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Chinese baseband suppliers like MediaTek are trying to push their way upmarket into 3G handsets and even smartphones, potentially squeezing Qualcomm and ST-Ericsson. Qualcomm is reported to be biting back, going aggressively after the low end Chinese handset makers, which are the main base of MediaTek’s huge volumes.

Chinese phonemakers are a double-edged sword for a firm like Qualcomm, which retains high margins on its chips. But as they start to expand from low end, and even counterfeit, handsets into more sophisticated devices, they cannot be ignored. The US vendor - according to sources in the Shenzhen manufacturing community, who spoke to Marbridge Consulting – is wooing midrange OEMs with four products targeted at smartphones that would retail for $100 to $120.

The sources said the midrange OEMs are currently testing Qualcomm’s 7227, 7225, 7627 and 7625 smartphone processor/baseband systems.

These handsets would mainly be for the new 3G networks in China, but handset vendors like Simcom, Prowave, Shengyao, Newings and Basewin are also starting to export their products to other emerging mobile economies and as white label offerings. In this, they are hoping to emulate Huawei and ZTE, both of which are now selling own-branded smartphones in the west.

Qualcomm is already a major supplier to these two giants, and has worked with them on ultra-low cost handsets as well as its usual smartphone targets. In particular, it has supplied components for low cost CDMA devices, a strength for ZTE.

It is seeing incursions into its own markets from MediaTek, but also other Chinese silicon firms like Spreadtrum. However, this is a good time to attack MediaTek, which is under its own pressures from rising competition, and has not yet seen the results of its moves into more sophisticated products, or from key developments like its recent alliance with DoCoMo.

In the fourth quarter of 2010, MediaTek suffered a 20% year-on-year decline in revenues as the price war took its toll, and it expects the first quarter of this year to see a sequential downtick too. This contrasts with 2009, when the company enjoyed more than 20% growth in 2009, even though the semiconductor sector fell by 10%. In 2010 its expansion slipped back to between 6% and 8%, according to analysts – while the whole chip industry may have bounced back with growth as high as 30% year-on-year. MediaTek was ranked seventeenth in the world by revenue in 2009 and is likely to have finished 2010 in twenty-first position.

One of the companies squeezing MediaTek in its core market, Chinese featurephones, is Spreadtrum, which this week showed off the world's first 40nm low power baseband spanning China Mobile’s TD-SCDMA 3G platform and its TD-HSPA extension. It also supports GSM/GPRS/EDGE and aims to push the price of 3G handsets closer to that of Mobile’s 2G devices.

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