MediaTek throws in the towel, facing chip supply constraints in the growing demand for 3G and 4G products. The smartphone silicon manufacturer, who is Qualcomm's biggest rival in the industry says it has underestimated the supply of chips it would need from its foundry partners.

Taiwan Semiconductor Manufacturing Co. (TSMC) is MediaTek’s largest supplier. For MediaTek, demand has been better than the company expected earlier this year.

“For the third quarter and the fourth quarter, we most likely will be facing supply constraints,” said MediaTek Chief Financial Officer David Ku on a conference call to announce the company’s second-quarter results. “Probably into the fourth quarter, we won’t be able to fulfill all of our demand.”

The company forecast that its third-quarter shipments of chips for smartphones and tablets will fall in a range of 145 million to 155 million units. That’s an increase from MediaTek’s forecast shipments of 135 million to 145 million units during the second quarter and 110 million units during the first quarter. In 2015, MediaTek gained market share in the smartphone business at the expense of Qualcomm.

The smartphone market has been an elusive target after it slumped for the first time ever earlier this year. Global shipments eked out 0.3% growth during the second quarter of 2016, according to a July 28 report from market research firm IDC. China’s three largest smartphone makers -- Huawei, Oppo and Vivo – had the largest gains, according to IDC.

Taiwan-based MediaTek, which sells most of its chips to manufacturers in China, appears to be benefitting from the growth by the mainland handset makers.

“We are still gaining market share,” said Ku. “Vivo and Oppo are gaining a lot of market share.”

MediaTek said that it expects more than 25% growth in revenue in 2016. About five percentage points of that growth will come from recent acquisitions of other companies, the company added.

Shift to high End MediaTek this year has put most of its R&D capacity into ramping up its high-end Helio line of smartphone chips for the 4G market, Ku said. The company’s new P20 product in the Helio line will start shipping in the fourth quarter, he said. The X30 will ship in the first half of 2017, he added. The Helio line will grow to account for about 20% of the company’s smartphone shipments by the end of this year, Ku said.

At this point, MediaTek’s most advanced modems are Category 6. The X30 will be Category 7 ready, Ku said. The company, which has lagged behind Qualcomm with the introduction of advanced modems, said its market share may slip during the fourth quarter because its bigger rival has widened the technology gap.

By the end of this year, the company expects to start offering Category 10 modems in its products.

“Modems will be a very important marketing tool,” Ku said.

MediaTek said it has gained market share against competitors in China such as Spreadtrum, which has slipped with its planned entry to 4G. Part of MediaTek’s gains have come from advantages in camera, multimedia and power functions, the company said. MediaTek said does not expect new 4G competition to come from China until next year.

The company said it will start making its first 10nm products at TSMC in 2017.

“We will have more than one product in 10nm next year,” Ku said. The company will make the X30 on TSMC’s 10nm process.

MediaTek’s main competitive advantages from the geometry migration will be power consumption and performance, according to Ku. “There will be no key benefit in cost,” he said.