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Qualcomm in talks with leading Chinese firm

The cell phone company is looking to establish an important beachhead in Asia, a market that could prove vital to its wireless strategy.

Qualcomm is looking to establish an important beachhead in Asia, a market that could prove vital to its wireless strategy.

In a global competition for wireless users, underdog Qualcomm may be set to strike a heavy blow. The San Diego-based company said it is talking with China's top telecommunications company China Unicom regarding the use of its code division multiple access (CDMA) technology.

The discussions underscore Qualcomm's strategic shift from manufacturing wireless equipment back to its roots in developing intellectual property, and also highlight its bet that CDMA can become one of the world's leading digital wireless technology protocols. A successful outcome would go a long way toward ensuring the success of both.

"It's bragging rights," said Iain Gillot, a wireless industry analyst at market researcher International Data Corp. "The Chinese market is huge. If they don't get it, their competitors can say 'Yeah, Qualcomm is big, but they don't have China.'"

For years, Qualcomm made equipment and mobile telephones to help ensure there was a market for its nascent CDMA technology. Faced with patent squabbles and falling profits in the cell phone business, the company exited both markets in the past year, hoping to rely on licensing CDMA and associated communications chips as the core of a profitable business.

The most common wireless transmission standard, GSM, which stands for Global Systems for Mobile communications, is particularly prevalent in Europe and Asia. According to market research firm Dataquest, nearly 157 million GSM-based mobile phones will be shipped worldwide this year, compared with shipments of about 43 million CDMA cell phones.

But many industry observers say CDMA, strongest in North America, is more efficient and can handle Internet-based transmissions better.

China has long used GSM. Until recently, government-controlled Chinese communications carriers have been reluctant to entertain other standards.

"We are in negotiations with China Unicom (regarding the introduction of CDMA in China) and we are pleased with the progress," said Qualcomm spokeswoman Christine Trimble.

As the primary CDMA patent holder, Qualcomm gets royalty fees from companies that utilize its technology. Royalties and chipset sales have been the fastest-growing part of the business in recent years, so ridding itself of the equipment manufacturing units made sound business sense, analysts said.

So far investors have applauded the strategy, making Qualcomm a top performing stock. But the company recently warned that its chipset sales may slow during the second quarter.

Moving into China would undoubtedly be a huge win for the company, according to analysts like IDC's Gillot.

Other analysts said the Chinese government, like the rest of the world, is recognizing that Qualcomm's CDMA technology is well-suited to handle the expected onslaught of wireless voice customers as well as mobile Internet access and other wireless data services. By embracing CDMA sooner rather than later, Chinese wireless carriers, as giant customers, will have more impact on the direction of the CDMA standard and its cost and features.

"The Chinese government can no longer afford to dictate a GSM-only standard," said Pete Peterson, a financial analyst at Prudential Volpe Technology Group. "The Chinese want to cut a deal because the market imperative is that you've got to play in CDMA."

An agreement with Chinese wireless carriers also could have an impact on carriers in other Asian countries, such as Korea, Thailand and Taiwan, that haven't settled on which next-generation wireless voice and data transmission protocol to deploy.

"(If Qualcomm breaks into China) now you have the world saying CDMA is the future," Peterson said.

Although Qualcomm may be inching toward an eventual agreement with China Unicom or others, its entry into the Chinese market could be years off. Some analysts expect a deal by late 2000 or early 2001, but others point to the strained political relations between the United States and China as a potential sticking point.

"It doesn't matter what the market wants, it's what the government is going to allow," IDC's Gillot said.