Qualcomm logo

Image source: Qualcomm.

Qualcomm (NASDAQ:QCOM) is fast losing supremacy in smartphone application processors (APs). Strategy Analytics estimates that Qualcomm controlled 42% of the smartphone AP market in 2015, down from its 52% share in 2014. Though the full-year numbers for 2016 aren't in as of this writing, Qualcomm's share in the smartphone AP market fell to 39% in the first half of last year.

MediaTek is moving in

Qualcomm's weakness is driven by the rise of a potent rival in the form of MediaTek (OTC:MDTKF). The Taiwanese manufacturer has been gradually eating into Qualcomm's share of the smartphone AP market by launching affordable processors to power both low- and midrange smartphones. The strategy of targeting the budget segments of the smartphone market has worked wonders for MediaTek so far, as its market-share gains indicate.

MediaTek increased its smartphone AP market share to 23% in the first half of 2016, according to Strategy Analytics, compared to just 14% at the end of 2014. It has eclipsed Apple to become the second-largest smartphone AP company, and poses a big challenge for Qualcomm.

However, it seems that Qualcomm has managed to hold back the erosion of its market share to some extent. As the numbers from Strategy Analytics indicate, Qualcomm's market share losses slowed down in the first half of 2016. The company lost only 3 percentage points of market share during this period, compared to a loss of 10 percentage points during 2015.

A fuller picture will emerge after Strategy Analytics releases its 2016 report, but it looks like Qualcomm's strategy of focusing more on the budget segment of the market is reaping rewards.

Qualcomm's going low to maintain its share

In 2015, Qualcomm renamed its Snapdragon 620 and 618 chips to Snapdragon 652 and 650, respectively, to further differentiate them from their predecessors. These two chips were originally launched at the beginning of 2015 to target the midrange mobile market, and were moderate successes for Qualcomm.

Snapdragon logo

Image source: Qualcomm.

For instance, fast-growing Chinese smartphone company Xiaomi decided to use the Snapdragon 650 in its Redmi Note 3 smartphone for the Indian market, in place of the MediaTek processor. Additionally, the Snapdragon 652 is being used by midrange smartphones from LeEco, Vivo, Oppo, and Xiaomi, and powers the first augmented-reality-enabled device using Tango from Alphabet's Google -- the Lenovo (NASDAQOTH: LNVGY) Phab 2 Pro.

Additionally, popular midrange smartphone companies are increasingly adopting Qualcomm's processor over MediaTek's. Leaks reported by other outlets suggest that Xiaomi will launch three variants of its next flagship, two with Qualcomm chips (one each for the midrange and the high end) and one with a MediaTek chip (for the budget market).

The common link among all these Chinese companies is that they are fast capturing bigger portions of the global smartphone market. In fact, Vivo and Oppo are among the top six smartphone manufacturers globally, according to research from IDC. What's more, the budget and midrange devices from these companies are gaining strong traction in emerging markets such as India.

In addition to Samsung, Xiaomi, Lenovo, Oppo, and Vivo make up the top five smartphone sellers in India. This is big news for these Chinese players, as Euromonitor International expects India's smartphone sales to double by 2020 to 200 million units.

Therefore, the market for budget and midrange chips is going to be huge as smartphones from the Chinese companies continue to gain traction. This is why Qualcomm has been churning out smartphone APs for this segment of the market quite regularly, and the next launch might not be far off.

What's next?

Qualcomm is rumored to be manufacturing the Snapdragon 660 using the 14nm fabrication process rather than the 28nm process of its predecessors and rumors indicate that Xiaomi will be a customer. A leaner manufacturing node theoretically translates into superior performance and lower power consumption, so Qualcomm should deliver a better chip.

In comparison, Qualcomm competitor MediaTek currently uses a 16nm manufacturing process in its Helio P35 mid-range chips. If Qualcomm is able to deliver a better performance in its midrange application processors, it could gain an upper hand over MediaTek's current processor lineup. What's more, the rumor mill is buzzing with the possibility of both Vivo and Oppo using the Snapdragon 660 in their phones later this year.

As Qualcomm raises its game in the midrange smartphone AP market, it should find more business from Chinese smartphone makers. Digitimes Research expects Qualcomm to further consolidate its position at the top of the smartphone AP market this year after a strong 2016 -- not surprising, given its focus on the fast-growing midrange segment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.