Mobile Weekly Notes: Apple, Samsung and Quacomm

The past week has seen quite a few developments in the mobile sector. Multiple reports about the smartphone shipment numbers in the second quarter of 2012 have come out, each claiming that Samsung had nearly double the smartphone sales as Apple (NASDAQ:AAPL) during the quarter. With demand for 28nm chipsets at a high, Qualcomm (NASDAQ:QCOM) seems to be considering buying a stake in UMC in order to have greater control over its supply chain and secure supply of the chipsets. Meanwhile, a consortium of Asian giants in the wireless industry have come together to develop home-grown mobile chipsets and reduce dependence on foreign players such as Qualcomm.

Apple

After several quarters of battling it out for the top position in the smartphone market, it seems Samsung has pulled ahead of Apple with a second consecutive quarter of strong smartphone sales. Strategy Analytics revealed in a recent report that Samsung managed to ship more than 50 million smartphones in Q2 2012, almost twice as many as Apple during the same period. This followed the 44.5 million smartphones that Samsung shipped in the previous quarter, also ahead of Apple’s 35 million iPhone shipments during the quarter.

The past year has seen Samsung  double its market share to more than 36% in Q2 2012 from about 18% during the same period last year. We believe that a major part of the company’s success can be attributed to its phenomenal Galaxy S III launch as well as a much larger portfolio of smartphones that address more market segments than the iPhone does. However, it is too soon to say that Apple is threatened by Samsung’s resurgence in the smartphone market since most of its big market share gains have come largely at the expense of others such as Nokia and RIM as opposed to Apple, which lost less than 1% market share. Also, the iPhone 4S was more than two quarters old when the Galaxy S III was launched. With numerous rumors about the iPhone 5 circulating in the media, we believe that many customers may have postponed purchasing new iPhones in anticipation of the iPhone 5.

The pent-up demand might mean a phenomenal holiday quarter for Apple, like last year, but it also puts its stock under the risk of the iPhone 5 not meeting customer expectations. Meanwhile, the company’s margin compression could continue into the next quarter as well, as expectations of an imminent iPhone 5 release strengthen. (see Apple Falls Behind Samsung In Smartphone Sales But iPhone 5 Is Near)

Qualcomm may buy UMC stake

Qualcomm seems to be making good progress on addressing its 28nm supply crunch. Following the recent deals it made with Samsung, UMC and Globalfoundries to supplement its main foundry TSMC – initial rumors that were later confirmed by Qualcomm on its earnings call when it said that it has four 28nm sources – the company is now rumored to be mulling buying a stake in UMC to secure supply. This rumor follows UMC’s recent offer of a 10% stake to anyone who wants to become a ‘strategic partner’ as it seeks to raise money and catch up with TSMC.

If Qualcomm does acquiesce, it will have a greater say in UMC’s operations and be able to jump ahead in the queue for capacity, securing supply for future shortages. Qualcomm has guided for 28nm supply to fall short of demand throughout the year, but it believes its efforts to ramp up supply will help close the gap by the year-end. It has also said that its operating margins will decline in the near term as it continues to invest to ensure greater control over its supply chain. Investing in the supply chain as well as having multiple vendors not only helps Qualcomm diversify the risk of one vendor missing targets, but also prepares its supply chain for the strong demand for mobile chipsets in the future. (see Qualcomm Moves To Bolster 28nm Supply Chain Further; May Buy Stake In UMC)

Asian threat to Qualcomm

Just four months after a joint venture between some of the biggest names in the Asian wireless market was called off, a new one has formed with many of the original founders. Of the original five that had initially come together last year, only Fujitsu, NTT DoCoMo and NEC Corp agreed to create a new collaboration named Access Network Technology Ltd., with Samsung and Panasonic dropping off. However, the idea still remains the same – to develop home-grown mobile chipsets and reduce dependence on foreign players such as Qualcomm. While the focus initially will be on the Japanese market, Fujitsu hopes to expand internationally and capture 7% of the global market share of smartphone chips by 2014.

With the emerging Asian markets expected to see an exponential growth in the sales of 3G-capable smartphones in the coming years, this could evolve into a major threat to Qualcomm in the future. If the Fujitsu joint venture takes off, not only will it mean the entry of another strong competitor in a market that is increasingly looking crowded right now, but also bring down the average pricing of mobile chipsets in the emerging markets. This would not only affect Qualcomm’s chipset sales but also licensing revenues, which are calculated as a % of the mobile phone ASPs. Lower chipset costs would cause handset vendors to cut the prices of smartphones, implying a decline in royalties for Qualcomm. The JV’s focus on bringing out LTE products may also dent Qualcomm’s market-leading position in LTE basebands and have an impact on chipset sales.

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