The US Department of Commerce added Chinese technology giant Huawei, the world’s largest maker of telecommunications equipment, to a trade blacklist last year. This restriction forbade any American company from selling Huawei products without obtaining a special license.
However, Qualcomm 09.30 NASDAQ: QCOM, the world’s largest maker of mobile chips, recently petitioned the Trump administration to release some of those restrictions and allow it to sell its smartphone chips to Huawei. Qualcomm argues that the blacklist should focus only on Huawei’s leading position in the network equipment market and not in the smartphone market ̵
It is unclear whether Qualcomm’s lobbying campaign will succeed, but investors need to understand the chipmaker’s three main motives.
1. Loss of “billions of dollars” in China
Qualcomm generated 48% of its revenue in China last year, but did not disclose its exact revenue from Huawei. In the past, Huawei has mainly installed its own HiSilicon Kirin chips, Qualcomm’s Snapdragon chips and Taiwanese manufacturer MediaTek chips in its phones. Qualcomm also earns wireless licensing fees from Huawei for every smartphone sold.
Huawei is currently the largest smartphone maker in China, according to Counterpoint Research, with a market share of 41% in the first quarter of 2020. Its three closest competitors – Vivo,, Oppo, and XiaomI (UTS: XIAC.F) – Also use mainly Qualcomm and MediaTek chips.
Qualcomm claims Huawei’s blacklist of phones would cost “billions of dollars” in chip revenue from China, according to a petition reviewed by The Wall Street Journalas it relinquishes the market to its smaller competitors.
2. Loss of Huawei orders to MediaTek and Samsung
As early as May, the Commerce Department tightened its rules to ban foreign companies that use American technology in their supply chains from serving Huawei. This change necessitated Semiconductor manufacturing in Taiwan (NYSE: TSM), or TSMC, the world’s largest chip maker, to stop production of Huawei’s Kirin chips.
The sudden shutdown of Huawei’s first-person chips is a key opportunity for Qualcomm and MediaTek. Unfortunately for Qualcomm, the blacklist also prevented it from delivering its latest chips – which TSMC also produces – to Huawei.
However, MediaTek manufactures its chips in its own foundry and it continues to sell mobile chip kits to Huawei. Huawei is also in talks with Samsung, which makes its own Exynos chipsets for its phones to buy additional mobile chips. Huawei may also try to persuade Samsung, which competes against TSMC in the foundry market, to produce its Kirin chips.
Qualcomm claims that these failures will “cause a rapid change in the market share of the 5G chipset in China and beyond” and “hamper US research and leadership on 5G issues.” Other Chinese companies – including Vivo, Oppo and Xiaomi – could also follow Huawei’s leadership and divert more orders away from Qualcomm.
3. Fear of re-opposition to China
Qualcomm generates most of its revenue from its mobile chipsets and modems, but most of its profits come from the licensing business.
Five years ago, Chinese regulators fined Qualcomm nearly $ 1 billion for anti-competitive practices and forced it to cut wireless licensing fees for Chinese companies. Qualcomm adheres to and carefully renegotiates licensing transactions with each smartphone manufacturer.
But last year, Huawei stopped paying licensing fees to Qualcomm, arguing that its reduction was too high. Qualcomm finally resolved the dispute with Huawei by signing a new licensing agreement in July.
If Qualcomm stops supplying its chips to Huawei, it could jeopardize this fragile agreement and once again antagonize Chinese regulators. I’m not saying China will impose Qualcomm again or Huawei will break its agreement, but both happened with very little warning.
Therefore, Qualcomm probably wants to remain friendly with Huawei and the Chinese government – but the actions of the Trump administration make it difficult to maintain peace. At the very least, however, Qualcomm’s lobbying efforts show China that it is not on the same page as President Trump.
The key extraction
The escalating technology war between the United States and China has made it difficult for companies on both sides to remain neutral. The trade blacklist certainly hurts Huawei, but it also hurts the company’s US suppliers.
Qualcomm remains poised to benefit from the expansion of 5G networks, but investors need to monitor their business in China. If left unchecked, the Trump administration’s actions against Huawei could ignite a catastrophic chain of events that could pass on Qualcomm’s Chinese business to MediaTek and Samsung.