Without Kirin’s high-end chips, the only choice for Huawei’s flagship to maintain the competitiveness of high-end products in the Android camp is Qualcomm Snapdragon 8 series flagship chips.

Even under the current gloom, Qualcomm and Huawei, the two leading enterprises in the communication industry between China and the United States, still have a balance point of competition and cooperation.

Kirin chip is about to stop production

Cooking without rice, sighing. Yu Chengdong, CEO of Huawei Terminal, admitted a few days ago that due to the second round of sanctions imposed by the US government, Huawei chips will stop production after September 15th. Mate 40, Huawei’s upcoming flagship product, will be equipped with Kirin 9000 chip (originally named as 1020) with 5nm technology, but it is also the last generation of chips that TSMC OEM for Huawei, unless the US government lifts the sanctions against Huawei.

Although Kirin chip itself has made many technological breakthroughs, in the field of chip manufacturing, the process of domestic chip manufacturers in China still lags behind the mainstream of the industry, which can not meet the demand of high-end Kirin chips developed by Huawei based on 5nm process. Last year, the first wave of sanctions in the United States did not affect TSMC, the foundry of Huawei’s Kirin chip. However, the second wave of sanctions in May this year finally forced TSMC to "cut off supply" to Huawei, which also made Kirin 9000 a swan song without a manufacturing factory.

Previously, Google was forced to stop providing Google services for Huawei’s mobile phones, which has caused Huawei’s new products to suffer a heavy blow in overseas markets (the models before sanctions can continue to be sold); This time, TSMC has no choice but to cut off the supply, which makes the future of Huawei’s flagship suffer a drastic cut, including the production capacity of Mate 40. This is undoubtedly a huge blow to Huawei, which just topped the global smartphone shipment list in the second quarter of this year.

However, the US government’s second round of sanctions against Huawei was issued on May 15th, giving Huawei a four-month buffer time, which came into effect on September 15th. In other words, TSMC will no longer accept new orders from Huawei after May 15th, and will no longer supply Huawei after September 15th. During these four months, Huawei has already made preparations, and the patent licensing agreement with Qualcomm is one of the key steps.

Finally reached an authorization agreement.

On July 30th, when Qualcomm released its financial report, it announced that it had reached a multi-year patent licensing agreement with Huawei, so Qualcomm will count $1.8 billion in patent licensing revenue in the fourth fiscal quarter. It should be emphasized that this fee is the licensing fee accumulated by Huawei since 2017, covering 3G and 4G LTE patents, not the future licensing fee for both parties. Boosted by this news, Qualcomm’s share price rose sharply from less than $93 on July 29th to $108 at present, and its market value also reached a new high.

In January 2017, after Apple filed a patent lawsuit against Qualcomm, it suspended the payment of patent licensing fees to Qualcomm. Qualcomm subsequently sued Apple iPhone for patent infringement, and successfully applied to ban the sale of some models of iPhone in Germany and China. In April of that year, Huawei also postponed the patent licensing fee for Qualcomm, but the relationship between the two parties was not as tense as that between Apple and Qualcomm. The two companies reached an interim agreement, and Huawei still paid part of the patent fees to Qualcomm regularly (paying $150 million every quarter) during the negotiation between the two parties.

In April last year, Apple and Qualcomm reached a settlement and multi-year patent licensing agreement, and paid a total of $4.7 billion in patent fees that were overdue for more than two years. In addition, Apple will purchase 5G baseband chips from Qualcomm for the iPhone 12 series released this year. Now Qualcomm has reached patent licensing agreements with all major OEMs, and Huawei is actually the last one to reach an agreement. A patent agreement with Huawei may bring as much significance to Qualcomm as a licensing agreement with Apple.

In addition to receiving $1.8 billion in patent fees payable, Qualcomm has completed the patent licensing agreement with major manufacturers in the whole smart phone industry. From 3G to 4LTE, and then into the 5G era, Qualcomm has always firmly occupied the leading position in the development of the smart phone industry by virtue of its basic invention advantages. In the field of communication technology, patent strength is not simply measured by quantity, but by quality. Although the absolute number of patents in the field of 5G in Qualcomm is not one of the best, most of them are core patents with higher quality and value.

