China’s leading smartphone vendors such as Oppo, Vivo and Xioami aren’t just pursuing the Chinese market. Qualcomm president Cristiano Amon said these companies are “tracking China’s Belt and Road initiative.”
5G pilot plan
Qualcomm often cautions its investors: “We derive a significant portion of our revenues from a small number of customers and licensees, which increasingly includes a small number of Chinese OEMs. If revenues derived from these customers or licensees decrease or the timing of such revenues fluctuates, our business and results of operations could be negatively affected.”
Fully aware of that potential risk, in January 2018 at the Qualcomm China Technology and Cooperation Summit in Beijing, Qualcomm teamed with leading Chinese manufacturers to launch a “5G pilot program.”
Qualcomm pledged to support the smart mobile phone industry in China in the 5G era. Executives from Lenovo, Oppo, Vivo, Xiaomi, ZTE and Wing Tech, as well as Qualcomm President Amon, said they would work together to roll out 5G terminals for commercial use as early as 2019. Through the 5G pilot program, Qualcomm promised to provide Chinese manufacturers with “top 5G commercial terminal platforms, technical expertise and industry leading semiconductor solutions.”
Through the collaboration, Qualcomm and Chinese manufacturers said they would not be limited to new mobile applications. They vowed to focus on other technologies, such as artificial intelligence and the Internet of things.
The 5G pilot plan was supposed to wind down by the end of this year. However, Amon last week told the Chinese press corps in Maui that it will rock on.
Impact of the U.S.-China trade war
When the U.S. government put Huawei on its “entity list,” Huawei had to reduce its reliance on U.S. companies such as Qualcomm.
Notably, however, while the domestic smartphone market in China shrinks, Huawei has expanded its market lead. It has shipped 41.5 million smartphones, garnering a record market share of 42 percent and annual growth of 66 percent, according to Canalys. Chinese observers interpret this phenomenon as the goodwill of Chinese consumers pulling for the home team.
In turn, this development makes Huawei a more pronounced competitor to Qualcomm in China.
Huawei, which develops their own application processors, in the past integrated some of Qualcomm’s chips in certain smartphone models. The current trade ban is likely to accelerate Huawei’s drive for independence from Qualcomm, preferring its own chips to Qualcomm’s.
For the time being, Huawei, which hasn’t developed its own baseband processors, is incorporating modules supplied by Japan’s Murata.
Qualcomm, reportedly earning more than 10 percent of its revenue from Huawei, will have to wait until the U.S.-China trade war ends before expecting Huawei to buy its 5G modem modules.
Qualcomm’s commitments in China
Setting trade war issues aside, Qualcomm’s commitments in China have already grown deep and wide.
Among many Qualcomm contributions, one of the most notable is its collaboration with China’s largest foundry Semiconductor Manufacturing International Corporation (SMIC) on 28nm wafer production. The July 2014 agreement made SMIC one of the first local semiconductor foundries to produce some of Qualcomm’s Snapdragon processors.
In parallel, through Qualcomm Ventures, Qualcomm has been investing in Chinese startups. These include SenseTime, Xiaomi, Thurdersoft and Mobike.
Mobike, for example, is a bike-sharing company, and SenseTime is an AI startup. Thundersoft is a leading Android core technology and solution provider. Qualcomm also backed Xiaomi before it went IPO on the Hong Kong stock exchange in July 2018.
Then there is Huaxintong Semiconductor Technologies (HXT), a high-profile joint venture established in 2016 by Qualcomm and Guizhou, one of China’s poorest provinces. With the Guizhou government holding 55 percent of HXT, the joint venture’s goal was to design and produce Arm-based chips for data-center servers in China.
As of August 2018, Qualcomm and Guizhou reportedly had sunk a combined 3.8 billion yuan into HXT. But as the global market for Arm-based servers remained lukewarm, Qualcomm late last year began reducing employees in its data center unit in the United States, an indication that Qualcomm was planning to retreat from the server-chip sector.
Nevertheless, Qualcomm at the time issued a statement in China supporting the HXT joint venture. This might have been window-dressing, because HXT subsequently ran out of money and decided to close shop.
Did HXT’s bankruptcy hurt Qualcomm’s reputation? Not necessarily, said a Chinese industry source. To the contrary, it became an example of Qualcomm’s commitment to China, the source noted.
In November 2013, Qualcomm’s Beijing headquarters and its Shanghai offices were raided by a Chinese government that suspected violations of China’s anti-monopoly law.
When China slapped Qualcomm with a near-$1 billion fine in February 2014, Qualcomm acquiesced. CEO Steve Mollenkopf said then that Qualcomm was actually “better-positioned as a company in China as a result” of the inquiry. The decision “removed the uncertainty” under which Qualcomm had been operating.
Indeed, as it turned out, the do-or-die commitment Qualcomm made to China then — in a desperate move to hang onto the Chinese market — has been richly rewarded. Qualcomm had made itself indispensable to China’s big global ambitions.