Qualcomm Inc. (QCOM:US) is set to get a boost in China.
China Mobile Ltd. (941) earlier this month said it will start offering discounts on smartphones that work on faster networks in China and other countries, in what Hong Kong-based spokeswoman Rainie Lei said is a “main push” for the world’s largest carrier.
That’s set to put Qualcomm in pole position because it’s the dominant supplier of mobile chips that offer faster speeds on more networks, according to Mark McKechnie, an analyst at Evercore Partners LLC in San Francisco. China’s network upgrade is the biggest growth opportunity in the industry this year. Just 1.34 million of China Mobile’s 775.6 million customers were using the latest high-speed services at the end of February, according to its website.
“If you want that kind of volume, you’ve got to give it to Qualcomm,” McKechnie, who has a buy rating on the stock, said.
China Mobile predicts it will sell about 100 million devices for long-term evolution, or LTE, high-speed data services by the end of the year. Qualcomm and Marvell Technology Group Ltd. are the only providers of the five-mode LTE chips, which can connect to more networks, that are in phones currently on sale.
Making deeper inroads into China is a top priority for Steve Mollenkopf, who took over on March 4 as Qualcomm’s chief executive officer.
“We invested really early in LTE when there wasn’t even a market and that’s one of the things that puts us generations ahead,” said Tim McDonough, vice president of marketing for Qualcomm Technologies.
The San Diego-based company, whose chips and technology are key components in Apple Inc. (AAPL:US)’s iPhone and Samsung Electronics Co. (005930)’s Galaxy family, has faced hurdles in China.
Qualcomm is largely absent from devices on China Mobile’s network because the state-owned carrier adopted a related system it said was developed locally. In November, Qualcomm disclosed that China’s National Development and Reform Commission had begun an investigation related to an anti-monopoly law. The NDRC said details of the probe are confidential, according to Qualcomm, which said it knows of no charge by the agency that it violated the law.
The upgrade will also test how MediaTek Inc. (2454) and others will be able to fend off competition from Qualcomm, which introduced the faster chips more than two years ago and had 100 percent of the market for LTE chips with integrated processors last year. That helped the U.S. company grab 64 percent of the total $18.9 billion market in 2013, according to market researcher Strategy Analytics. MediaTek was its closest rival with 12 percent.
“They have a huge advantage in terms of this introduction and it’s going to last for at least three quarters,” Sravan Kundojjala, an analyst at Strategy Analytics, said of Qualcomm. “Next year, there’s going to be intense competition.”
MediaTek, based in Hsinchu, Taiwan, had about 35 percent to 40 percent of the total smartphone chip market in China last year, neck-and-neck with Qualcomm, Chief Financial Officer David Ku told Bloomberg News. While Qualcomm has the early lead in LTE chips, the Taiwanese company’s current one-to-two quarter lag is better than the seven-to-eight gap it had when third-generation wireless technology rolled out, Ku said.
The Taiwanese company anticipates that 80 percent of the 10 million to 15 million LTE chips it sells this year will be in China. With a target of 300 million smartphone chips for all technologies this year, China Mobile’s focus on five-mode handsets will have little impact on MediaTek’s full-year sales, Ku said. MediaTek rose 1 percent in Taipei trading today.
Qualcomm chips will probably be in about 70 percent of China Mobile’s LTE-capable phones this year, Kundojjala said. Marvell will follow with as much as 15 percent, he estimated.
Marvell, which has its headquarters in the U.S., said its chips, including models with integrated processors, are already designed into phones for China Mobile’s network from manufacturers such as Samsung and Lenovo Group Ltd. (992) MediaTek said phones based on its chips will go on sale in the second quarter, although most of its customers are working on devices that won’t make it into the subsidized category.
Intel Corp. (INTC:US), Broadcom Corp. and Nvidia Corp. are all working on chips that will be capable of LTE and eligible for China Mobile’s subsidy category. None have five-mode-capable products on the market right now.
The decision by China Mobile, majority-owned by the government, is driven by the inclusion of Qualcomm’s LTE technology into handsets sold by local manufacturers such as Xiaomi Corp. and ZTE Corp., which will help them make the jump to export markets, according to Christopher Rolland, an analyst at FBR Capital Markets in New York. Using chips capable of accessing more networks makes it easier for phone makers to sell the same model in multiple countries, saving on research and development costs, he said.
“Most people with their design budgets don’t want to do 13 versions of their phone,” Rolland said. “People want to design a world phone.”
China Mobile isn’t mandating that devices connected to its LTE service are five mode, according to Lei. The products that it buys and then sells at a subsidized price will mostly be from that category though, the spokeswoman said. China Mobile shares rose 1.6 percent in Hong Kong trading today.
The carrier, which has twice as many subscribers as the U.S. has people, is following other service providers around the world and in its home market in upgrading its network as it seeks to stem declining market share. To help the new service take off, China Mobile’s cost of subsidies will climb 29 percent to 34 billion yuan ($5.5 billion) this year, the company predicted.
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