Modoff's latest from Asia- QCOM /Basebands & China
Snips>>
Bottom line, Qualcomm is gaining share
among the top 5 vendors (not just the Koreans) from high-end smartphones to low-end
devices.
"Spread spectrum or code-division air interfaces will remain the dominant technology for the rest of
the decade and well beyond."
>>>>>>>>>>>>>
Basebands
Our checks in the cell phone components space reinforced trends we have been seeing for
some time.
Chief among these remain Qualcomm’s strengthening position in the 3G baseband arena.
We spent much of our time in Asia asking about the 3G competitive landscape, and the
trends here are clear. Qualcomm has a leading product portfolio with which it can appeal to
handset vendors across the landscape. From low-cost vendors looking to make white label
phones for carriers and OEMs to companies designing the most popular and advanced
smartphones, Qualcomm has a chip for them. Bottom line, Qualcomm is gaining share
among the top 5 vendors (not just the Koreans) from high-end smartphones to low-end
devices.
By contrast, some of the company’s oldest competitors seem to be falling by the wayside.
Freescale continues to languish under its private equity capital structure. We have heard of
further management changes in their wireless unit. We think the focus on financial
engineering, cost-cutting to boost cash flows and legal action to enforce contracts have
shifted the focus to near-term gains away from long-term trends. While the company has a
legacy relationship with Motorola that should provide an annuity of sorts, they seem to be
falling further behind on the technology curve. By no means will they be shut out of 3G, but
we do think the gap between them and other vendors (and their customers’ needs) seems to
be growing.
In a similar vein, Texas Instruments’ 3G strategy remains somewhat muddled and
increasingly dependent on Nokia, and potentially Motorola. Finally, we think Ericsson Mobile
Platform (EMP) continues to struggle for the resources needed to maintain customer
relationships, at a time when its parent faces many distractions. Vendors such as NXP and
Marvell remain far behind.
Infineon, on the other hand, appears to be making steady progress. Nonetheless, they are
still some ways behind Qualcomm. Finally, Broadcom remains steadfast in its goal of
becoming a presence in the 3G baseband market, but the RF chain remains challenging and
ramping to support OEMs will prove expensive.
One area of concern for Qualcomm investors recently has been the long-term fate of CDMA
networks. Verizon’s decision to eventually adopt LTE as its next air interface standard was
the latest red flag for some.
When examining Qualcomm’s prospects, however, it is important to remember that long
before we see any declines in the company’s addressable market, its TAM will first grow
significantly. The company is just now showing the first signs of these benefits as spread
spectrum technologies (CDMA, WCDMA, TD-SCDMA) come into widespread usage.
WCDMA and CDMA combined were less than 50% of total handset shipments this year, and
even by 2011 we do not expect their share to have reached 80% of volumes. Spread
spectrum or code-division air interfaces will remain the dominant technology for the rest of
the decade and well beyond. Based on its traction so far, it seems highly likely that
Qualcomm will participate in this growth.
The only area of concern is how these various technologies will share the mix. We will save
the discussion of TD-SCDMA for another section, but will likely remain a small contributor.
The growth in WCDMA (and HSPA, etc.) is well-worn territory with 3G growing rapidly in
many markets. The only variable right now seems to be what will happen to CDMA.
Qualcomm’s earnings are not totally indifferent to what happens with these networks, but
our estimates (and probably the market) already discount CDMA peaking in a few years, then
gradually declining.
On our recent trip, we learned one reason why this growth may actually continue instead.
While there are no official numbers, it now appears that the various Chinese carriers have an
extra 10 million CDMA subscribers on CDMA450 networks. This frequency range offers far
greater coverage than higher frequency networks, making it particularly appealing for
deploying it in rural areas. In China, fixed line operators China Telecom and Netcom both
have CDMA 450 networks, that combined cover every province in the country. There are also
CDMA 450 carriers in Indonesia and Vietnam, among others.
Another important statistic remains the falling cost of CDMA handsets. While these never
offer as many models as low-cost GSM phones, the price differential has narrowed
significantly.
Take together, low-cost handset and CDMA 450 networks, these factors could prove
important volume drivers in many markets in the developing world, and meaningfully improve
CDMA growth trends.
China 3G
Finally a word on China 3G. Actually four words. We do not know. In fact, we think it would
be more accurate to use only three words. No one knows.
The usual theories persist. “The government is waiting for its domestic standard, TDSCDMA,
to be ready commercially.” This standard continues to struggle to find viable
handsets. Our contacts indicate that the network equipment is ready to go. But even the TDSCDMA
Forum, the standard’s industry body, admits that stand-by times on handsets has
only reached 80 hours (they actually put out a press release on the matter) versus over 300
for many new phones today. Data rates are pegged at 2.8 Mbps (theoretical, with 400 Kbps
demonstrated) versus 14.4 Mbps for HSDPA. They are improving, but the terminals still have
a ways to go until they can meet consumer expectations.
Another theory is that the licenses have to wait for restructuring of the industry players.
Giving China Netcom, Telecom, and Unicom a level playing field with China Mobile. All we
can say about this now, is that we hope not. This could take a while.
Maybe the Olympics will be a catalyst. Maybe not.
The only new impetus for licensing that we see is the potential for other countries to launch
3G ahead of China. Will China’s leaders be willing to lose face when India launches its first
3G network before China does? Will they be willing to see Vietnam launch 3G before China?
Both of these are possibilities for 2008. |
