Successful Multinational Corporations in China Series: Qualcomm China [2/2]

Technology Author: Fuller Wang Jul 02, 2022 05:49 PM (GMT+8)

Since China's reform and opening-up, many multinational corporations and groups have achieved success in China. They have not only been successful in their fields, but some also benefitted from wise M&A moves or investments. To answer these questions EqualOcean launches its Successful Multinational Corporations in China and analyzes the critical points of investing in China for investors and people interested in such a topic.

Qualcomm China

As mentioned earlier, we believe that Qualcomm's oligarchy in  5G patents and handset chips has been challenged. However, we can see that Qualcomm seems to have found the way to break through: diversification.

Diversifying route

From a chipsets-focused and patents-focused company to a company with QCT (Qualcomm CDMA Technologies, including handsets, RF Front-End, automotive and IoT), Qualcomm has always kept abreast of the latest weather reports. Qualcomm's RFFE can be traced back to 2010. Qualcomm invested USD 3.1 billion in Atheros, delivering innovative technologies for wireless & wired communications, marking its official entry into the RF Front-End field. The raising giant then acquired fabless semiconductor company Black Sand Technologies in 2014 and turned its research direction to GaAs PA. During this period, in addition to expanding its own product line, Qualcomm also reached a cooperating relationship with TDK's EPCOS. In January 2016, Qualcomm and TDK form a joint venture to draw upon TDK's capabilities in micro acoustic RF filtering, packaging and module integration technologies and Qualcomm's expertise in advanced wireless technologies to serve customers with leading edge RF solutions into fully integrated systems. In 2019, Qualcomm was required to maintain interest in RF360 Holdings and launched the Qualcomm Snapdragon 5G Modem-RF System.

 Qualcomm has also actively deployed in the automotive industry, including but not limited to telematics, connectivity and infotainment (digital cockpit). Beginning with the first-generation Snapdragon 620A in 2014, Qualcomm has released four generations of smart cockpit chips (620A, 820A, SA8155P and SA8295P), upgraded from 28nm-node to 5nm-node base. Several popular models including NIO EC6, ES6, ES8, ET7, XPEV G3i, P7, P5, and Li Auto ONE are equipped with Qualcomm Snapdragon smart cockpit chips. Comparing handset chips with smart cockpit chips, Qualcomm keeps the competitive advantages of handset chips and quickly dominates the smart cockpit chips market.

 Besides the areas that are shown on its 10-K, Qualcomm is also finding ways to do so on invisible fields, such as metaverse. In March 2022, Qualcomm set up USD 100 million funds to invest in immersive XR technologies in an endeavour to help jump-start the metaverse field. From last year to this year, the XR chip market is in a stage of rapid growth, and Qualcomm has almost gained a monopoly position again in this market in recent months. In May this year, Qualcomm announced during MWC 2022 that it has reached cooperation on developing XR-related technology (including spatial computing and metaverse ready technologies). ByteDance is a Chinese company that purchased virtual reality headset maker Pico in 2021, being one of the main players in the Chinese market. We think this is the best reflection that Qualcomm is still deploying new fields

Data storytelling

 The effectiveness of the diversification strategy can be seen at a glance from its financial report Its primary business model QCT revenue increased by 52% year-on-year to USD 9.55 billion, much higher than the expected USD 8.86 billion in Q1 2022, while the QTL revenue decreased by 2% year-on-year to USD 1.58 billion, further indicating that the days Qualcomm rely on its licensing strategy has gone. Qualcomm's handset business performed great in the quarter (up 56% year-on-year), but more importantly, other QCT businesses contributed 34% of its revenue in the first quarter of 2022 and maintained a strong growth rate. among the three segments, the revenue contributed by RFFE QCT and Auto QCT increased by 28.5% and 41.3%, respectively, while IoT QCT even surged by 60.7%.

 As we mentioned, Qualcomm is transforming the technology accumulated in the handset field to the automotive and IoT fields, to explore new cooperation in emerging fields and create a long-term favourable market position. Today, Qualcomm's automotive chip orders are valued at more than USD 16 billion, with a month-on-month increase of more than USD 3 billion. IoT business is another key. The demand for rugged handheld devices in the warehousing, logistics, healthcare industries and robot platforms has accelerated. We also feel that IoT. The data also confirmed this (revenue increased by 61% year-on-year). However, it is worth noting that the smart handset business is still the most important part to drive Qualcomm's performance growth, accounting for more than half of the total revenue. There is evidence that this situation will continue in the near future. Qualcomm announced in March 2021 that it has completed its acquisition of Nuvia, a startup founded in 2019 by three former engineers from Apple’s silicon team. CEO Cristiano Amon said in June 2022 that the company now believed it could beat Apple in the PC market. We think it will bolster Qualcomm’s efforts to compete with Apple Silicon and create custom-designed CPUs, indicating Qualcomm will never be penny-wise and pound-foolish.

Worthy price?

 Qualcomm's selected financial ratios (EV/EBITDA, P/E, P/B) have been hovering at low levels in the recent two-year period. Also, Qualcomm's P/E in the past twelve months has been lower than both the stock market average and industry average, making us hold a long-term bullish view. Given that Federal Reserve is trying to raise target interest rates and reduce its balance sheet in a way that neither inflames inflation nor stifles economic growth (even though it could fail and back to recession), we believe it could be a good time to overweight long-term bullish targets recently (or by the next time Fed adjusted target interests).

Risks to watch

 Although Qualcomm seems to dominate the next decade, we believe that Qualcomm should be alert to two risk points in the near future.


 On the one hand, according to Morgan Stanley, with the de-stocking action of China's handset likely to continue into the second half of this year, considering that about 60% of Qualcomm's profits come from the Chinese market, it is likely to eventually lead to a price war between Qualcomm and MediaTek. MediaTek achieve 110 million chips delivered in 2021, up 42.5% year-on-year, surpassing Qualcomm and securing the top spot in China's mobile phone chip market in 2021. We think it is mainly because of the uncertain relationship between China and the United States, that many domestic manufacturers are also looking for Qualcomm substitutes. MediaTek is naturally the best choice. Besides the political impact, the chips of MediaTek are relatively more cost-effective, especially the Dimensity series. Since Q2 2022, the Android mobile phone brands in China Mainland have lowered their mobile phone sales forecasts many times, representing weak demand in China Mainland, Europe and other emerging markets. As 5G chips and optical lenses are key components of smartphones, with the Android brand in China Mainland shipping season may not be prosperous, 5G chips and optical lens-related industry shipments will also be affected, and Qualcomm may be affected.


 On the other hand, domestic companies bring fierce competition,  especially in the field of auto. Although it has made great achievements in the field of the smart cockpit, it seems that Qualcomm's snapdragon ride platform is not the first choice in the field of autonomous driving. In China's auto market, new EV makers such as NIO, XPEV and Li Auto, are trying to research autonomous systems for autonomous driving, and they are trying to build a more open and flexible system platform to carry their own algorithm stack. The first two use NVIDIA drive Orin system level chips, while the latter uses the products of Chinese chip supplier horizon, which we think put Qualcomm under pressure.

 On the second anniversary of the commercial use of 5G networks in China, Qualcomm CEO Amon sent a message through the social platform to congratulate China on its amazing 5G achievements. The pace of China's digital transformation is accelerating, and the integration of the digital economy and the real economy has brought more and more remarkable results. We believe that Qualcomm will keep thinking about how to cooperate with more industrial partners to achieve rapid breakthroughs in smart cities, smart transportation, industrial Internet and other fields and create a driving force for China's digital economy.