City dwellers are upgrading their phones to take advantage of features like color screens and built-in cameras, which means demand exists for TI's new chip.

"The replacement rate in China is very high, with replacements accounting for around 50% of cell phone shipments," says Jason Yin, managing director of In-Stat China.

Nokia ( NOC) and Motorola ( MOT) have each managed to gain share by aggressively selling cheap handsets in China's less affluent interior. "They fully seized the opportunities in tier-two and tier-three cities and rural communities with their low-cost phone lines," Yin says.

TI also has rural residents in its sights, hoping they'll eventually upgrade to phones with multimedia features. "For many people in China , when they one day connect to the Internet for the first time, they will experience it through their cell phones," Templeton says.