Qualcomm (NASDAQ:QCOM), the largest mobile chipmaker in the world, recently formed a new joint venture in China with the Guizhou Province government. The new company, Guizhou Huaxintong Semiconductor Technology, will design, develop, and manufacture chipsets for servers. Qualcomm will provide research support and server chip technology licenses to the joint venture.

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Guizhou, China. Source: Pixabay.

The company will launch with an initial investment of 1.85 billion RMB ($280 million), and be 55% owned by the Chinese government, and 45% owned by Qualcomm. In a press release, Qualcomm President Derek Aberle stated that, although Qualcomm had worked with its Chinese partners for more than two decades, the joint venture "represents a significant increase in our collaboration in China."

This move could help ARM Holdings (NASDAQ:ARMH), which provides the chip designs on which Qualcomm's data centers are based, and harm Intel (NASDAQ:INTC), which has faced multiple challenges in the Chinese data-center market. Let's take a closer look at Qualcomm's data-center ambitions, and how it could turn China into the next big battleground for server chip dominance.

Why Qualcomm is expanding into data centers
Qualcomm has lost market share in mobile application processors and wireless modems to low-end rivals like MediaTek over the past year. Several major smartphone makers also decided to develop their own ARM-based CPUs instead of buying Qualcomm's Snapdragon processors. That market shift caused Qualcomm's chipmaking (QCT) revenues and pre-tax earnings to fall 8% and 35% in fiscal 2015, respectively.

To diversify away from mobile devices, Qualcomm expanded into new markets with chips for connected cameras, cars, drones, and Internet of Things devices. Another potential area of growth is the data-center market, which Intel dominates with its x86 Xeon chips.

Last October, Qualcomm started sampling its first data-center chips, which use 24-core Qualcomm CPUs with custom ARM cores, to tier-1 data centers. Qualcomm claims that these chips "will be competitive in performance and price" against Intel's Xeons. In 2014, ARM said that its chip designs could claim 10% of the data-center market from Intel by 2017.

Qualcomm paired its data-center CPUs with Xilink's (NASDAQ:XLNX) field-programmable gate arrays (FPGAs) to accelerate workloads. Unlike traditional processors, FPGAs can be reprogrammed, which makes them popular among industries that need chips for custom tasks. This partnership directly counters Intel's acquisition of FPGA-maker Altera.

Another challenge for Intel in China
Intel's Xeon chips still power most Chinese servers, but the government has grown wary of American tech ever since the Snowden leaks revealed NSA back doors in hardware and software. In response, China has accelerated its efforts to grow homegrown CPUs like BLX IC Design's Loongson chips. These chips are still much-less powerful than Intel's Xeons, but they could catch up within the next decade.

To make matters worse, the U.S. blocked more than $1 billion in orders of Intel Xeons to China last year. The U.S. claimed that those sales, which were intended for China's most-powerful supercomputers, would be "contrary to the national security or foreign policy interests" of the United States. This pressure from both sides has created an opening for Qualcomm and ARM to enter the market.

Tianhe

China's Tianhe-2 supercomputer. Source: Chinese Ministry of Science and Technology.

Intel recently unveiled a $100 million "strategic collaboration" with Tsinghua University to protect its data-center market in China. Through the collaboration, Intel will add a new computer-processor module, which would run alongside its Xeons in Chinese data centers. The reconfigurable module, designed by Tsinghua, would "add capabilities that address specific local requirements" -- meaning that it's likely designed to address China's national security concerns.

What Intel stands to lose
Last quarter, Intel's data center only rose 5% annually, to $4.3 billion, slowing down dramatically from 12% growth in the third quarter. For the full year, data-center revenue rose 11%, but Intel previously expected a compound annual growth rate of 15% for the business through 2018. That big miss caused Intel stock to fall nearly 10% the day after its earnings report.

Intel relies on sales growth in its data center, Internet of Things, and memory businesses to offset concerns about its Client Computing (PC and mobile) division, which posted a 1% annual sales decline last quarter. But looking ahead, sales of its data-center chips could remain sluggish as ambitious new challengers enter the market. While Qualcomm is unlikely to conquer the data-center market anytime soon, its growth could still hurt Intel in crucial markets like China.

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Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool recommends Intel. 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.