The U.S. Commerce Department added Chinese tech giant Huawei, the world's largest telecommunications equipment maker, to a trade blacklist last year. That restriction barred any American company from selling products to Huawei without obtaining a special license.
However, Qualcomm (NASDAQ:QCOM), the world's largest mobile chipmaker, recently petitioned the Trump administration to loosen some of those restrictions and allow it to sell its smartphone chips to Huawei. Qualcomm argues the blacklist should target only Huawei's leading position in the networking equipment market and not the smartphone market -- where it ranks second globally behind Samsung (OTC: SSNLF).
It's unclear if Qualcomm's lobbying campaign will succeed, but investors should understand the chipmaker's three main motivations.
1. Losing "billions of dollars" in China
Qualcomm generated 48% of its revenue in China last year, but it doesn't disclose its exact revenue from Huawei. In the past, Huawei mainly installed its own HiSilicon Kirin chips, Qualcomm's Snapdragon chips, and Taiwanese chipmaker MediaTek's chips in its phones. Qualcomm also earns wireless licensing fees from Huawei on each smartphone sold.
Huawei is currently the largest smartphone maker in China, according to Counterpoint Research, with a market share of 41% in the first quarter of 2020. Its three closest competitors -- Vivo, Oppo, and Xiaomi (OTC:XIACF) -- also mainly use Qualcomm and MediaTek's chips.
Qualcomm argues that blacklisting Huawei's phones would cost it "billions of dollars" in chip revenue from China, according to a petition reviewed by The Wall Street Journal, as it cedes the market to its smaller rivals.
2. Losing Huawei's orders to MediaTek and Samsung
Back in May, the Commerce Department tightened its rules to bar foreign companies that use American technologies in their supply chains from serving Huawei. That change forced Taiwan Semiconductor Manufacturing (NYSE:TSM), , or TSMC, the world's largest contract chipmaker, to stop manufacturing Huawei's Kirin chips.
The sudden suspension of Huawei's first-party chips represented a major opportunity for Qualcomm and MediaTek. Unfortunately for Qualcomm, the blacklist also prevented it from shipping its newest chips -- which TSMC also manufactures -- to Huawei.
However, MediaTek manufactures its chips at its own foundry, and it continues to sell mobile-chip sets to Huawei. Huawei has also been negotiating with Samsung, which produces its own Exynos chipsets for its phones, to procure additional mobile chips. Huawei might also try to persuade Samsung, which competes against TSMC in the foundry market, to manufacture its Kirin chips.
Qualcomm claims those setbacks would "cause a rapid shift in 5G chipset market share in China and beyond" and "hamper American research and leadership on 5G issues." Other Chinese companies -- including Vivo, Oppo, and Xiaomi -- could also follow Huawei's lead and divert more orders away from Qualcomm.
3. A fear of antagonizing China again
Qualcomm generates the majority of its revenue from its mobile chipsets and modems, but most of its profit comes from its licensing business.
Five years ago, Chinese regulators fined Qualcomm nearly $1 billion for anticompetitive practices and forced it to lower its wireless licensing fees for Chinese companies. Qualcomm complied and painstakingly renegotiated licensing deals with each smartphone maker.
But last year, Huawei stopped paying licensing fees to Qualcomm, claiming its cut was too high. Qualcomm finally settled that dispute with Huawei by signing a new licensing agreement in July.
If Qualcomm stops shipping its chips to Huawei, it could jeopardize that fragile agreement and antagonize Chinese regulators again. I'm not saying China will fine Qualcomm again or Huawei will break its agreement, but both those events occurred with very little warning.
Therefore, Qualcomm probably wants to stay friendly with Huawei and the Chinese government -- but the Trump administration's actions are making it tough to maintain the peace. At the very least, however, Qualcomm's lobbying efforts show China that it's not on the same page as President Trump.
The key takeaway
The escalating tech war between the U.S. and China has made it tough for companies on both sides to stay neutral. The trade blacklist certainly hurts Huawei, but it also hurts the company's American suppliers.
Qualcomm remains poised to profit from the expansion of 5G networks, but investors should keep an eye on its Chinese business. If left unchecked, the Trump administration's actions against Huawei could spark a disastrous chain of events that could hand Qualcomm's Chinese business to MediaTek and Samsung.