Last year, the US Department of Commerce blacklisted Chinese tech giant Huawei, the largest maker of telecommunications equipment. That restriction prevents any U.S. company from selling products to Huawei without obtaining a special license.
However, Qualcomm (NASDAQ: QCOM), the world’s largest mobile chipmaker, the Trump administration recently filed a petition to loosen some of those restrictions and allow its smartphone chips to be sold to Huawei. Qualcomm claims that the blacklist should only target Huawei’s leading position in the network equipment market and not the smartphone market – where it ranks second globally. Samsung (OTC: SSNLF).
It is unclear if Qualcomm’s lobbying campaign will succeed, but investors need to understand the chipmaker’s three main motivations.
Image source: Huawei.
Lose “billions of dollars” in China
Qualcomm generated 48% of its revenue in China last year, but it does not disclose its exact revenue from Huawei. In the past, Huawei has mainly installed its own HiSilicon Kirin chips, Qualcomm’s Snapdragon chips, and Taiwanese chipmaker MediaTek’s chips in their phones. Qualcomm also incurs Huawei’s wireless licensing costs on every smartphone sold.
Huawei is currently the largest smartphone maker in China, according to Counterpoint Research, with a market share of 41% in the first quarter of 2020. Its three closest competitors – Vivo, Oppo, en Xiaomi (OTC: XIAC.F) – also mainly use chips from Qualcomm and MediaTek.
Qualcomm claims blacklists of Huawei’s phones would cost “billions of dollars” in chip revenue from China, according to a petition evaluated by The Wall Street Journal, because it lends the market to its smaller rivals.
2. Separate from Huawei’s orders to MediaTek and Samsung
Back in May, the Department of Commerce tightened its rules to restrict foreign companies using U.S. technologies in their supply chain service to Huawei. That change forced Taiwan Semiconductor Manufacturing (NYSE: TSM), as TSMC, the world’s largest contract chipmaker, to stop manufacturing Huawei’s Kirin chips.
The sudden suspension of Huawei’s first-party chips represented a great opportunity for Qualcomm and MediaTek. Unfortunately for Qualcomm, the blacklist has also prevented it from shipping its latest chips – which TSMC also makes – to Huawei.
However, MediaTek produces its chips at its own distillery, and it continues to sell mobile chip sets to Huawei. Huawei has also negotiated with Samsung, which produces its own Exynos chipsets for its phones, to purchase additional mobile chips. Huawei might also try to convince Samsung, which competes with TSMC in the foundry market, to produce its Kirin chips.
Qualcomm claims that the deployment “would cause a rapid shift in 5G chipset market share in China and beyond” and “hinder US research and leadership on 5G issues.” Other Chinese companies – including Vivo, Oppo, and Xiaomi – were also able to follow Huawei’s lead and take more orders from Qualcomm.
A fear of antagonizing China again
Qualcomm generates the majority of its revenue from its mobile chipsets and modems, but most of its profits come from its licensing business.
Image source: Huawei.
Five years ago, Chinese regulators fined Qualcomm nearly $ 1 billion for anti-competitive practices and forced them to reduce its wireless licensing fees for Chinese companies. Qualcomm complied and carefully renegotiated licensing agreements with every smartphone maker.
But last year, Huawei stopped paying licensing costs to Qualcomm, claiming the cut was too high. Qualcomm finally settled that dispute with Huawei by signing a new licensing agreement in July.
If Qualcomm stops sending its chips to Huawei, it could jeopardize that fragile deal and antagonize Chinese regulators again. I’m not saying China will find Qualcomm again if Huawei breaks its agreement, but both events happened with very little warning.
That’s why Qualcomm is likely to remain friendly with Huawei and the Chinese government – but the actions of the Trump administration make it difficult to maintain peace. At the very least, Qualcomm’s lobbying efforts show that it is not on the same page as President Trump.
The important takeaway
The escalating tech war between the US and China has made it difficult for companies on both sides to remain neutral. The trade blacklist certainly hurts Huawei, but it also hurts the company’s American suppliers.
Qualcomm remains on the verge of benefiting from the expansion of 5G networks, but investors need to keep an eye on its Chinese business. If left unchecked, the Trump administration’s actions against Huawei could throw up a catastrophic chain of events that could leave Qualcomm’s Chinese company to MediaTek and Samsung.
