TAIPEI -- MediaTek, the world's No. 2 mobile chip provider after Qualcomm, warned on Tuesday that the escalating trade war between the U.S. and China could hit second-tier smartphone makers while harming overall demand.
"There is a very clear and rapid consolidation trend among Chinese smartphone makers ... the big ones are still doing well but we see some small ones turn very cautious about demand outlook," MediaTek CEO Rick Tsai said in an earnings briefing. "It's possible that these second-tier handset makers become conservative because of the Washington-Beijing trade battle."
At the start of the year, the industry looked for 4% to 5% growth in overall smartphone shipments in 2018, Tsai said, but he now sees "a significant slowdown" and "no growth" for this year.
Tsai's remarks highlighted the struggles of midsize Chinese smartphone makers to stay afloat amid weaker demand in a competitive market. Shipments declined in 2017 for the first time, research firm IDC says, but little of the decrease came from the top five vendors.
MediaTek supplies to most Chinese smartphone makers including major players like Huawei, Oppo, Vivo and Xiaomi, but it also provides chip solutions to some second-tier ones such as Lenovo Group, ZTE, Meizu and Gionee. The Taiwanese company's chips were adopted by Samsung Electronics' mid- to low-end models as well. However, industry suggest that the demand for new Oppo and Vivo smartphone models unveiled earlier this year has been weaker than expected.
MediaTek forecast July-September revenue between 62.3 billion and 67.1 billion New Taiwan dollars ($2.03 billion to $2.19 billion), up 3% to 11% from the previous quarter. But those figures also range between a 2.1% decrease and 5.4% increase on the year. Gross margin is projected between 36.7% and 39.7%, compared with 36.4% in a year-earlier period.
For the April-June quarter, MediaTek's revenue rose 4.1% from a year ago to NT$60.48 billion. Net profit more than tripled to NT$7.49 billion from NT$2.21 billion a year earlier, as the company recovered from losing substantial market share to U.S. rival Qualcomm since 2017. Profit was also boosted by boosted by a one-time share disposal gain of up to NT$3.8 billion. Gross margin was 38.2%, compared with 38.4% in the March quarter, and 35% in a year-ago period.
Some analysts have concerns that MediaTek faces short-term problems from the termination of the integration deal between Qualcomm and Dutch company NXP Semiconductors, a victim of the Washington-Beijing trade conflict. They think Qualcomm may cut prices more aggressively to grab market share in the mobile segment, after hoping to reduce dependence in that area by leveraging the expertise of top automotive chip provider NXP.
Tsai said MediaTek would roll out competitive chip solutions to take on Qualcomm's similar lineup, adding that he did not see price erosion currently. Qualcomm and MediaTek share similar customer bases, though the U.S. chip provider usually sells solutions to clients' flagship phone models while the Taiwanese company designs chips for mainstream and entry-level handsets.
But the CEO confirmed that MediaTek's revenue and chip shipments for smartphones and tablets could fall slightly for 2018. Mobile chips still account for around 40% of MediaTek's revenue.
"We believe the near-term outlook continues to deteriorate," Stefan Cheng, an analyst at Maybank, said in a research note. "Meanwhile, market share between Qualcomm and MediaTek has reached equilibrium, in our view, while Qualcomm still has upside in the next 12-18 months, as we believe MediaTek will have a smaller share in the 5G segment initially."
MediaTek's shares dropped 2.31% ahead of earnings to close at NT$254 on Tuesday. They have been under pressure for the past few months, dropping nearly 30% since a recent peak of NT$362 on April 18. The market was already on alert as major contract chipmakers Taiwan Semiconductor Manufacturing Co. and United Microelectronics flagged weaker-than-expected demand for mid- to low-end smartphones for the second half of 2018.