Is Samsung Closer to Cutting Qualcomm Out?

Last week, Samsung (NASDAQOTH: SSNLF  ) finally unveiled its first integrated applications processor and cellular baseband known as ModAP ("modem" + "applications processor"). The processor integrates a four ARM Holdings Cortex A15 processors, as well as four ARM Cortex A7 processors in a big.LITTLE configuration and what appears to be a Samsung-designed Category 4 LTE modem (150 Mbps download, 50 Mbps upload). This move has led some industry watchers to believe that long-term, Samsung will be cutting Qualcomm (NASDAQ: QCOM  ) out. 

Should Qualcomm investors be nervous?

Understanding the situation
At Samsung's analyst day held last year, the company outlined its dual-pronged strategy to applications processor and modem sourcing. At the high end, Samsung aims to pair its Exynos applications processors with stand-alone cellular baseband processors from tier-1 vendors such as Qualcomm and Intel (NASDAQ: INTC  ) . 

At the low end, Samsung seems to want to use its ModAP Exynos products. Traditionally for its low-end smartphones, Samsung has used integrated parts from Qualcomm as well as a few others here and there. While this business probably isn't as important to Qualcomm as the high-end, high-margin parts that it sells to Samsung for its high-end products, the volumes at the low end and mid-range of the smartphone markets continue to be large and very fast growing. 

The bad news is that if Qualcomm loses this business, it will probably see its chip growth rate slow. The good news for Qualcomm, however, is that Samsung is starting to lose ground in the low end and mid-range to many Chinese OEMs and ODMs that probably won't be designing their own chips anytime soon. Though Qualcomm needs to fight MediaTek for this business, the former does have the upper hand with its modem technology.

Will Qualcomm lose this business?
The open question here is whether Qualcomm will ultimately lose this business. Quite frankly, Qualcomm seems to spend more on the R&D for its mobile chip products than Samsung does for its entire semiconductor business -- which consists of DRAM, NAND, logic manufacturing, and SoC design. Can Samsung's limited logic chip R&D budget relative to Qualcomm's ultimately lead to good enough result to show Qualcomm the door?

In my humble opinion, it's quite unlikely. 

Foolish bottom line
At the end of the day, Samsung can afford to continue its strategic investments in the applications processor and modem spaces, since its mobile device business is extremely profitable. (In Samsung's recent "bad" quarter, it generated $7.1 billion in operating profit.) However, given that Samsung is starting to see operating profit pressure in the low end and mid-range of the smartphone market, and given that Qualcomm is still quite ahead technologically, Qualcomm investors probably shouldn't worry too much in the near to medium term.

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  • Report this Comment On July 13, 2014, at 9:22 AM, JeffreyHF wrote:

    I agree with most of what you said in this piece, Ashraf, but would add one more factor. Qualcomm has a growing foundry relationship with Samsung, and they are working together on the leading edge 14nm node. That should militate in favor of Qualcomm retaining a significant amount of chip sales to Samsung, for the forseeable future.

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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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