Qualcomm Tries New China Strategy;
Firm Focuses On Local CDMA Output
By MATT FORNEY and PUI-WING TAM
Staff Reporters of THE WALL STREET JOURNAL
After losing a lucrative deal to supply off-the-shelf cellular-phone technology to
China, Qualcomm Corp. is mapping out a new strategy to sell next-generation
products in the world's fastest-growing mobile-phone market.
That strategy involves greater emphasis on technology transfer and local
production. Observers cite the lack of progress in those areas as a factor
behind Qualcomm's most recent problems in the country.
China announced Sunday that it won't buy "narrow-band" code-division
multiple access, or CDMA, technology from Qualcomm. The decision means
China's current mobile-phone network, which had 30 million subscribers at the
end of last year and is growing by a million or more subscribers a month, will
use only GSM technology popular in Europe. That is a setback for U.S. trade
policy, which had made a priority of pushing CDMA in China, and for the San
Diego-based company in its battle with European firms for telecommunications
supremacy.
"This takes Qualcomm out of the game for the
next few years, and that's a long time to be out of
the game," says Mark Cabi, a telecommunications
analyst at Credit Suisse First Boston. "The
perception for the company's growth is now gone."
As news of China's plans leaked out over the past few months, the company's
stock has tumbled, falling by two-thirds since January. Tuesday morning, shares
rose 2%, or $1.3125, to $68.5625. Says Christopher McHugh, a senior
portfolio manager at Turner Investment Partners, which has sold its stake in
Qualcomm, the China announcement "is a big psychological negative."
Now, the company is hoping to stanch these losses by pushing local production
of CDMA equipment -- a key demand of Chinese bureaucrats eager to
develop their country's mobile-phone industry. "We're working closely with
Chinese manufacturers to transfer CDMA technology to them," says Steve
Altman, a company vice president, adding that "we have approximately 70 to
75 licensees."
Qualcomm's failure to convince China that it would build enough products
locally helped doom its plans to build narrow-band CDMA, the kind of
technology currently in use in the U.S. and a handful of other countries. As of
now, no Chinese companies can build reliable handsets, base stations and other
equipment using CDMA.
If Qualcomm had started earlier building closer ties to Chinese companies able
to make CDMA equipment, the government might not have nixed its February
agreement, say people familiar with Qualcomm's negotiations. "Unicom [China
United Telecommunications Corp.] did not have in place a localization plan so
that in two or three years time it would no longer have to import billions of
dollars of CDMA equipment," says a Western diplomat.
Unicom, China's state-owned second phone company, said Sunday it won't
build a current-generation mobile-phone network using CDMA, but will use
Qualcomm's technology in the future. If Unicom follows through, Qualcomm
still stands to make money -- the company hopes to have its next-generation
product ready by the end of the year, but it is unlikely that Unicom will begin
using it so quickly.
Qualcomm was anxious for Unicom to deploy its current narrow-band product
because countries are likely to upgrade to new technologies more slowly than
expected. "Qualcomm thinks narrow-band will have a longer life span in many
parts of the world, and it can't be pleased that narrow-band has been frozen
out of China," says Peter Cowhey, a professor at the University of California at
San Diego and a former adviser to Qualcomm's chairman, Irwin Jacobs.
Eventually, though, China will almost certainly use some form of CDMA
technology. If China uses cdma2000, Qualcomm's next-generation standard,
the company stands to gain the most. If China uses another version of the
technology, called WCDMA, Qualcomm might receive less in royalties because
European companies also claim to hold patents, although the legal battles
haven't yet begun.
In a sign that the government is considering using Qualcomm's products in the
future, it has asked Chinese telecommunications equipment makers to provide
an update on their progress in building advanced mobile-phone networks,
including Qualcomm's cdma2000.
interactive.wsj.com |
