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Analysis: How Qualcomm became a battleground in the race to 5G

In the global race to build and deploy the next generation of mobile wireless technology, chip makers such as Qualcomm Inc. and its competitors are leading the way, and markets and governments are taking notice.

Qualcomm's leading role in the production of the technology needed to power new 5G devices was a central point made by the U.S. government in blocking a recent takeover effort of the California-based chip maker by foreign entity Broadcom Ltd. While some analysts say the security concerns about working with foreign companies, particularly those based in China, are overblown, the debate underscores the first-mover 5G advantage expected to be enjoyed by Qualcomm and its commercial partners.

Qualcomm in February announced the smartphone manufacturers that will be among the first to use its Snapdragon X50 5G modem, the market's first 5G-ready chip device for smartphones. Initial manufacturing partners include brands such as LG, ZTE and Xiaomi. Analysts predict that smartphones containing the Snapdragon X50 device will hit the market by 2019.

"[Qualcomm is] probably going to be the first to the market [with 5G-ready smartphone chips], and when it comes to mobile devices, you clearly want to have that edge," said Jeff Heynen, an analyst with SNL Kagan, a media research division of S&P Global Market Intelligence.

Some of Qualcomm's closest competitors in the 5G development race include Huawei, a Chinese-based networking and telecommunications equipment and networking company, and Santa Clara, Calif.-based Intel Corp. But Qualcomm is widely considered "well ahead of foreign and domestic competitors" in the 5G space, as Stifel analyst Kevin Cassidy said in a March 12 research note.

A complicating factor for some of Qualcomm's competition is U.S. government officials' concerns that Chinese manufacturers could allow their country's government to install spy technology in devices sold in the U.S. Huawei already has faced setbacks in marketing some of its smartphones in the U.S. An expected deal for its upcoming Mate 10 Pro to be distributed by AT&T Inc. collapsed earlier this year, reportedly in part due to pressure from U.S. government officials. A Huawei executive at a consumer electronics trade show in January said the Mate 10 Pro would still reach U.S. consumers but as an unlocked device sold by retailers, PC Magazine reported.

Huawei and other Chinese brands have faced clear opposition from some U.S. government officials. Congressman Michael Conaway, R-Texas, in January introduced a bill that would prohibit the U.S. government from purchasing or leasing telecommunications equipment and services from Huawei and ZTE. FBI Director Chris Wray and other officials in February testifying at a Senate Intelligence Committee hearing on global threats and national security also expressed concerns about U.S. customers using phones from Huawei and ZTE.

Kagan analyst Greg Potter labeled the security concerns "a little bit overblown," considering the market dynamics involved.

"If anyone finds any security flaws in any chipsets or telecom hardware that Huawei is selling to manufacturers or carriers, that’s obviously going to be bad for [Huawei's] business," Potter said.

The Committee on Foreign Investment in the U.S., a government body that reviews any M&A transaction involving a foreign owner taking control of a U.S. business, expressed concerns that Broadcom's attempts at a hostile takeover of Qualcomm could slow down the company's progress on 5G technology, allowing Chinese competitors to gain a competitive advantage. "China would likely compete robustly to fill any void left by Qualcomm as a result of a hostile takeover," the committee wrote in a March 5 letter, adding, "A shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States."

"The reality is, a lot of people in the industry are happy with the outcome of the [Qualcomm/Broadcom] ruling," said Anshel Sag, an analyst at Moor Insights & Strategy. "They see Qualcomm being acquired by Broadcom as an end to the decades of leading innovation in wireless that Qualcomm pretty much brought upon the industry."

How quickly those innovations result in 5G devices hitting the market depends in part on companies being able to adopt technology standards that are still in development. The 3rd Generation Partnership Project, a collaborative effort by various telecommunications organizations, is working on creating common 5G technical standards, but its initial standard is not slated for release until 2019, with a full standard to follow in 2020.

"To be fully compliant with the full standard is actually going to be very difficult for a lot of operators," Sag said. "It basically requires them to completely rethink how their wireless network … and the data centers behind it operate."

Sag also noted that many other factors will factor into the timeline for 5G devices to hit the market, including the necessary network infrastructure to support it.