January marked the smartphone industry’s slowest growth rate of all time as mobile
This was felt by manufacturing heavyweights Apple and Samsung, who both warned that 2016 would see demand for their devices slow. Chip makers are starting to feel the knock-on effect of this. A number of analysts have noticed a trend of manufacturers choosing to develop certain parts of a chipset themselves.
Ben Wood, chief of research at CCS Insight, points out that top-tier manufacturers are no longer going directly to chipset makers: ‘The addressable market for chip makers is declining. Three of the biggest manufacturers in the world aren’t going directly to chip makers such as Qualcomm or Mediatek in the way they used to. As things get tougher in the market, being more vertically integrated is more important. Samsung makes its own chips, Apple makes a lot of silicon itself, and Huawei has a high silicon division.’
A whole new level
Smartphone differentiation is moving further away from form factor, and now starting at chip level. Standout features are taking precedence as consumers opt to hold on to handsets longer. This shift is seeing chip makers take on a greater role when it comes developing new device capabilities.
French manufacturer Archos says chip makers are now chasing manufacturers, especially smaller brands that are targeting different price points. Sales director Rakesh Odedra says: ‘I feel that the chip makers are chasing the manufacturers a lot more. It seems to be the smaller brands like us who have had a number of devices across different countries, and to hit different price points chip makers are having to come up with different features to allow us to do that.’
ARM says that that chip makers are now in control when it comes to deciding the function of a phone, making them more integral to manufacturers. James Bruce, head of mobile solutions, describes this as one of the major changes in the market.
He says: ‘Differentiation starts at the chip and then it’s about a combination of the chip and the actual OEM itself, depending on where it wants to differentiate. This could be to deliver high-end features at a lower price point, or it could be a premium smartphone bringing new user experiences, so it is a combination of device and chip. The big change compared with five years ago is that you’re seeing a lot more integration and the chip is becoming more and more important.
‘Even if you get single-digit growth in the mobile market, that’s still a significant number of units per year, and that provides opportunities for the chip guys. What’s really interesting is what the chip guys are doing – because it’s not a market where it’s all about reducing cost – they’re doing a lot of innovation, adding new capabilities and features, and that’s driving the whole smartphone market.’
For the most part, consumers are unaware of the chip brand, with much of the hype surrounding a smartphone usually centred on the manufacturer. Because of this, Archos’ Odedra explains that chip makers such as Qualcomm are trying to raise awareness among consumers, in a bid to make a chipset brand a recognised name.
‘The consumer does not understand chips,’ he says. ‘They just about understand optic core and dual core, and I think that in terms of marketing Qualcomm has done well with Snapdragon and has helped consumers understand the chip side of the market. It is important for chip makers to make consumers understand what is best.
‘I don’t think consumers are too worried about it as long as the device does what they want it to do. However, once you get into the tech world you need to be able to communicate the advantage of the chips, and the chip makers don’t do that as well as they could.’
Chip makers are branching out their partnerships in a bid to keep their product portfolios as diverse as possible. Mediatek has targeted internet giants Amazon and Google, as well as mobile manufacturers Sony and HTC. The company also works quite closely with a number of less established brands – in the UK the chip maker has partnered with both Kazam and BQ.
Chet Babla, senior director of corporate sales EMEA, explains that these brands take a greater interest in software and hardware to add features beyond a certain price point.
‘We view our partnerships with key players such as Google or Amazon as a key area of play for us,’ he says. ‘So it’s important to find good touch points and look at what problems they’re trying to solve in their devices. It’s a long road for us but proving very successful. We continue to have devices with tier 1 players – Sony is the big one, and also LG and HTC.’
CCS Insight’s Wood has argued that with margins tightening in mobile, it is best to stick with the top tiers as that’s where profit will be. However, Archos disagrees with this, with Odedra explaining that top-tier manufacturers only release one or two devices a year, while less established brands release a lot more.
‘If you look at the global slowdown in sales, we are seeing a 22% growth, so we have more devices than ever before,’ he says. ‘This is why I think chip makers do not have the same opportunities with top tier as they only launch two devices, whereas we launch several. We are now engaging more and more with chip makers.
‘Chip makers need to get with guys like us so we can use their chipsets across the range, and they need to work with us in order to hit the price points in the market that Samsung and others are moving out of. That is where the profit is and the opportunity now is with people like us.’
If you don’t have a diverse portfolio, you will struggle as a chip maker, says Babla, who believes chip brands will be forced to move into different areas of the market to survive.
‘People are recognising that for a chip business you need scale in terms of both physical and breadth of portfolio, so this is a running theme we will see throughout the year. If you’re single source on a product line, you’re going to struggle in the chip market. You need a diverse portfolio, so if you have exposure to mobile and IoT (Internet of Things) and all the parallels, you have a better chance of surviving in the industry.
‘The point of differentiation is absolutely coming from the chip makers now. From a chipset point of view the challenge is getting harder, and this is where it will sort out the men from the boys. Companies like us have to work harder at innovating to have our product differentiate more.’
As smartphone sales slow, there are certain features of a device that can be enhanced, and this presents new opportunities for chip makers. Babla explains that when it comes to delivering these capabilities, price point is also critical as consumers expect more for less.
‘Smartphones are becoming ubiquitous,’ says Babla. ‘There’s a lot of focus on the user experience and that’s the focus for the chipset vendors. We’re pulling in a lot of multimedia camera features as this is what the consumer now wants.
‘In previous years, modem [internet connection] was the fighting point, but we’re getting to the point now where it’s how many millions of megabits do you need in a device? Do you want all day use out of it or do you want to use it as a great gaming or camera device? This is where the fight is moving to from a chipset point of view.
‘Consumers want a better user experience and they don’t just want to pay £600-£700 for that, they want it in the mid segments and that will also hit the entry levels over the years. So the challenge for us is how do you pack in all that tech at an appealing price and without compromising on the power levels? It’s a continuing journey.’