Must-know: Chinese subsidy regulations will impact Qualcomm
Overview: Qualcomm benefits from China's LTE adoption progress (Part 6 of 7)
Chinese subsidy regulations
In the prior parts of the series, we have been discussing the issues that Qualcomm (QCOM) is facing in China in respect to the royalty or technology licensing business (or QTL). The concept of selling subsidized smartphones in lieu of a two year contract is quite common in the U.S. However, this concept is new in the Chinese market. Early this year, China’s telecommunication providers—China Mobile (CHL), China Unicom (CHU), and China Telecom (CHA)—had started to sell the Apple (AAPL) iPhone 5S at a subsidized price. However, it seems that the Chinese government wants to stop the practice of smartphone subsidies.
How the regulation will hurt Qualcomm
According to a report from AppleInsider citing UBS analyst Steven Milunovich as the source, China’s government has asked Chinese telecommunication providers to cut their marketing costs by 20%, which will include a cut on smartphone subsidies. If this happens it wouldn’t just impact high end smartphone vendors like Apple, but also Qualcomm. Qualcomm has long been a supplier of chipsets to Apple devices for a long time. As a result, the regulation would hurt Qualcomm in two ways.
First, it will impact Qualcomm’s chipset revenues because high end smartphones carry high priced chipsets and help push up the average selling price of its chipsets. Second, it benefits Qualcomm’s royalty business, which depends on the smartphone average selling price. More sales of high end smartphones would boost Qualcomm’s chipsets (or QCT) as well as the royalty business.
According to a report from Umeng, China’s largest analytics firm, and as the previous chart shows, 27% of China’s smartphones were sold for over $500 in 2013. 27% is a substantial number. The regulation would impact the high end smartphone market in China.
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