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6 June 2017

Latest Chinese venture for Qualcomm focuses on mass market handsets

China has been seen as a significant threat to Qualcomm’s dominance of its market. The US firm came to a settlement of the antitrust case against it in the country, but at the cost of lower royalty rates and a long fight (now mainly won) to get local companies to sign up for licences. And rivals from Greater China, such as MediaTek, have been eating into Qualcomm’s market share and putting pressure on its prices and margins.

However, China is also a major opportunity for a company which remains ahead of the pack in the advanced state of its technologies in key markets. Qualcomm has been steadily offsetting its disadvantages in the country via new partnerships and investments. It has set up venture funds in cooperation with local and state-run institutions, to foster goodwill and also to have access to some of the innovations coming out of the huge Chinese investment in semiconductor R&D. It has signed a Chinese foundry partner, SMIC, and created a joint venture in the country for its new line of server chips, Centriq.

Now it has announced another joint venture, JLQ Technology, far removed from advanced servers – this will focus on design, testing and sales of chipsets for mass market smartphones. Qualcomm is partnering with Jianguang Asset Management (JAC Capital); Leadcore Technology, a subsidiary of Datang Telecom Technology; and Wise Road Capital.

The group will combine Qualcomm’s technology with Leadcore’s R&D capabilities and its deep relationships within China, plus the financial cloud and connections of the two capital firms.

Like Intel’s investment in local handset chipset supplier Spreadtrum, this deal could help Qualcomm to improve its access to Chinese phonemakers, and also enhance the tough economics of supplying the components for low cost devices – the main area of growth in the cellphone space, but one which eats into the margins of US suppliers if they approach the sector via their usual channels.

“With China’s growing consumption of consumer chipsets and a well-developed smartphone ecosystem, this joint venture will be well-positioned to tap into the growing consumer demand in China,” Said William Sun, general manager, JAC Capital. “We believe the establishment of this Joint Venture in IC design will be beneficial for consumers and boosting China’s IC design industry.”

“This joint venture further demonstrates Qualcomm’s long term commitment to the China mobile industry. This project will help Qualcomm expand its presence to new segments and customers, as an addition to our vibrant and fast growing semiconductor business in China,” said Cristiano Amon, EVP of Qualcomm Technologies.

The potential power of Qualcomm in China, if it plays its cards right with local partners, was highlighted by the defensive response of one of the country’s largest hi-tech organizations, Tsinghua Unigroup, owner of Spreadtrum, a major supplier of smartphone modems and other chips, and a key partner of Intel (which has an investment in the firm). Chairman Zhao Weiguo told a Global Semiconductor Alliance event in Shanghai last week that the new JV was a “low-class” tactic aiming to weaken Spreadtrum Communications’ competitiveness.

“There are always some people who want to curb the development of China’s local high-tech industries,” he commented, saying that the new venture will pose a threat to local chipmakers which are specialized in chips for low end or midrange handsets. The GSA itself took a diplomatic approach, saying in a statement: “China has a huge market opportunity for our industry and there will be a big fight for market share. We have no doubt that Unigroup will continue to make progress in pushing China forward and taking a global approach. And Qualcomm is of course an icon of our industry… setting the pace of innovation for our industry and setting a high bar for leadership.”

An even more significant alliance for Qualcomm is its server-focused JV with hi-tech Guizhou Province in China, focused on developing and selling the Centriq range in that market. Like JLQ, this should open doors for Qualcomm in order to accelerate its progress in an important area of expansion for its business.

The US firm estimates that server silicon will be a $15bn addressable market for it by 2020, with $6bn of that potential located in China. Baidu, the ‘Chinese Google’ is already testing ARMv8 processors and will be a hot target for the Qualcomm venture, which is working on China-specific implementations of Centriq.

Qualcomm has a 45% stake in Guizhou Huaxintong Semiconductor Technology (GHST), which was valued at CNY1.85bn ($280m) when it was set up. “We felt the fastest way to participate in China was through a joint venture,” said Anand Chandrasekher, head of Qualcomm’s server unit, on announcing the deal. “We view the China market as the second largest server market in the world by 2020 and it’s the fastest-growing market already.”

Centriq will particularly target modern infrastructure such as low power blades for hyperscale cloud platforms. Over time, there will be rising attention to customizing these products for Chinese needs, in the hope that this will be a way to steal share from the dominant Intel, as well as local challengers.

GHST reflects an increasingly common pattern in the Chinese chip industry, in which deals with foreign majors go well beyond conventional sales and marketing, or even co-development, agreements. Instead, the established players commit investment funds and valuable IPR and engineering expertise, helping their new partners to achieve a high class product set more quickly and cheaply than developing from scratch. In return, the outsiders get that all-important market access and understanding, as well as the use of local facilities.

“We are not only providing investment capital, but we also are licensing our server technology to the joint venture and assisting with R&D process and implementation expertise,” said Derek Aberle, president of Qualcomm.

Qualcomm has also set up an investment company to be a vehicle for future start-ups and ventures in the province. This is additional to the $150m China Investment Fund the firm established in 2015.

Guizhou is a valuable partner because it has been early, among Chinese provinces, to make significant investments of government resources into big data. The Chinese technology industry is still very reliant on government backing and private-public partnerships. GHST will be based within a new industrial cluster in the Guian New Area (the new areas are state-funded areas of special economic development). This will include a green data center containing over 2.5m servers, providing services for many companies including all three national telcos.

Another important relationship in China is with the country’s largest foundry, SMIC. Qualcomm is using the company to manufacture some of its products, and they also have a joint venture in Shanghai focused on R&D. They extended an existing but fairly marginal deal in July 2014, to include the equity JV and to transfer some 28nm Snapdragon manufacturing to China.

For Qualcomm, the rise of Chinese manufacturers able to adopt new processes and support premium components will be a relief, giving it greater access to capacity and better negotiating power. In return, it will contribute its own expertise – it says the new deal will “help accelerate SMIC’s 28nm process maturity and capacity, and will also make SMIC one of the first semiconductor foundries in China to offer production locally for some of Qualcomm Technologies’ latest Snapdragon processors on 28nm node.”

Going forward, SMIC will also extend its capabilities in key process technologies like 3DIC and RF front end wafer manufacturing. It is essential that Qualcomm can drive the roadmaps of its foundry partners since, as a fabless provider, it does not have the same level of control over its processes, or ability to innovate, as Intel.