Watch out Qualcomm, Broadcom and AMD. MediaTek’s bid for MStar vaults the Taiwanese chipmakers into fourth place by fabless (that is, designing and selling the chips, but not actually making them) sales. If they can redeploy their research and development overlap and use MediaTek’s market-creating savvy, they could just pose a threat.

MediaTek’sreputation rests on its innovative packaging of full chip “solutions” to Chinese makers of cheap phones. After the early iPhone knock-offs, this spawned the legitimate low-cost smartphone industry that has overtaken the high-end market by sales globally. MStar competes (poorly) in phone chips but its strength lies in the television market.

The financial rationale for the merger is simple: keeping up with the Americans is expensive. In its China-leading profits heyday in 2007, MediaTek generated $9 in sales for every $1 spent on R&D. Now it gets $4, in line with the biggies. Operating margins have tumbled from two-fifths to about 14 per cent – still double that of AMD, but only half of Qualcomm. MStar, meanwhile, is still getting an impressive $6 for every R&D dollar. The challenge for the new company will be retaining and refocusing more than 1,000 handset-focused engineers (Nomura estimates) on next-generation projects.