Qualcomm In Venture With Chinese Chip Maker To Prevent Government Backlash

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Leading mobile chipmaker Qualcomm (NASDAQ:QCOM) struck a deal to help China’s biggest semiconductor foundry, Semiconductor Manufacturing International Corporation (SMIC), advance its technology, as the U.S. chip maker seeks to improve its standing in the country following an antitrust investigation. The foundry has partnered with Qualcomm, Huawei Technologies and the Belgian firm Imec to establish the joint venture. SMIC will have majority control over the new joint venture. The latest move should help Qualcomm develop closer ties with China and its largest chip maker, SMIC. (Read Here)

In terms of chip technology, SMIC is still two or more generations behind its rivals, which include Intel, Samsung and Taiwan Semiconductor Manufacturing Company (TSMC). Although behind industry leaders, SMIC has the support of the Chinese government, which last year released a blueprint that called for the country to lead in the semiconductor market by 2030. The government has also been funding local players, including SMIC, to make this all happen. The new joint venture with Qualcomm hopes to help the Chinese foundry streamline its research operations.

This is not the first time SMIC and Qualcomm have linked up. In the past, Qualcomm has helped the Chinese company develop smartphone processors. However, the latest venture is said to require more advanced technology, for which Qualcomm is obviously ready with more partners, to help produce the iconic Snapdragon chips. Also, as a result of the new deal, SMIC is expected to cut costs in research and development and narrow the technology gap against rivals Intel Corporation and Taiwan Semiconductor Mfg. Co. Ltd. in the production of chips that power mobile devices like smartphones and tablets.

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The question now is that how will this benefit Qualcomm? Qualcomm just had a huge settlement with the Chinese government, so from their perspective they need to be able to sell in China. The logic is if they help SMIC manufacture Qualcomm chips in China, that improves their ability to sell those chips there. The deal will help Qualcomm to use more companies to produce the chips it designs that power many of the world’s most popular smartphones. The strategy is not only profitable, but also a step towards bettering the relationship with China.

Qualcomm president Derek Aberle said “We believe that this venture will serve to better meet the growing needs of local Chinese and global customers who demand high performance, low power mobile devices. The collaboration will also help bring even more advanced processing technology and wafer manufacturing capacity to China, thereby helping China to build capability in FinFET technology.

For Qualcomm, China represents big business. It is not only the largest market for smartphones, but many device manufacturers are based in the country and using Qualcomm’s Snapdragon mobile processors. However, the company still faces competition from Intel and domestic chip vendors, which are all competing to grab a larger share of the mobile processor market.

Our price estimate of $71 for Qualcomm is marginally higher than the current market price. For fiscal year 2015, we estimate the company to report revenue of $29 billion and net income of $8.1 billion. Also, our non-GAAP EPS estimate is $4.70 as compared to the market consensus of $4.79.