Date
23 November 2017
Broadcom has become the top industry player after acquiring Avago for US$37 billion in 2015. Photo: Reuters
Broadcom has become the top industry player after acquiring Avago for US$37 billion in 2015. Photo: Reuters

Why a Broadcom-Qualcomm marriage matters to phone users

Chip giant Broadcom has made an unsolicited US$103 billion bid for Qualcomm Inc. in what could become the largest tech deal ever.

The deal, if successful, could reshape the chip industry, creating a dominant player with nearly 70 percent market share.

Both companies are headquartered in California and listed on Nasdaq. Their market capitalizations are US$113.2 billion and US$92.2 billion, respectively.

Broadcom’s US$70-a-share offer for Qualcomm values the chip maker at US$130 billion, a 28 percent premium over its closing price on Nov. 3.

Though the smaller of the two chip makers, Qualcomm is more well known to retail customers because it designs the CPUs used in most mobile phones.

Broadcom also designs chips for use in mobile phones but not the CPU. As an analogy, Broadcom products are like the steering wheel of a car, while Qualcomm chips are the engine.

Broadcom has become the top industry player after acquiring Avago for US$37 billion in 2015. Broadcom reported second-quarter revenue of US$4.37 billion compared with US$4.05 billion by Qualcomm.

A combined Broadcom-Qualcomm would create a dominant chip supplier with a market value of over US$200 billion.

Interestingly, both companies don’t have factories nor hire large numbers of workers. Instead, they focus on research and development of new chips. Their main income is from patent licensing to phone makers such as Samsung, Apple and Sony.

Sitting at the top end of the supply chain, both firms enjoy huge profit margins. The gross margin of Broadcom and Qualcomm reaches 45 percent and 57 percent, respectively, surpassing even the 38 percent gross margin of Apple.

For instance, the raw material cost of a 64GB iPhone 8 is about US$248. Of this, about US$45 or 18 percent is earned by chip makers led by Broadcom and Qualcomm.

Given their superior technology, they have no close rivals. Taiwan’s MediaTek Inc., the third-largest chip maker, still relies on lower-end chip products. And its turnover is a lot less.

Currently, Broadcom and Qualcomm have some overlap on product and technology. Therefore, customers still have the option to switch from one or the other and they would still exercise some restraint in pricing.

But if the deal goes through, the combined firm would become powerful enough to raise prices further. That would affect the gross profit or earnings of mobile brands like Apple or Samsung, which may eventually pass on the higher cost to end-users.

Reuters reported that Qualcomm would review the proposal but remains hesitant in accepting it.

This article appeared in the Hong Kong Economic Journal on Nov. 8

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at english@hkej.com

RT/RA

 

Hong Kong Economic Journal columnist

EJI Weekly Newsletter

Please click here to unsubscribe