Qualcomm Inc (QCOM)

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CDMA chipset shortage hits second-tier handset makers

Qualcomm’s inability to meet demand for its lower-end CDMA handset chipsets is causing production problems for many Korean handset makers, particularly medium-sized firms upon whom the brunt of the shortage has fallen.

It seems Qualcomm underestimated demand for its 5000 series chipsets, apparently forecasting stronger demand for its 6000 series. Smaller makers at the lower-end of the market have had their orders cut by up to 50%, said Tae-kyung Hwang general manager, project department, at the Information and Telecommunications Intellectual Property Association, which has taken the lead in supporting second-tier handset makers.

These companies have had to live with the shortages since Qualcomm is the only CDMA chipset supplier in Korea, although it subcontracts manufacturing to IBM and two Taiwanese companies. Many firms hesitate to complain as they’re concerned about disruptions in their already reduced orders.

In Japan, where Qualcomm now supplies 100% of the CDMA chips used in KDDI handset models, manufacturers are also suffering, but the problem is less serious because most have already moved to newer, more powerful chips. The shortage is expected to continue until June when all suppliers for Japanese carriers move from the 5000 series to the 6000.

Samsung and ETRI have been developing chips for the handsets as have Texas Instruments, but as the record in Japan shows, it’s difficult trying to compete with Qualcomm. Fujitsu and Motorola tried but failed to successfully develop their own chips. Sony and Panasonic launched products with their own chips but ultimately switched to Qualcomm as did Denso and Kyocera after using competing chipsets.

The widespread dissatisfaction in Korea over the royalty payments being made by Korean makers to Qualcomm, which holds over 400 key CDMA patents, is partly because Korea has played a major role in the success of CDMA worldwide. It is estimated that in 2002 Qualcomm collected nearly $4 billion in royalties in Korea.

One issue is that the royalty guidelines based on the net selling price (NSP) were set before the launch of handsets with cameras and other sophisticated features.

“The royalty guideline based on the NSP is irrational because we must pay a royalty even on expensive add-ons like camera modules and sound cards, which have nothing to do with Qualcomm,” argues Hwang, who believes that Samsung and LG Electronics have special lump-sum deals with Qualcomm.

The other point of contention is the optional royalty arrangement that Qualcomm created after long negotiations with China but also openly offered in Korea. Makers would pay a 7% royalty on exports for the first three years and 5% thereafter. This arrangement favors fledgling CDMA handset businesses. For Korean makers, which have built up substantial export businesses over several years, the burden of paying an extra 1.25% royalty for three years is unacceptable and they aren’t interested in the new deal (they are currently paying 5.75%).

Even shifting to the manufacture of W-CDMA handsets won’t help Korean makers in this respect because Qualcomm operates the same royalty guideline for W-CDMA. They may even sometime in the future have to pay additional royalties on the W-CDMA patents held by NTT DoCoMo, NEC, Fujitsu and Motorola.

Meanwhile, Qualcomm’s share of the W-CDMA chip market is growing. Its MSM6250 W-CDMA chipsets are being used by Sanyo and Toshiba and have recently been selected by Chinese manufacturers ZTE and Hisense. When NTT DoCoMo upgrades its FOMA network next year to meet UMTS standards, Qualcomm expects to gain further market share in Japan.

As for Korea, despite all the hype about the success of CDMA, Korean makers last year actually sold more GSM handsets than CDMA phones. This year they expect their GSM sales to increase nearly 50% and pass the 100-million mark.

– Staff writer

http://www.telecomasia.net/telecomasia/article/articleDetail.jsp?id=92460