Is Qualcomm’s Foray Into China Likely to Be a Success?

Qualcomm’s strength in the LTE arena should enable it to conquer China

Jan 9, 2014 at 12:15PM

Leading mobile device chip manufacturer Qualcomm (NASDAQ:QCOM) has witnessed a slowdown of its explosive growth in recent years. This has mainly been due to lowered profit margins from sales of its high-end chipsets, thanks to the dwindling market for expensive smartphones.

On the other hand, this has also resulted in a boom in demand for mid- and low-range smartphones, especially among cost-conscious consumers in emerging markets such as China. As a result, Qualcomm has been compelled to bring out low-end chip sets suitable for such phones, but which tend to yield lower profit margins.

However, with China as the planet's largest smartphone market, Qualcomm is hoping to make up for the lowered profitability through sheer volume of sales of its chipsets in that region. This is just one of the reasons that China is a critical part of Qualcomm's current expansion strategy.

Why China?
China's importance to Qualcomm became apparent when the nation's wireless telecom providers received government approval to start operations based on the next-generation 4G LTE mobile network technology. Out of these companies, Qualcomm is actively targeting China Mobile, the country's largest wireless carrier. With 763 million customers, China Mobile's subscriber count is more than double that of the population of the United States, making it the planet's biggest wireless carrier as well.

But, Qualcomm has an even more important reason to go all out in its efforts to target China Mobile: Qualcomm pioneered the Code Division Multiple Access, or CDMA, network standard that has been widely adopted globally for 3G networks. This also means that the company derives a majority of its profits from royalty fees that come from wireless providers and smartphone makers using the CDMA standard.

However, Qualcomm's products are hardly used in devices tied to China Mobile's wireless network due to their incompatibility with the latter's indigenous TD-SCDMA 3G network standard. This has led handset makers operating on China Mobile's 3G network to avoid paying royalty fees to Qualcomm, creating a gaping hole in the latter's revenue flow. With the company's growth currently declining elsewhere, Qualcomm's desperation to tag on to China Mobile's new 4G LTE standard seems totally justified.

How hard is it, really?
Cracking the Chinese puzzle has never been easy, as top smartphone maker Apple realized when it failed to launch its iconic iPhone on China Mobile's indigenous network standard for almost six years due to incompatibility issues. Qualcomm's hurdles have recently become even more formidable, with the Chinese government launching an investigation into its local operations.

But, Qualcomm is certainly leaving no stone unturned. The company has already introduced the latest version of its Snapdragon 410 chipsets targeted at mid- and low-range handsets that also happen to be LTE-enabled and compatible with all global networks.

Incidentally, the bulk of China Mobile's subscriber base is comprised of cost-conscious consumers who are unable to afford high-end, expensive handsets. Qualcomm's marketing team is also equally busy convincing local Chinese handset makers, such as Xiaomi and ZTE, that adopting its chipsets would put the latter group on a level global playing field with market leaders Apple and Samsung.

Any chances of success? 
Having said that, the single biggest thing that should turn the tables in Qualcomm's favor is the LTE factor, an area where industry rivals Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA) are generations behind. Qualcomm has a near monopoly in the LTE arena, accounting for almost 97% share of global revenue for the LTE market.

On the other hand, fellow chip manufacturer Intel continues to derive as much as 80% of its overall revenue from chips made for the fast-fading PC industry, and has a negligible 1% share of the market for smartphone chips. Qualcomm dominates more than 90% of that market. NVIDIA is also having a pretty tough time, having recorded a whopping 54% fall in revenue from sales of its Tegra line of mobile device chipsets in the recent third quarter. NVIDIA has been trying to make up lost ground recently with the launch of the K1 -- a high-end graphics chip aimed at mobiles devices and cars.

Some Foolish final thoughts
Qualcomm's hard work in China already seems to be yielding the desired results, as over 55 organizations have already agreed to deploy the former's technology on the country's newly developed LTE network. The fact that Qualcomm has been making LTE-enabled chips for almost two years, and controls an overwhelming majority of the worldwide smartphone chip market, should automatically make it the best option available for Chinese manufacturers, most of whom have global ambitions as well. This stock should definitely be a part of your tech portfolio as things are likely to work in Qualcomm's favor even further by the middle of this year.

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Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Intel and Nvidia. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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