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China Throws Qualcomm a Bone
By Bill Mann
OK, it's a big bone: a multibillion-dollar one, in fact. But wireless communications technology
provider Qualcomm (Nasdaq: QCOM - news) is going to need some Dramamine if its
roller-coaster ride vis-a-vis China doesn't level off.
Wu Jichuan, the Chinese Minister of Information Industry, committed number-two Chinese
wireless operator China Unicom (NYSE: CHU - news) to the flavor of narrowband CDMA
championed by Qualcomm, IS 95, as opposed to another competing protocol, W-CDMA, which is favored by Nokia (NYSE:
NOK - news) and Ericsson (Nasdaq: ERICY - news).
In February, China Unicom inked a deal with Qualcomm to deploy a wireless network, with significant construction coming this
year. Then Unicom waffled, making bare mention of CDMA in its materials in advance of its June IPO, instead saying that it
would concentrate on its existing GSM network, which had reached "critical mass."
This has been a bruising course for Qualcomm. The company probably should have known better than to consider its February
agreement with the Chinese a done deal, waiting instead for a sign of buildout before counting its chickens. Instead Qualcomm
has been battered and bruised by a dance partner that has all of the grace of a camel with intestinal problems.
By signaling a go-ahead, the Chinese government is lighting the way for Qualcomm's much-stronger intellectual property to gain
exposure to China Unicom's 7 million existing customers -- plus the fastest-growing wireless market in the world.
Still, grizzled Qualcomm shareholders, weary from poor turns from the Chinese, are probably right to treat this announcement
with some skepticism, preferring to wait for some actual buildout to take place before they pop the champagne corks.
It's noteworthy that the final arbiter as to what CDMA technology China Unicom would use was not the company itself, but the
government. Minister Wu essentially mandated that Unicom deploy an IS 95 network, calling the previous media reports ruling
out China Unicom's adoption of CDMA technology "confusing."
Since the government is in fact running the show here, the possibility at least exists that these conflicting reports were made on
purpose to pit Chinese trading partners in Europe and in the U.S. against one another for the eventual benefit of China.
Political considerations are also unlikely to be far from the surface here. Qualcomm and another American powerhouse, Lucent
(NYSE: LU - news), are largely behind the IS 95 protocol, and have huge financial stakes in adoption of this standard. As
China is cognizant of the political power held by these companies in Washington, it is not unreasonable to surmise that the
government believes that this move will improve bilateral relations.
Regardless of the rationale(s), Qualcomm's once rapidly fading hopes of gaining a strong position in China in the near future
were just resuscitated.
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