On November 9, U.S. President Donald trump signed a $250 billion deal with Chinese President Xi Jinping in Beijing. As President Trump has been urging China to improve its trade imbalance, the bulk of the orders are for Chinese companies to expand their investments in the U.S. and buy a lot of U.S. products. As a result, China has delivered a willingness to reduce its trade deficit, one of those multi billion deals made during the day included a US$12 Billion worth deal between the world’s largest smartphone chipset company Qualcomm from USA and the fast growing Chinese smartphone brands Xiaomi, OPPO and vivo.
With the deal which is though non-binding, Qualcomm and these upstart Chinese smartphone brands signed a Memorandum of Understanding (MoU) to sell US$12 billion worth components over the period of three years. This deal comes at a very interesting time when Qualcomm has been facing series of legal battle with one of its biggest customer Apple and other trade bodies over the IP royalty rates which has hurt Qualcomm’s stock and market cap attracting other semiconductor companies like Broadcom for an acquisition bid for Qualcomm. Following are some of our key observations and takeaways from the deal:
- Risen from business background, Trump and the administration he selected tend to emphasize highly on development of economy rather than other issues in the nation. Evidently main purpose of Trump’s trip is to ease the long-standing trade deficits with China. U.S. corporate delegates joining Trump’s trip have successfully managed to get billions of dollar contracts from China while China barely earned any from the U.S.
- This shows China has delivered a willingness to reduce the trade deficit in exchange for technological support and other instances of trade cooperation
- Major Chinese smartphone vendors including OPPO, VIVO and Xiaomi are rising significantly in global market, with their position secured at top ten in 2017 (see here).
Exhibit 1: Top Six Smartphone Brands Globally – Q3 2017
- Many of these top smartphone brands who have been growing scale in countries like China (see here) and India (see here) have ramped up their procurement budgets in order to expand beyond these two key markets into parts of Asia (see here), Europe, Latin America and Middle East Africa
- Unlike Huawei (see here), Samsung and Apple (see here) who have successfully developed its in-house chipsets to power their portfolio and are less dependent on Qualcomm, other Chinese vendors still rely heavily on Qualcomm’s Snapdragon for flagship / higher-end and now even mid-tier models.
- With lack of R&D capability in chipset development, signing of the MoU or not, OPPO, VIVO and Xiaomi are expected to purchase similar value-worth products from Qualcomm over the next three years.
- This publicly announced deal which has made into global news cycle, will help these brands boost their global mindshare by attracting eyeballs and enhance brand image partnering with market leaders such as Qualcomm
- This deal will help Qualcomm secure a decent chunk of smartphone market as these three brands are estimated to ship a combined of more than 300 million smartphones every year and almost a billion smartphones over the span of next three years.
- Further, this deal spans beyond smartphones into area such as IoT incorporating NB-IoT (see here)/ eMTC / Gigabit LTE / 5G capabilities which is a plus for Qualcomm
- While this news has not moved the Qualcomm stock significantly as in long-term it is a given except for Huawei, Samsung and Apple most of them will be dependent on either Qualcomm, MediaTek and Spreadtrum but it still gives the San Diego based semiconductor company some assurance in banking of these key vendors in near- to mid-term.
- Further, it will be interesting to see if Qualcomm can also secure similar marquee deals with key design houses, ODMs and other long tail OEMs and smartphone brands.
- Though all eyes will also be on Qualcomm’s licensing business in wake of these impactful deals and the significant traction Qualcomm is now enjoying in China after the settlement resolution with China’s NDRC (see here) and if these will have any impact on current lawsuit with Apple
- So, in summary, both Chinese and US companies benefit from this deal to advance market share with technology partnership