24 June 2019

Qualcomm may need to cut its fees as China goes 4G

To recoup its huge fourth-generation (4G) network investment, mainland’s top carrier China Mobile (00941.HK) needs to popularize the new high-speed technology as quickly as possible. One of the most efficient ways of doing this is to roll out cheap smartphones that will snare more users.

China Mobile has a huge subscriber base of more than 740 million people for all its service offerings. The group said in November that 1,000-yuan (US$165) 4G devices will be its main focus next year.

Now, for handset manufacturers seeking to make affordable 4G smartphones, one problem they have to contend with is Qualcomm (QCOM.US), as the US firm’s phone chips are relatively expensive, leaving little room for profit in low-cost handsets.

But given the changing dynamics in the industry and the tight budgets, Qualcomm — which has traditionally charged fat fees — may have to adjust its pricing strategy if it wants to protect its market share in China.

The smartphone chipmaker is reported to be persuading China Mobile to adopt the “5 modules 10 spectrums” solution for the latest generation telecommunications technology to ensure compatibility with networks in other countries, empowering the roaming ability of 4G smartphones.

After several rounds of negotiations with suppliers, China Mobile’s decision to focus its procurement plan on 3-module devices has sent out a strong signal to Qualcomm on the need to drive down costs.

Qualcomm makes money from royalties. For a 5-module 4G smartphone with a selling price of 2,000 yuan, a handset maker reportedly has to pay 5 percent licensing fee and 15 percent solution fee; that is, a total of 20 percent or 400 yuan to Qualcomm. But most companies only make 100 yuan on a 2,000 yuan phone.

The 5 modules stand for TD-LTE, FDD-LTE, TD-SCDMA, WCDMA and GSM. They refer to mobile communications systems; different countries may adopt a different system.

Meanwhile, the National Development and Reform Commission, China’s top economic planning agency, is conducting an anti-trust investigation into Qualcomm with regard to its 4G chips.

Given the importance of the China market, experts believe that Qualcomm will have to give in and lower its royalty fees for handset makers, or it will risk an erosion in its business.

In fact, China is the key market for Qualcomm as smartphone growth shifts from the United States to the developing countries. According to Qualcomm’s latest financial report, almost half of its annual revenue, or US$12.3 billion, came from China for the year ended September.

– Contact the writer at [email protected]


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