The Chinese smartphone market is rarely the source of bad news. From the explosion in the popularity of the devices in the country to innovation on software platforms and free-to-play games, the country’s mobile revolution appears to be one of the most vibrant technological dynamics on the planet right now. Executives from Qualcomm, Inc. (NASDAQ:QCOM) might not agree.
It seems that Chinese smartphone makers are not paying their bills and Qualcomm, Inc. (NASDAQ:QCOM) is going to suffer on its bottom line. Analysts and investors took a look at the news for the first time yesterday. The first group downgraded the company on greater than expected risk. The second group followed that lead and took billions off of the company’s value.
Qualcomm looks weak in China
China is, for now, the biggest driver of growth in the world smartphone market as a whole. India is still, in many ways, untouched by the mobile changes that have taken place across the world, and other regions, like Africa have yet to take off. Asia is supposed to be synonymous with mobile growth. That appears to be untrue for Qualcomm, Inc. (NASDAQ:QCOM) which manufactures baseboard chips, the kind that allow phones to connect to mobile data networks.
According to the company’s executive Chinese business have not been paying their licensing bills on these chips. A new report from Goldman Sachs on the company lowers the price target on shares from $95 to $88 on the risks from the Chinese business. According to the analysts, “uncertainty around royalties in China is a meaningful negative, given our expectation that China will account for more than 50% of handset sales long term.”
Another problem for Qualcomm, Inc. (NASDAQ:QCOM), according to the Goldman report, and one that’s compounding the royalties problem is the investigation into the firm’s business by the NDRC, the anti-trust organ of the Chinese government. Qualcomm is set to have major problems in Asia, and there is no telling where the issues might end. Given the new-found higher risk profile it’s no wonder that the company’s shares have lost so much value since the revelation.
There are about 200 million devices that Qualcomm, Inc. (NASDAQ:QCOM) says that it missed out on revenue from in its most recently reported quarter. The trouble for investors is that the dynamics of that number have not been tested. The fact that so many companies are refusing to pay up could encourage others to do the same, leading to a collapse in the company’s revenue.
It could also, however, precipitate the placement of the company’s problems at the center of talks between the USA and China. Trade talks between the powers regularly refer to IP violations in the Asian country, and if the problem at Qualcomm, Inc. (NASDAQ:QCOM) gets worse it may require government intervention to save the company.
Qualcomm, Inc. (NASDAQ:QCOM) could attempt the Google approach and leave the country, but OEMs would still use its designs and pay it nothing. The chip-maker is in a desperate situation, and the market doesn’t seem quite able to price that risk just yet.