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Smartphone Chipmaker Qualcomm

A Love-Hate Dance with Taiwanese Tech

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A Love-Hate Dance with Taiwanese Tech

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It's tucked away inside the smartphone in the palm of your hand. Striking while the iron is hot, Qualcomm is looking not only to gobble up the smartphone chip market, but now is also taking aim at the entire digital household.

A Love-Hate Dance with Taiwanese Tech

By Hsiao-Wen Wang
From CommonWealth Magazine (vol. 476 )

Qualcomm chairman and CEO Paul Jacobs, a tall, imposing devout Jew who favors the casual attire of blue jeans, is a virtual unknown among the Taiwanese public.

Yet the 48 year-old Jacobs is HTC CEO Peter Chou's closest comrade-in-arms and Mediatek chairman Tsai Ming-kai's most respected adversary.

Qualcomm is the unseen market champion behind the world's 450 million smartphones.

Controlling the Heart of the Smartphone

You never see it, as it's tucked away in the deepest recesses of your smartphone. There's a nearly 50-percent chance that a Qualcomm-designed chip and central processing unit make possible your smartphone's calls and calculations and the appointments you record on its personal organizer. Qualcomm is tantamount to the heart of the smartphone.

Jacobs, an engineer, took the reins of the world's biggest IC design company from his father six years ago. In that time, Qualcomm's operating revenue has expanded by 150 percent, further consolidating its position at the top of the heap of the smartphone chip market. According to data from market research firm Strategy Analytics, Qualcomm controls a 41-percent share of the global smartphone chip market, far exceeding the 27-percent share of number two Texas Instruments. In the red-hot Android segment of the market, Qualcomm holds an even more mind-blowing 60 percent of the central processing unit market.

"We are in an unprecedented good position as the industry trends are all going our way," Jacobs delightedly told CommonWealth Magazine in an exclusive teleconference interview.

With 3G telecoms becoming more ubiquitous, and annual growth in the smartphone and tablet PC markets of 30 percent and 50 percent, respectively, Qualcomm looks set to scale new heights.

The massive upheaval in the technology sector has seen global semiconductor leader Intel lose half its market value over the past decade. During that same period, Qualcomm's market value has surged 89 percent to US$90 billion, more than 2.5 times that of HTC, Qualcomm's number-one client.

The secret recipe for Qualcomm's success has been to lead competitors in research and development investment.

Each year, Qualcomm invests vast sums in developing the next generation of communications technology, spending as much as 23 percent of revenues on R&D. In comparison, Taiwan Semiconductor Manufacturing Co., Ltd., Taiwan's flagship technology enterprise, spends between seven and eight percent of revenues on R&D. Qualcomm's emphasis on R&D has given it the deepest and most extensive array of patents within the 3G and even next-generation 4G telecom standards. Each year, Nokia, Samsung, LG and other handset giants dutifully hand over royalties to Qualcomm. Nikkei Business Publications has described Qualcomm as the "emperor" of the wireless communications industry.

"Our licensing department business continues to execute well and keeps increasing," Jacobs says candidly.

Like quicksilver, Qualcomm's influence has surreptitiously permeated Taiwan's hottest technology companies.

Back when HTC was still contract manufacturing PDAs for Compaq (a company since acquired by Hewlett-Packard), Qualcomm had already seen the writing on the wall, investing 10 years ago in today's kingpin of the Taiwan stock market. Since then, HTC and Qualcomm have been joined at the hip, and Jacobs is close personal friends with HTC's chairwoman Cher Wang and CEO Peter Chou. Shuttling back and forth between Taiwan and the U.S. on his private jet, Jacobs has also become fond of bringing Qualcomm board directors along for the ride to meet the captains of Taiwan's tech industry, further enhancing Taiwan's reputation as a "technology island."

On the other hand, in one strategic move, Qualcomm forced Mediatek to bid farewell to the golden age of the "bandit" cell phone.

Striking Down Mediatek's Mighty Bandits

Two years ago, as Mediatek's cell phone chip shipments surpassed those of Qualcomm, the two competitors reached a patent settlement. On its face, the settlement declared that Mediatek would not be liable for licensing fees on the 3G chips it shipped. Instead, responsibility for the payment of licensing fees was shifted downstream to Mediatek's customers, forcing many manufacturers of bandit cell phones – low-end, generic or self-branded handsets – out of business.

"Qualcomm made its move brilliantly, acquiring Mediatek's prized client list and shipping figures while forcing Mediatek to change its commercial model," an attorney familiar with the relevant Patent Law issues says.

This allowed Qualcomm, which had previously not focused on China, to begin reaping the benefits of that market. Of Qualcomm's more than 190 current licensees worldwide, 70 are in China. China now accounts for 30 percent of Qualcomm operating revenue and is the company's biggest single market.

Qualcomm is set to become the major purveyor of ultra-cheap US$100 smartphones.

"We've made a lot of investments to drive down the chip price," Jacobs says. We offer the most integrated chip and help enhance our partners' R&D efficiency."

For example, the latest smartphone offering from Chinese telecom giant Huawei, costing 850 renminbi (about US$130), is fitted with a Qualcomm solutions package. The ultra-low-cost smartphone sold more than a million units in China in its first 100 days.

"We certainly hope to bring the smartphone to the bottom of the pyramid as quickly as we can," says Jacobs, eager to take a bite out of both the high and low ends of the market.

His next move will be a foray into the area of the digital household. Qualcomm has already acquired Atheros, a major wireless communications chipmaker, as it prepares to utilize its position as the leading cell phone chipmaker to move into the digital household and intelligent networks.

Like it or not, the love-hate tug of war between Paul Jacobs and the Taiwanese tech sector will continue to play out.

Translated from the Chinese by Brian Kennedy


Box

Qualcomm

Founded: 1985

2010 operating revenue: US$11 billion (about NT$316.2 billion)

2010 gross profit: US$7.4 billion, gross profit margin of 67.3 percent

2010 net profit: US$3.2 billion, net profit margin of 29.1 percent

Market position: market leader in smartphone chips, world's biggest IC design company

Keywords:

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