WSJ Tech Center 7/4/01
Qualcomm Announces
Its First Deals in China
By PETER WONACOTT
Staff Reporter of THE WALL STREET JOURNAL
BEIJING -- Qualcomm Inc., moving to kick-start its sales in China, is reaching
out to local manufacturers in ways that underscore the market's potential heft
and the tortuous path the company took to get here.
Qualcomm announced Tuesday its first
agreements to license its wireless technology to
two Chinese telecommunications-equipment
makers -- ZTE Corp. and Great Dragon
Information Technology Corp. Though financial
terms weren't disclosed, Qualcomm Chairman
and Chief Executive Irwin Jacobs said the
company would license its technology at terms
more "favorable" than those wireless handset and
chip manufacturers in other countries now enjoy.
Despite such concessions, the deals represent promising signposts in the San
Diego, California, company's long battle to spread its technology in China.
Nearly all of the country's 111 million mobile-phone subscribers are hooked up
to a GSM (global system for mobile communications) network, which is based
on technology favored by swaths of China's telecom bureaucracy as well as
Qualcomm's European competitors. Over the last few years, the U.S. firm has
appealed repeatedly to China's top leaders -- often through senior U.S.
government officials -- to promote its own CDMA (code division multiple
access) technology, so the two wireless standards can compete openly. But a
final deal kept getting pushed back amid fits in U.S.-China relations.
Now, Beijing appears to be throwing its weight behind CDMA. In October, the
country's No. 2 mobile-telecommunications operator, state-owned China United
Telecommunications Corp., will launch a nationwide CDMA network that can
initially support 15 million users. The new network is expected to charge service
fees that are half as much as those for GSM network users.
And, in a step to boost China's telecom market in general, the government
recently cancelled fees for installing fixed lines and setting up mobile-phone
accounts.
The new licenses grant the two Chinese companies the right to make and sell
equipment based on Qualcomm's CDMA standard, which can support current
and future generations of mobile phones and wireless devices.
Mr. Jacobs, in Beijing to open a new training center to speed the rollout of
CDMA, predicted a jump in mobile-phone users, which he said would be a boon
for Qualcomm's business. "China still has a relatively low penetration rate,
meaning most of the growth is yet to come," he told reporters.
That potential has spurred Qualcomm to play favorites, analysts say. Efforts to
nurture Chinese manufacturers with low fees and extra training is politically
astute in a country where its toehold is still tenuous, said Craig Watts, an
telecom analyst at technology consultancy BDA (China) Ltd. In the eyes of the
government, "Qualcomm is meeting its obligations," he said.
But, by cozying up to Chinese equipment makers, Qualcomm risks angering
customers in other markets. The higher royalty fees South Korean telecom firms
pay Qualcomm, for example, squeeze their profit margins, drag on equipment
exports and hinder efforts to expand CDMA use in that market, analysts said.
"They can't maintain a dual policy on royalty fees," warned James Kim, a
technology analyst in Seoul for Salomon Smith Barney.
Qualcomm could come under pressure to renegotiate those fees, especially as
low-cost Chinese competitors look to export CDMA equipment. One of them is
Shenzhen-based ZTE, which signed the first licensing agreement with
Qualcomm. It has already started producing equipment for the new CDMA
network, and although a ZTE executive wouldn't disclose terms of the contract,
she confirmed that Qualcomm extended the company "favorable treatment."
Write to Peter Wonacott at peter.wonacott@wsj.com.
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