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Qualcomm, MediaTek could take 5G market share if Huawei's supplies dry up

As Huawei Technologies Co. Ltd.'s technology supply options narrow further, the company and its local customers could turn to QUALCOMM Inc. and MediaTek Inc. as alternatives, experts told S&P Global Market Intelligence.

The U.S. Bureau of Industry and Security announced a tightening of rules in May to "strategically target" Huawei's acquisition of semiconductors that are manufactured abroad using U.S. software and technology.

The move saw Taiwan Semiconductor Manufacturing Co. Ltd. reportedly pause shipments to Huawei unit HiSilicon(Shanghai) Technologies Co. Ltd., which manufactures the Kirin chips for the Chinese company’s smartphones.

Unless TSMC decides it can ship to Huawei within the stricter U.S. rules, Huawei will be forced to draw from its inventory and purchase from alternative suppliers including Semiconductor Manufacturing International Corp., known as SMIC, and MediaTek, experts said.

Huawei had 167.39 billion Chinese yuan worth of inventory at Dec. 31, 2019, which could last between five months and two years depending on the range of components, the experts said. Without threats to its supply chain, Huawei's inventory level would be more similar to Apple Inc., Telefonaktiebolaget LM Ericsson (publ) and Cisco Systems Inc., according to Kinngai Chan, managing director and senior analyst at technology research firm Summit Insights Group.

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It is uncertain whether Huawei will be able to purchase technology from Qualcomm, the experts said. But either way, the U.S.-headquartered semiconductor manufacturer will benefit as Huawei loses consumer device market share to other Chinese smartphone makers, John Vinh, managing director of equity research at KeyBanc, said.

If Huawei replaces the components it sources from TSMC with those from SMIC, or replaces HiSilicon's designs with MediaTek's, the quality of its smartphone chips will fall, he said. With Qualcomm leading in 4G and 5G smartphone chips, which it can sell to other phone makers, Huawei will lose its advantage in high-end smartphones.

"The performance [of the smartphones] will be so bad and Huawei will definitely lose market share to [Chinese rivals]," Vinh said. In this scenario, Qualcomm will see more orders from Chinese smartphone makers, he added.

Chinese manufacturers make up an increasing portion of Qualcomm's revenue, Phil Solis, research director of connectivity and smartphone semiconductors at IDC, said. "I believe the U.S. will allow Qualcomm to continue selling its products to Chinese handset makers in general," he added.

Qualcomm ended a run of quarterly year-over-year revenue drop in the first quarter of 2020 by topping the list of global integrated circuit designers with US$4.1 billion in revenues, up 10.2% year over year. Qualcomm's supply of chips for Chinese brands' flagship and high-end smartphones was partly to thank, according to CY Yao, a senior analyst at TrendForce.

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MediaTek could also see a boost in revenues as an alternative to Huawei, analysts said.

"Huawei will likely engage MediaTek as the merchant supplier option if Huawei is unable to secure supply with its in-house design," Chan said. Huawei's 2020 orders to MediaTek are reportedly set to be 300% of those seen in previous years, with the latter evaluating whether it has the resources to fulfill them.

The Taiwanese chip designer will see more orders from China starting in the third quarter of 2020 when it will debut a new line of 5G processors and enter into direct competition with Qualcomm, according to Yao.

MediaTek's net income increased 69.9% year over year in the first quarter of 2020, due to the increased orders from the Chinese smartphone makers.

In addition, MediaTek and Qualcomm will see a long-term revenue boost as the average selling price of 5G chips is higher than for previous generations, analysts said. On average, the most commonly distributed 5G chips cost 30% more than 4G chips, according to Summit Insights' Chan.

Qualcomm shipped 129 million units of chips in the quarter ended March 31, 2020, down around 17% from the prior quarter. Meanwhile, revenue from chips grew to US$4.1 billion from US$3.6 billion. MediaTek saw a similar increase in chip revenue, the experts said.