The Qualcomm–China Paradox

How Industry Strength and Competition Can Coexist

In late 2014 and early 2015, Qualcomm was on the defensive in China. It faced intense rivalry from MediaTek as well as challenges from the national regulator — the National Development and Reform Commission — that resulted in a succession of manufacturers withholding royalty payments.

Fast-forward to 2018 and Qualcomm’s position is now very different. The company eventually complied with the commission in February 2015, accepting a fine of $975 million and rectification terms including lower royalty rates of 65 percent of a phone’s net selling price. This is by no means the end of regulatory hurdles on a global basis, but Qualcomm adapted, and a host of new agreements followed with a broad number of Chinese manufacturers.

Since then, Qualcomm’s business has flourished in China. Although it wasn’t widely appreciated at the time, the negotiation created a platform for a new wave of investment and growth with Chinese manufacturers at a crucial point in the expansion and maturation of the country’s smartphone industry. Qualcomm invested heavily in local sales and support in tandem with a more competitive array of chipsets, from the premium-tier Snapdragon 800 series to the entry-level Snapdragon 200 line, covering a multitude of prices and configurations.

Qualcomm’s leadership is clear. It has a very strong position by virtue of its investment in research and development, the size of its intellectual property portfolio and breadth of its product set and solutions. However, one thing that’s overlooked is the role this has played in enabling the competition and diversity that characterizes the smartphone ecosystem in China. Qualcomm’s wealth of reference designs and chipset platforms has substantially reduced barriers to entry, and allowed Chinese original design and equipment manufacturers to compete not just in entry and mid-tier segments in the country, but across a full range of segments domestically and, increasingly, internationally.

We believe that Qualcomm’s latest efforts with Chinese manufacturers are a sign of its strength in China and its opportunity for growth. But more importantly, they highlight its part in creating a rich and highly competitive Android ecosystem. Of course, this poses a considerable threat to established manufacturers like Apple, Samsung and Huawei.

Qualcomm’s announcement of the 5G Pioneer initiative with Lenovo, Oppo, Vivo, Wingtech, Xiaomi and ZTE is testament to this. By working with Qualcomm, these manufacturers ensure they’re at the leading edge of development of 5G handsets and can compete internationally on a level playing field in the premium tier when smartphone designs launch in 2019. Without Qualcomm, this wouldn’t be possible. MediaTek is unlikely to have 5G solutions ready for the first batch of network launches. Similarly, whilst Intel will be a player in 5G, it doesn’t yet rival Qualcomm in modem technology, nor does it have widespread commercial relationships with smartphone makers beyond Apple.

Qualcomm is unquestionably well placed as the industry transitions to 5G. The added complexity of next-generation technology also opens further opportunity to increase the content it sells into smartphones. The company believes it has a serviceable addressable market of $20 billion by 2020 for radio frequency (RF) front-end chips through its joint venture with TDK. Lenovo, Oppo, Vivo and Xiaomi are each pledging to multiyear purchases of Qualcomm’s RF front-end solutions (RF components between the modem and antenna), and join recent design wins with Google, HTC, LG, Samsung and Sony. Their motivations are straightforward: integration, cost and time to market.

However, Qualcomm’s business isn’t immune to headwinds. Its industry leadership means its licensing model continues to be a source of regulatory scrutiny, its dispute with Apple continues to weigh on revenue from its QTL unit and its supremacy in connectivity is the very reason the business is being keenly pursued by Broadcom (see Instant Insight: Broadcom Bids to Acquire Qualcomm). The pursuit of silicon strategies in vertical markets by Apple, Samsung, Huawei and others also remains a challenge. However, this is nothing new, and Chinese manufacturers’ need to rival established smartphone players is exactly why Qualcomm’s position is strengthening rather than weakening.

Qualcomm’s leadership in mobile chips is undeniable, but it’s also the enabler of a vibrant and competitive smartphone marketplace.