Balancing act: Chip giant Qualcomm caught between Washington and Beijing

Chip maker Qualcomm, blocked this week from a takeover bid amid national security fears, was already walking a Pacific tightrope: it has government and defence contracts in the United States, but two-thirds of its revenue come from China.

US President Donald Trump on Monday halted microchip maker Broadcom’s US$117 billion takeover of Qualcomm over concerns it would give China the upper hand in the next generation of mobile communications, forcing the Singapore-based firm to drop its bid.

The move illustrated the awkward position of Qualcomm, which is based in San Diego, California.

In the US, it has government and defence contracts and is seen as a “trusted” supplier.

In China, it has its most lucrative market, thanks to patent licensing fees it receives there from smartphone suppliers, including Apple, Samsung Electronics and Xiaomi.

On top of that, China, the US and Europe are racing to develop the next generation of mobile network technology, called 5G, for smartphones and other internet-connected devices. Whoever controls the technology will gain a potential strategic advantage, and the US government does not want to have to rely on Chinese-made equipment.

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The result is a delicate balancing act to navigate trade disputes and political tensions between Beijing and Washington that could irk policymakers and regulators on both sides, hurting business and deals.

“We see ourselves as part of the China semiconductor system,” Cristiano Amon, Qualcomm’s president, said at a Beijing event in January. “It’s very clear that 5G is important to the United States of America. It’s important for China.”

Qualcomm is still waiting for Chinese approval of its proposed US$44 billion acquisition of NXP Semiconductors and trying to mend its relationship with Chinese customers after paying a fine of nearly US$1 billion for anti-competitive practices in 2015.

The company is helping Chinese telecommunications equipment manufacturer ZTE Corp and China Mobile, the world’s largest wireless network operator by subscribers, to develop 5G technology and is involved in China’s 5G standard development trials. It has similar partnerships in the US and Europe.

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The Committee on Foreign Investment in the United States (CFIUS), which vets acquisitions of US corporations by foreign companies, said the Broadcom takeover risked weakening Qualcomm, which would boost China in the 5G race.

A Broadcom takeover could see the company cut research and development spending by Qualcomm or sell strategically important parts of the company to other buyers, including those in China, officials and analysts said.

As such concerns emerged, Broadcom immediately jumped into action, pledging to invest in Nasdaq-listed Qualcomm’s 5G technology and accelerate its move to the US. That plan, however, did not go down well with CFIUS.

The clash marked a sharp fall from grace for Broadcom, whose chief executive, Hock Tan, was welcomed by Trump to the White House last year to announce a plan to move its headquarters to the US. At the time, Trump called Broadcom “one of the really great, great companies”.

Led by Tan, a Harvard-educated Malaysian entrepreneur, Broadcom grew largely through acquisitions. Tan is an aggressive deal maker and built the US$100 billion chip giant up from a business worth just US$3.5 billion in 2009.

Until the Qualcomm bid, its biggest deal had been the US$37 billion acquisition of Irvine, California-based Broadcom, where the company, called Avago Technologies at the time, got its current name.

Qualcomm executives acknowledge the tricky relationship the firm has in China, especially with local companies like Huawei Technologies, which is spearheading China’s 5G push.

“Our relationship with Huawei is complex; I don’t know if there’s a good word for it,” Amon said in Beijing in January, adding that the company was a big supplier to Huawei while also being a competitor with the privately-held Chinese company’s own semiconductor business.

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Although Huawei is in a strong position to supply 5G network equipment to carriers in many large markets – with the notable exception of the US – it still has to license some technologies from Qualcomm, which owns more 5G patents than any other company in the world.

Keeping Chinese relationships on track is key for Qualcomm as domestic smartphone suppliers like Oppo, Vivo and Xiaomi gain prominence, and as broader US-China trade tensions rise.

Our relationship with Huawei is complex; I don’t know if there’s a good word for it

Cristiano Amon, Qualcomm president

Trump is seeking to impose tariffs on up to US$60 billion of Chinese imports and will target the technology and telecommunications sectors, Reuters reported on Wednesday, citing unnamed sources close to the negotiations.

“I would imagine relationships that we have in China, and probably the symbiosis of that relationship, it will play a very strong role with the (Chinese) regulators’ view of the future of Qualcomm,” Amon said.

The Broadcom takeover case highlights a growing risk for US companies in China.

“It’s an unenviable position because they are pretty dependent on China,” said Andrew Gilholm, director of analysis for China and North Asia at risk consultancy Control Risks, referring to Qualcomm.

“They are an extreme case but as more and more sectors become effectively considered ‘strategic’ from a comprehensive national security perspective, more and more companies are facing this kind of squeeze between the US and China.”

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