By Noel Randewich
SAN FRANCISCO, July 3 (Reuters) - Qualcomm, which makes mobile chips, said on Thursday that Chinese contract manufacturer SMIC would produce its Snapdragon processors.
The agreement with SMIC suggests Qualcomm aims to shore up capacity for future demand but it could also improve Qualcomm's relationship with the government in China, a key growth market where the U.S. chipmaker has been under antitrust scrutiny.
Qualcomm said in a news release it is working in China with SMIC, or Semiconductor Manufacturing International Corp, on 28 nanometer manufacturing technology used to make its Snapdragon chips, which are used widely in smartphones.
SMIC has previously made power management and other chips on behalf of Qualcomm but the Snapdragon agreement signifies a technological step up in the two companies' relationship.
Qualcomm is a major customer of Taiwan Semiconductor Manufacturing Co Ltd, the world's leading contract chip manufacturer. In 2012, a slower-than-expected launch of 28 nm production at TSMC affected the supply of chips to customers including Qualcomm and Nvidia.
"You're going to have an iPhone launch, then holiday selling season. There could be a pretty substantial increase in wafers for back half (of 2014), said FBR analyst Chris Rolland.
SMIC is the world's fifth largest contract chipmaker, according to market research firm IC Insights, and it trails TSMC in technology.
China's anti-monopoly regulator has accused Qualcomm of overcharging and abusing its market position, and the chipmaker could face a fine more than $1 billion.
Helping SMIC with 28 nm production will mean a boost to China's semiconductor industry and could help SMIC offer similar services to customers beyond Qualcomm.
The Chinese government has placed enormous emphasis on moving the world's second-largest economy up the technology value chain in areas such as semiconductors.
TSMC is now ramping up newer 20 nm manufacturing technology, allowing for increased power and efficiency by packing more transistors onto each chip.
(Reporting by Noel Randewich; Editing by Bernard Orr)