Sep 1, 2010

Cutting the Commodity Mindset Chains

Upstream parts and equipment suppliers often tell me they feel like the tail on the dog. Most of the market attention goes to the front end of the beast, the final solution sellers. Whether it’s jumbo jets or oil rigs on down to stoves or mobile phones, it’s the final brand product that ultimately designs the product, chooses component suppliers, and gets the order. Boeing, Saudi Aramco, Whirlpool, Nokia. They hold the high cards, and - here's the rub for upstream players - they grab most of the margin as well.
But not always. A recent Economist article has a great example of a Taiwanese microchip manufacturer that suddenly is growing like gangbusters – because it chose to extend its value beyond simply making and providing commodity components such as chips.
MediaTek looked at the manufacturing and design problems confronting its downstream cell phone customers on China’s mainland that were limiting their ability to meet end customer demand. MediaTek then figured out what it could do to help solve those problems better than other component suppliers, while itself avoiding onerous investments in huge new chip facilities. In the process it would remake itself into a high-value-added “fabless” supplier. As The Economist describes it:
In 2004 MediaTek expanded into higher-value territory by making the bundles of chips, or “chipsets”, on which mobile phones rely. Being a latecomer, the firm opted to sell processor-, radio- and other sorts of chips together with the necessary software. This “total solution” makes it much easier for phone makers to produce handsets.
MediaTek’s customers were Chinese shops trying to bootstrap their way into the modern economy with no spare cash. Imagine how their owners felt when Mediatek came along to make this possible:
A handset firm there used to need 20m yuan ($2.9m), 100 engineers and at least nine months to bring a product to market. Now 500,000 yuan, ten engineers and three months will do. As a result, Chinese handset-makers now number in the hundreds.
These customers felt turbocharged, for sure. And the same for Mediatek. In five years, its annual revenues have zoomed from $1.2 billion to $2.9 billion. But The Economist’s excellent coverage skipped over one essential element in the formula:
Rising from a product supplier to a “platform supplier” takes more than new design skills and convincing peer suppliers of other components to tag along behind you. It takes convincing your downstream end-solution (OE) customers they need this service. Fact is, even when they need it badly (and I’ve seen cases of this), they don’t necessarily recognize what they’re missing. You have to help them see the light, and the scale of their opportunity. You have to sell them not just a platform but a service. In MediaTek’s case, it’s: “We can help you get to market three times faster, and with only a tenth as may engineers.”
That’s not just a commodity component. That’s value!

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