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QUALCOMM (QCOM)
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Qualcomm : In U.S.-China Tech Rivalry, Whose Side Is Qualcomm On?

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03/13/2018 | 02:20pm CEST

By Dan Strumpf in Hong Kong, Yoko Kubota in Beijing and Liza Lin in Shanghai

Qualcomm Inc.'s strategic value to the U.S. saved it from a hostile takeover, but the mobile-chip giant is now at the center of an escalating tech rivalry between its home country and its biggest market: China.

In cutting off Singapore-based Broadcom Ltd.'s $117 billion bid for Qualcomm, President Donald Trump cited national-security concerns raised by China's growing strength in an array of advanced technologies. These include the fifth-generation wireless technology, known as 5G, that will usher in a faster, more powerful connections--an area where China's Huawei Technologies Co. is also pouring huge sums into research and development.

Qualcomm has now effectively been designated a national champion in the battle with Beijing. However, the company's loyalties are divided--it needs China as much as it competes with it.

China makes up nearly two thirds of San Diego-based Qualcomm's revenue. It is home to some of the world's fastest-growing mobile-phone manufacturers and is a rising player in the standards-setting process for 5G.

"The business in China is becoming increasingly strategic for Qualcomm," said Charlie Dai, an analyst at Forrester, citing its "explosive growth" in smartphones and its development of new businesses based on artificial intelligence that require advanced silicon chips.

Qualcomm supplies China's biggest smartphone makers, and is an investor in handset maker Xiaomi Corp., which is set to conduct one of the biggest initial public offerings of the year. Venture-capital arm Qualcomm Ventures is also a growing force in the local startup industry, with as many as 35 active ventures including a strategic partnership with facial-recognition startup SenseTime. Qualcomm also has chip-making joint ventures in China, including ones with the southwestern Guizhou government and foundry Semiconductor Manufacturing International Corp.

That exposure means that Qualcomm must take care not to get on the wrong side of Beijing, which closely monitors its tech industry.

"Whoever gets a lot of profits and interests from China will be somewhat vulnerable to China's actions, vulnerable to a potential trade war dispute between the U.S. and China," said Mark Li, a technology analyst at research firm Bernstein.

Also, Qualcomm is lacking only China's regulatory clearance for a deal of its own: a $44 billion takeover of Dutch rival NXP Semiconductors NV.

This means China has several levers it could pull as it weighs how to respond to Mr. Trump's decision this week to quash Broadcom's pursuit of Qualcomm.

Qualcomm and China's antitrust regulator didn't immediately respond to a request for comment.

Steve Mollenkopf, Qualcomm's chief executive, has traveled frequently to China. In November he joined Mr. Trump and Chinese President Xi Jinping at a deal-signing ceremony in Beijing for a $12 billion chip deal with Chinese smartphone brands including Oppo and Vivo, which are owned by BBK Electronics Corp.

In February, Mr. Mollenkopf attended a meeting between U.S. business executives and President Xi's top economic adviser in Washington. That same month, he unveiled a chip aimed at Chinese smartphone companies at a large technology expo in Barcelona. Mr. Mollenkopf is set to visit Beijing this month to attend the state-hosted China Development Forum.

China is pushing to develop its own chip industry, but so far its domestic companies haven't achieved the computing speed to go up against the likes of Qualcomm, analysts say. Of the $22.3 billion in revenue Qualcomm generated in fiscal 2017, 65% came from China, up from 57% in the previous year. By contrast, 54% of Broadcom's 2017 revenue came from China.

"China has no real alternative to Qualcomm globally in terms of high-end chips," said Chris DeAngelis, general manager at tech advisory firm Alliance Development Group in Beijing.

Qualcomm's relationship with Beijing wasn't always so smooth. In 2015 the company was fined nearly $1 billion for violations of China's antitrust laws regarding the licensing of its patents.

However, since then the company's stature in China has grown such that both Oppo and Vivo sided with Qualcomm against Broadcom's proposed takeover. Shi Yujian, Vivo's chief technology officer, said Tuesday that a tie-up wouldn't have been good for customers because it would have concentrated resources and pricing power within a single giant company.

The Committee on Foreign Investment in the U.S., which vets foreign deals, recently flagged concerns that Broadcom would stymie research and development at Qualcomm, leaving it ill-equipped to counter China's growing clout in 5G technology--in particular that of Huawei, the Shenzhen-based telecommunications behemoth.

"The Trump administration has a techno-nationalist view of technology," said Scott Kennedy, who heads up China studies at the Center for Strategic and International Studies, who said Mr. Trump's decision "is intended to protect American technological prowess."

A Huawei spokesman said that it and Qualcomm work together on 5G and that it wasn't accurate to characterize them as rivals.

Stella Yifan Xie in Shanghai and

Yang Jie

in Beijing contributed to this article.

Write to Dan Strumpf at daniel.strumpf@wsj.com, Yoko Kubota at yoko.kubota@wsj.com and Liza Lin at Liza.Lin@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
QUALCOMM -0.88% 74.06 Delayed Quote.16.71%
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Financials ($)
Sales 2018 22 432 M
EBIT 2018 5 564 M
Net income 2018 -3 661 M
Finance 2018 8 138 M
Yield 2018 3,21%
P/E ratio 2018 -
P/E ratio 2019 20,29
EV / Sales 2018 4,49x
EV / Sales 2019 5,54x
Capitalization 109 B
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Mean consensus OUTPERFORM
Number of Analysts 26
Average target price 71,4 $
Spread / Average Target -3,6%
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Managers
NameTitle
Steven M. Mollenkopf Chief Executive Officer & Director
Cristiano R. Amon President
Jeffrey William Henderson Non-Executive Chairman
George S. Davis CFO, Principal Accounting Officer & Executive VP
Mary Gendron Chief Information Officer & Senior Vice President
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