Qualcomm Stock on Hold As China Deal Frays
By Michael Fitzpatrick
LOS ANGELES (Reuters) - For now, Qualcomm Inc. (NasdaqNM:QCOM - news) can only sit and wait as China's two big wireless companies fight for market share, putting on hold the U.S. mobile communications company's hopes to open the world's most populous nation to its wireless CDMA technology.
``They (Chinese wireless operators) are in a race against each other, not against new players. It means they want to get service out as soon as possible -- that's one thing that's somewhat negative against CDMA,'' said Prudential Volpe analyst Pete Peterson, who just returned from China.
Qualcomm's deal with China Unicom, the newer entrant in China's wireless market, appears to be a casualty of that fight for market share between Unicom and state giant China Mobile Communications, which has the lion's share of users.
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And Qualcomm stock, among the highest of the high fliers last year, has been brought solidly back to earth as its China deal has frayed.
``There's a significant amount of uncertainty priced into the stock at this point. The smell of bad news in the air drives a lot of people out of the stock,'' said Peterson, who rates the stock a strong buy.
The stock, which has lost about two-thirds of its value since January, dropped 5-7/16 on Monday to 67-1/4 on Nasdaq after China's No. 2 state telecommunications carrier, China Unicom, said it had no reason to use current-generation CDMA technology.
Qualcomm developed CDMA (code division multiple access) technology that forms the base of new generation of wireless communications and is widely used in the United States.
The San Diego-based company had hoped to start rolling out its technology in China, which now uses the rival GSM standard that dominates in Europe and is driven by mobile powerhouses Ericsson (LMEb.ST) of Sweden and Finland's Nokia.(NOK1V.HE)
``As we've maintained, we believe that CDMA will be deployed in China. We're hopeful that it will be sooner rather than later,'' Qualcomm spokeswoman Christine Trimble said.
But for the short term, GSM looks to be the winner.
``In the short term it looks like GSM will be stronger. GSM sales will be stronger-than-anticipated in China because of Unicom's delay,'' Peterson said.
``We don't believe from our discussions that this is going to mean that there won't be CDMA in China,'' Peterson said. ''Our discussions there lead us to believe the Chinese will be enthusiastic in developing CDMA networks...'' Peterson said.
Qualcomm signed a deal in February with China Unicom to open that country's giant market to its CDMA technology. Days later, however, China delayed the roll-out.
On Sunday, the official China Daily Business Weekly reported that China Unicom has scrapped a project using current CDMA wireless telephone standards, but would build a network using later-generation CDMA technology,
``The timing of construction of a narrowband CDMA system has become unfavorable, so we plan to build a wide-band CDMA network,'' a China Unicom official was quoted by the newspaper as saying. ``We have to minimize the risks of such a huge investment,'' said the official, who was not identified.
Peterson said an alternative standard developed by China with German firm Siemens AG (SIEGn.DE) and known as TD-SCDMA, was unlikely to be widely deployed.
``The market conditions don't seem to favor that happening. There is a significant requirement for standardization. There is a significant amount of cost that needs to come out of these networks and ... TD-SCDMA is going to have lower capacity and higher costs.'' Peterson said.
Even if that were deployed, Qualcomm indicated it would expect to reap some benefits from licensing fees.
``We believe we have a number of essential patents that are necessary for the deployment of any viable current of future generation of CDMA,'' Trimble said.
Qualcomm also is in discussions with manufacturers in China that would build handsets and infrastructure equipment for CDMA networks using chipsets from Qualcomm, Trimble said.
``We're encouraged by those discussions,'' she said.
Trimble said the next generation of CDMA technology, known as CDMA 2000, would be rolled out later this year with wide-scale deployment in 2001.
``For China to compete in that (manufacturing equipment for the third generation) CDMA market, it would need to roll it out sooner,'' she said.
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