In a recent interview, Broadcom‘s (NASDAQ:BRCM) chief executive, Scott McGregor, declared the company’s intention to work toward building a relationship with low cost Chinese smartphone makers as the company focuses on expanding its presence in microchips that allow handsets to connect to the Internet. Broadcom looks ahead to working with manufacturers such as ZTE Corp as it aims to gain share in other emerging markets as well where the demand for low-cost handsets is on the rise. 
Historically, Broadcom has lagged behind in the baseband and application processor market. However, the company has registered a marginal increase in its market share over the years. According to a recent report by Strategy Analytics, Broadcom ranked fourth in the global smartphone application processor market, which at $2.47 billion, posted a robust 55% y-0-y growth in Q1 2o12. Though Qualcomm (NASDAQ:QCOM) retained its leadership position in the applications processor market, it registered a decline in its revenue share due to intense competition from Broadcom and MediaTek in low-end Android smartphone market.  (Read Related Article: Qualcomm Dials Up $69 On Smartphone Demand In Emerging Markets)
Stand-alone processors accounted for 44% of smartphone apps processors in Q1 2012, up from 39% in Q1 2011.  However, baseband-integrated app processors are cheaper for handset makers to use in mobile phones compared to standalone processors. The baseband-integrated app processors strategy of companies such as Broadcom and MediaTek is the prime reason for the growing threat to Qualcomm.
Broadcom is looking at developing new chips compatible with mobile phones in China as the current chips produced by the company are only compatible with China Unicom phones. We believe that Broadcom’s focus on the rapidly growing low-cost smartphone market in emerging countries could turn out to be a good long-term strategy, and could further pull up its market share in smartphone application processors. However, with the continuously evolving Chinese semiconductor industry, Broadcom might face intense competition from the other market players.
China Leads the World in Smartphone Sales
With the increasing adoption of mobile devices globally, smartphones and tablets are slated to fuel growth in the semiconductor industry, going forward. Much of this growth is presently coming from the emerging economies with China leading the pack, so far. According to estimates by Canalys, smartphone shipments in China registered a phenomenal y-o-y growth of 199%, shipping close to 42 million smartphones in Q2 2012. In comparison, the worldwide smartphone sales grew by only 47%. Bypassing the U.S., the country accounted for 27% of the global smartphone shipments in Q2 2012. 
Low-end smartphones are growing at a rapid pace in emerging markets such as China, and with a relatively low smartphone penetration, many mobile semiconductor manufacturers are trying to penetrate these markets. China, for example, has 3G penetration of about 17%, but smartphone sales are growing rapidly. This gives most chipset players an even ground to grow their market share.
We have a price estimate of $45.99 for Broadcom, a premium of around 30% to the current market price.Notes:
- Broadcom Seeks Links to China’s Smartphone Market, The Wall Street Journal, August 22, 2012 [↩]
- Strategy Analytics: Smartphone Applications Processor Revenue Soared 55 Percent in Q1 2012, Market Watch, August 7, 2012 [↩] [↩]
- Canalys Q2: 68% Of All Smartphones Shipped Were Android; China’s The Biggest Market By A Wide Margin, Tech Crunch, August 2, 2012 [↩]