Despite tough times in China, Qualcomm sees stronger chip sales there

Qualcomm is struggling through rough waters in China, but the chipmaker still sees enormous potential there.

Cristiano Amon, co-president of the Qualcomm CDMA Technologies division, said in an interview Monday that the company will be in a strong position to expand its chip sales in China as the country quickly adopts 4G LTE, a newer technology connecting devices to wireless networks, and more people in China start purchasing higher-end smartphones.

Amon, who helps lead the company's mobile and computing chips sales, also said Qualcomm is working to grow its wireless chips business in automotive and wearable devices, looking to leverage its lead in 4G technology to push into new markets.

"We're very, very excited about the traction in China," Amon said, later adding, "We expect that as the market in China becomes more sophisticated ... we're actually going to be better positioned over time."

Amon spoke specifically about Qualcomm's chips business, one of the company's two major segments. Its other is licensing, which brings in less revenue than chip sales but makes up most of Qualcomm's operating profits.

It's the licensing business especially that's facing challenges in China, with the Chinese government currently conducting an anti-monopoly investigation into Qualcomm's business practices. Also, the company last month said it's in a dispute with a licensee in China and believes some Chinese licensees are underreporting their sales of licensed products. Those issues have dampened Qualcomm's sales projections and weakened its stock price.

Adding to the tension of the investigation, antitrust expert Zhang Xinzhu last week was dismissed as an adviser on an anti-monopoly committee for China's cabinet, after state-run media alleged he took "huge rewards" from Qualcomm for helping write an economic analysis for antitrust regulators. Zhang was hired by a consulting firm working for Qualcomm, which Qualcomm said was paid a standard rate.

Amon declined to discuss issues involving the anti-monopoly investigation.

Despite those woes, the San Diego-based company has been working to build up in the Chinese market, hoping to capture a fast-expanding base of smartphone customers as China's middle class grows, while also allowing the chipmaker to balance against slower smartphone growth in developed markets. Still, Qualcomm faces off against a handful of international players, including Intel and Marvell, as well as Taiwan's MediaTek, which has grown rapidly by providing chips to mid-tier and lower-tier phones.

With China's increased adoption of 4G -- a next-generation wireless standard that offers broadband speeds over wireless networks -- Amon said Qualcomm has been able to expand and push into entry-level 4G handsets, even after largely sitting out of the China smartphone space just five years ago. He said Qualcomm wasn't involved in China's domestic market while handset makers there were churning out phones using older and slower 2G technology, and then the company was late to market with a 3G offering.

Qualcomm also has gained from its relationship with local handset makers Oppo and Xiaomi -- two of its biggest customers in China -- as it helps them speed their move to higher-end, more profitable devices.

"The acceleration from 3G to 4G is creating a momentum for Qualcomm and we're very, very happy with that momentum right now," Amon added.

Mike Burton, semiconductor analyst for Brean Capital, said Wednesday he didn't expect Qualcomm's licensing problems in China would bleed into its chip sales in the short-term, thanks in part to Qualcomm benefiting from the broader trend of 4G adoption there.

He added that the licensing investigation created some "very big concerns" and could eventually lead to Qualcomm lowering the amount of royalties it can collect in China, but he said the company remains well ahead of competitors in 4G technology, which will help chip sales.

"The other guys are still coming up the curve on 4G," Burton said.

On wearables, Amon said Qualcomm's chips are used in three wearable devices now -- from LG, Samsung, and Timex -- and the company is working on other designs that aren't yet public. He said such devices have started with wristbands and watches but could eventually come in a multitude of forms, including wearables on ears and eyewear like Google Glass.

On automotive, Amon said Qualcomm has been providing modems for cars for years, with a main service being General Motors' OnStar emergency alerts and security service. Now, he said cars can connect with smartphones, allowing for news features such as letting users disable a stolen car right from their phone.

"The car is ripe for the transformation of broadband," he said.