Why China’s market is a double-edged sword for Qualcomm

Market Realist

Overview: Qualcomm benefits from China's LTE adoption progress (Part 7 of 7)

(Continued from Part 6)

China’s market is a double-edged sword

Qualcomm (QCOM) announced its fiscal 3Q14 earnings on July 23, but the majority of the discussion in the conference call revolved around the dynamics in China. China is an important market for Qualcomm because its earns ~50% of its revenues from China. According to a report from Gartner, year-over-year (or YoY) smartphone sales growth in China in 4Q13 was 86%. This is way higher than the worldwide smartphone sales growth of 36%. Although India and Latin America showed higher growth than China, they’re much smaller markets than China in absolute terms. This is why China is important for Qualcomm.

Qualcomm is facing a barrage of issues in China

Qualcomm beat its own estimates of revenues and profits in the last quarter and credited the success to continued adoption of LTE technology by Chinese telecommunication providers such as China Mobile (CHL), China Telecom (CHA), and China Unicom (CHU). However, China is becoming a double-edged sword for Qualcomm. There are a number of issues that Qualcomm has suddenly encountered in China.

First, it’s undergoing a dispute with a licensee in China over the issue of payment of patent royalties. Second, there’s an added uncertainty behind the timing of the licensing agreement between Qualcomm and some Chinese mobile phone vendors who have started to adopt the LTE technology. Qualcomm mentioned that negotiating licensing deals takes times. This isn’t only true for Chinese smartphone vendors but also for tablet players as these two sets of players can be different. This makes the situation even more complicated for Qualcomm.

Third, Qualcomm is facing another major problem of under-reporting of device sales by Chinese companies whom it has already signed licensing deals with. The motivation behind Chinese companies under-reporting their sales is that it helps them avoid paying large royalties to Qualcomm.

Fourth, the regulations from China government to control the subsidy offered by Chinese telecom providers would hurt the high-end smartphone market in China. It would not only hurt Apple’s (AAPL) iPhone sales in China, but also Qualcomm’s chipsets and royalty business as Qualcomm has long been a supplier of chipsets to Apple.

On top of all these issues, Qualcomm is facing anti-monopoly investigation from China National Development and Reform Commission (or NDRC). Qualcomm mentioned that it is fully co-operating with NDRC, but the timing of the resolution remains uncertain.

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