Being a dominant player in a high-growth industry may have its perks, but in a rapidly changing growing industry, competition can emerge rapidly. RIM and Nokia have learned this lesson the hard way. Qualcomm (NASDAQ:QCOM), on the other hand, is learning to negotiate the treacherous path as a number of competitors such as Nvidia (NASDAQ:NVDA), Intel (NASDAQ:INTC) and Broadcom (NASDAQ:BRCM) have emerged to challenge its dominance in the mobile space.
As if its hands were not already full, a joint venture between some of the biggest Asian names in the wireless industry has now formed, just four months after a similar consortium was called off.  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.
Qualcomm’s China play threatened
China’s smartphone market is blossoming and is expected to overtake the U.S. by the year-end to be the world’s largest smartphone market by volume. Quarterly data already shows China accounting for a majority of smartphone shipments. According to recent market figures from Canalys, 42 million smartphones were shipped to China in Q2 2012, out of a total of 158 million smartphone shipments in the quarter.  As compared to a growth rate of 47% worldwide in smartphone sales, China grew by a whopping 200% over the same period last year to claim a market share of 27%, well ahead of U.S.’s 16%.
Last quarter’s holiday sales may help U.S. shorten the gap but IDC expects China to still remain the leader for the full year with around 21% market share by the year-end. ((IDC: China to pass US in smartphone shipments in 2012, ItWorld, March 15th, 2012)) We expect this to be driven by rising income levels, a burgeoning middle class and heavy smartphone subsidies as carriers look to transition their huge 2G base to 3G for the higher data revenues that 3G brings in. With 3G poised to see an explosion in demand in emerging markets such as China, we expect Qualcomm to be at the forefront of this transition. (see Qualcomm Rides China’s Smartphone Boom As It Reaches One Billion 3G Subscribers)
However, 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. And as Qualcomm is also eying these high-growth markets, it would have had to bring down its prices as well in order to compete. Recently, Qualcomm had to lower its chipset pricing in China in order to compete with low-cost vendors such as MediaTek. (see Qualcomm Lowers Price on Chips to Penetrate China, Emerging Markets).
This would not only affect 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 have an impact on Qualcomm’s chipset sales and dent its market-leading position in LTE basebands. Chipset sales currently make up more than 40% of Qualcomm’s value, with royalties contributing another 34%. Our $69 price estimate is about 17% ahead of the current market price.Notes:
- Fujitsu, NEC, Docomo in smartphone chip JV – Nikkei, Reuters, July 31st, 2012 [↩]
- Canalys Q2: 68% Of All Smartphones Shipped Were Android; China’s The Biggest Market By A Wide Margin, TechCrunch, August 2nd, 2012 [↩]