Bottom line: Qualcomm’s new licensing deal with Oppo extends a recent upbeat trend for the company in China after a yearlong retrenchment, and will be followed by more similar deals through the rest of this year.
Following a difficult year in China that saw it fined a record amount for anti-competitive behavior, global telecoms chip leader Qualcomm (Nasdaq: QCOM) appears to be slowing regaining its footing in the world’s largest smartphone market. That’s my interpretation of the latest headline, which has the company announcing a new chip licensing deal with Oppo, one of the market’s fastest growing smartphone makers. Word of this latest deal almost certainly came from Qualcomm itself, which is eager to show its days of trouble in China are in the past.
Qualcomm spoke more directly of its future optimism about China when it released its most recent quarterly report a couple of weeks ago. At the time, it said growing demand for its lower-end chips in China as it signed a new series of licensing deals was prompting it to raise its overall sales forecasts. (English article) That upbeat outlook sparked a rally in Qualcomm’s previously beaten-down shares, which have risen more than 10 percent since the company announced the upward revisions to its sales outlook.
The upbeat news marked a break for a company that is a leader in its field for high-end chips used to power many of the world’s smartphones. That leading position included some unusual licensing practices and big fees for use of its technology, which prompted China’s crowded field of smartphone makers to complain of anti-competitive practices.
China’s anti-monopoly regulator opened an investigation into the matter, and early last year levied a record fine of nearly $1 billion against the company and ordered it to overhaul its licensing practices. (previous post) That forced Qualcomm to renegotiate its licensing deals with most of its Chinese customers. But many of those companies stalled and delayed new deals as long as possible, partly as a money-saving tactic due to intense competition in China’s smartphone market.
One of the first to sign a new agreement was local giant Xiaomi, a former rising star in China’s smartphone market that has more recently fallen on hard times. Now Oppo has joined the licensing crowed with its own new deal, signing an agreement that will cover technology used in 3G and 4G smartphones. (Chinese article)
The deal is quite significant, since Oppo has risen rapidly over the last year to become China’s second largest smartphone brand, behind only the similarly surging Huawei. In this year’s first quarter, Oppo’s China sales, which account for the vast majority of its business, nearly tripled to 15.8 million units, giving it 15.4 percent of the Chinese market, according to IDC.
This latest licensing deal contrasts sharply with headlines less than a month ago, when Qualcomm sued Meizu, a mid-sized smartphone maker backed by e-commerce giant Aliababa (NYSE: BABA), for patent infringement. (previous post) Like this newest licensing agreement, that move was also widely publicized by Qualcomm and showed the company was regaining confidence that it had Beijing’s backing to force Chinese brands into signing such new agreements.
It’s a bit unclear how many of China’s major smartphone brands still need to sign new agreements with Qualcomm, since the company doesn’t make big announcements for each such deal. I expect Qualcomm may have already reached a deal with Huawei or feel it is close to such a deal, since Huawei is generally one of the industry’s more mature players and is less likely to use stalling tactics like Meizu’s.
One result of Qualcomm’s new confidence will be rising costs for China’s smartphone makers, many of them already losing money due to the stiff competition. That could force many companies to look for cheaper alternatives from Qualcomm rivals like Taiwan’s MediaTek (Taipei: 2454) or China’s own Spreadtrum. It could even finally prompt some of the smaller players like OnePlus or Smartisan to finally call it quits, sparking a much-needed round of consolidation in the overheated market.
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