Chip giant Intel (INTC -1.60%) reported earnings last night, and investors were none too happy with the digits, as shares are down nearly 3% as of this writing. Revenue came in at $13.5 billion, at the high end of Intel's toned-down guidance. Fellow Fool Anders Bylund has a broader breakdown for you, while I'm honing in on an important storyline beneath the headline figures: China.
The Middle Kingdom
Weakness in PC sales in China were a contributing factor to the company's soft third quarter and uninspiring fourth-quarter sales guidance of $13.6 billion with $500 million of wiggle room. Here are a couple of snippets from the conference call relating to China:
We talked about that when we did the pre-announcement about a month ago, and the surprise there was that China, which had been very strong, turned weak on us on top of a continuing weakness in the mature markets of the U.S. and western Europe.
CEO Paul Otellini continued:
In terms of China, the slowdown there was -- it's principally a notebook business, and the slowdown there was in consumer notebooks.
This is particularly striking as just over a year ago, China surpassed the U.S. as the world's largest PC market by units. At the time, market researcher IDC had predicted that China would see unit shipments of 85.1 million in 2012, topping the 76.6 million that were expected stateside. A July estimate from IHS iSuppli expects China to see a total of 83.6 million PC unit shipments.
What turned the Chinese PC market on its head?
Short answer: mobile
Stop me if you've heard this one before, but mobile devices are where the next growth area in computing is. That's a conundrum for Intel, as it doesn't have any major spots in mobile applications processors, in stark contrast to its domination of PC processors. This year saw a similar storyline pan out as well, as just months ago China became the largest smartphone market in the world.
IDC expects the world's most populous nation to comprise 26.5% of all smartphone shipments, driven by demand on the low end for Google (GOOGL 0.69%) Android devices and on the high end for Apple (AAPL -0.81%) iOS gadgets. For the first time ever, smartphone sales overtook feature phone sales in China, with the 44.4 million smartphones shipped comprising 51% of the market in the second quarter.
Android and iOS activations combined soared a mind-boggling 401% between July 2011 and July 2012, far outpacing all other geographies, including the other BRIC nations of Brazil, Russia, and India.
Source: Flurry Analytics.
It should be clear by now that mobile device sales are cutting into PC sales, a clear detriment to Intel's results. Who gains from Intel's loss?
Where do we start?
Mobile-chip makers are picking up where Intel left off. In smartphones, Qualcomm (QCOM -2.53%) is the leader with 48% revenue share. Apple designs the chips for its iPhones and has Samsung manufacture them. When it comes to the low-end Chinese market, MediaTek in particular has ridden that market segment to grow 13-fold during the first half of this year.
Tablets are a different story. Apple's dominant iPad is similarly powered by its own silicon. NVIDIA (NASDAQ: NVDA) has been gaining much more traction in tablets than smartphones with its quad-core Tegra 3, a trend that CEO Jen-Hsun Huang sees as here to stay.
While Intel continues to put together its mobile game plan, these companies will continue to capitalize.
All's not lost
Intel has already made its way into a select number of Android smartphones, though none of them target the Chinese market yet. Chipzilla has already worked with Google to optimize the operating system for its chips, and Google subsidiary Motorola recently released the RAZR i that sports Intel inside targeting the European market.
Microsoft Windows 8 is Intel's best bet with tablets, even though Otellini doesn't expect any near-term upside from the new operating system, as OEMs remain cautiously optimistic regarding its prospects.
For now, as smartphones continue to top the shopping list for discretionary spending, Intel's loss is Apple's gain.
