concern is the next-generation TD-SCDMA chips. Although the Chinese government has thrown its weight behind the development of TD-SCDMA technology, there is still considerable uncertainty as to how the licenses for TD-SCDMA operators will be issued, how TD-SCDMA will create segmentation between itself and other 3G standards, and how the technology will evolve in the future. These issues will have an impact on subscriber take-up, which in turn may affect the level of demand for TD-SCDMA chips.

Another potential problem is the likelihood of intense competition within the TD-SCDMA mobile phone chip market. There are currently four companies in China that are working on TD-SCDMA chip R&D. Development of TD-SCDMA chips requires close collaboration with the mobile phone vendor to improve product performance. Unfortunately, the mobile phone vendors with which Spreadtrum is collaborating on TD-SCDMA product development have limited R&D and design capabilities, low production capacity, and little influence over how the market develops. This puts Spreadtrum at a disadvantage compared to other mobile phone chip design firms that have the backing of leading international mobile phone vendors, and may have a negative impact on both the speed with which Spreadtrum is able to bring its new TD-SCDMA chips into the market and the market share that the company is able to secure.

Appendix

List of Companies