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Samsung Plays Hardball With Qualcomm

By Jamal Carnette, CFA - Jan 18, 2016 at 12:00PM

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It appears Samsung won foundry exclusivity without offering exclusivity in return.

Qualcomm's Snapdragon 810 was excluded from all high-end smartphone units last year. It appears Qualcomm won its way back into 2016 models, but apparently the win didn't come cheap. Source: Samsung.

If you own Qualcomm (QCOM 2.34%), you're certainly looking for 2016 to be a better year than last. Shares of the mobile-focused semiconductor company reported a 33% loss last year versus the broader semiconductor space, which reported a 3% loss in 2015. A combination of a Chinese antitrust lawsuit, continued pressure from low-cost chipmakers in developing markets, and slower-growth smartphone markets weighed on Qualcomm's results.

However, Qualcomm's biggest issue last year was mostly self-inflicted. Last year's flagship chip – the Snapdragon 810 – was prone to overheating. As a result of heating issues, major smartphone maker Samsung (NASDAQOTH: SSNLF) decided not to use the chip, instead opting to use its own Exynos chipset to power its high-end Galaxy S6 model. Sony used Qualcomm's chip, and later had to perform a software fix in order to rectify Snapdragon overheating problems on its Xperia Z3+ handset.

In addition to the loss of direct revenue, Qualcomm also faced considerable damage to its reputation. It was imperative for the company to win spots with its next-gen Snapdragon 820. Earlier reports pointed toward the company repairing bridges with Samsung. However, it appears Samsung isn't being generous merely for the sake of being generous, as Qualcomm's win appears costly.

Samsung will fabricate Qualcomm's chips; Qualcomm will power Samsung's Galaxy
In a press release on Jan. 14, Samsung trumpeted that it has begun production in earnest of its 14nm Low-Power Plus chips. Most notable in the press release was the release of Qualcomm's Snapdragon 820 as one of its "many foundry customers."

The specific inclusion of Qualcomm in the press release, and the verbiage, hints to the fact that Samsung will fabricate the entire Snapdragon 820 output. Samsung winning the entire Snapdragon 820 fabrication had been earlier reported by Recode, but today Samsung confirmed it.

If so, this is a sea change from Qualcomm's modus operandi. For the Snapdragon 810, Qualcomm leaned upon a host of manufacturers to fabricate the chips, in order to encourage price competition. It isn't as if Qualcomm isn't getting anything from sourcing direct from Samsung -- the 14nm FinFET Low Power Plus should fix Qualcomm's prior-gen overheating problems, and shrinks the node size from Snapdragon 810's 20nm.

In addition, of course, it seems Qualcomm is back into Samsung's next Galaxy iteration. Numerous reports point toward Samsung dual-sourcing its chip with the Exynos chip the company used for the Galaxy S6 powering the new unit alongside the new Snapdragon 820. Simply put, it seems that Samsung won foundry exclusivity, whereas Qualcomm did not receive exclusivity as the Galaxy chipmaker. 

A response to Apple?
From the looks of the deal, it seems Samsung negotiated from a position of strength. Not only is the company the world's largest smartphone vendor, but the Galaxy is considered the highest-caliber Android phone, and the company's Exynos has proven to be a capable chip; Qualcomm's last Snapdragon was a reputational disaster. As such, it appears as if the company required full fabrication in order to bring Qualcomm's chip back into the high-end smartphone.

However, in the 14nm market, Samsung may not be on as firm position as one may think. After years of fabricating Apple's A-line series of chips, the last two iterations -- the A8 and current-gen A9 -- were dual sourced from both Samsung and TSMC.

Early reports are that Apple will no longer depend upon Samsung, it's high-end smartphone rival, for chip fabrication, entrusting TSMC for full fabrication, and dealing the company a considerable blow to its 14nm foundry business. Samsung playing hardball with Qualcomm appears to be an opportunistic way for Samsung to replace lost Apple 14nm business.

Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Qualcomm. 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.

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