Why pay Qualcomm?

This licensing agreement is also of great significance to Huawei. On the issue of patents, the two mobile communication giants actually have the same consensus: only by respecting intellectual property rights and paying for patents can we have enough revenue to ensure technological innovation, promote the development of the communication industry and form a virtuous circle. Both companies have invested 15%-20% of their annual revenue in technological innovation, and only in exchange for tens of thousands of communication technology patents have they become the two major innovators leading the 5G communication industry.

As an industry leader in the field of carrier equipment, Huawei also has a strong patent pool for communication technology and has reached extensive cross-licensing agreements with major telecom operators around the world. Huawei also has a large number of patents to seek authorized revenue, and its intellectual property rights need to be respected by its partners. Since 2015, Huawei has accumulated nearly $1.5 billion in patent licensing revenue. Earlier this year, Huawei also filed a patent lawsuit against Verizon, the largest mobile operator in the United States, demanding that the latter pay a patent licensing fee of up to $1 billion.

Huawei has spanned both telecom operators and consumer terminals, while Qualcomm is not involved in the manufacturing of terminals and basic equipment. This is the fundamental reason why Huawei must pay the patent licensing fee to Qualcomm. However, considering that both Huawei and Qualcomm have a large number of patents that need cross-licensing, perhaps Huawei is the most powerful manufacturer in the smart phone industry. However, as the largest manufacturer in the smart phone industry, the patent licensing fee paid by Huawei to Qualcomm with an annual shipment of more than 200 million units will not be a small number.

In the past three years, Huawei has been the fastest growing manufacturer in the smart phone industry, surpassing Apple and Samsung, and finally topped the industry in the second quarter of this year. Although it was banned by the US government last year, which slowed down the growth of Huawei’s mobile phones, it did not stop the rise of Huawei’s mobile phones. According to Yu Chengdong, the US ban last year caused Huawei to ship 60 million mobile phones less. In the first half of this year, Huawei’s consumer business realized revenue of 255.8 billion yuan and mobile phone shipments of 105 million units.

Huawei’s flagship is short of chips.

However, the chip is the "Achilles heel" of Huawei’s mobile phone. Huawei cannot cover every aspect of the chip industry. After TSMC was unable to OEM Kirin high-end chips for Huawei due to the ban, Huawei urgently needs to find a new chip supply for its flagship mobile phone to fill the supply chain gap of its high-end product line. And they only have three choices: Samsung, MediaTek and Qualcomm.

MediaTek was originally a supplier of Huawei chips. Earlier this month, the media reported that Huawei and MediaTek signed a cooperation intention and purchase order, and will purchase 120 million chips from MediaTek. However, a large number of MediaTek chips can be used in the low-end market, but there is no guarantee that Huawei’s flagship will continue to ensure its hard-won competitiveness in the high-end market.

It is also unlikely that Samsung will supply Orion to Huawei’s flagship. On the one hand, Samsung does not have a history of supplying Orion chips to the outside world on a large scale, nor does it have the corresponding customer support capabilities. Because the supply of chips is not only a simple sales volume, but also requires extensive technical cooperation and support. On the other hand, Huawei is Samsung’s main competitor at present. In the Android flagship market, Huawei’s two flagship P series and Mate series are almost in direct competition with Samsung’s S series and Note series. It is no exaggeration to say that supplying Huawei is a direct blow to the sales of its flagship products. Previously, Samsung, which also has the OEM capability of 5nm chips, also refused to OEM Kirin chips for Huawei.

As far as the current reality is concerned, without Kirin’s high-end chip, the only choice for Huawei’s flagship to maintain the competitiveness of high-end products in the Android camp is Qualcomm Snapdragon 8 series flagship chip, which is also the general processor of all high-end flagships in the Android camp. Although some unique functions of Kirin chip can no longer be realized, at least Huawei can stand on a competitive platform with other Android manufacturers and form a differentiated advantage through its own research and development accumulation. Crucially, Qualcomm doesn’t set foot in the terminal business himself, and has always maintained close cooperation with mainstream mobile phone manufacturers in China such as Xiaomi, OPPO and vivo, and is also a long-term chip supplier of Huawei. The business model determines that Qualcomm is happy to see Huawei’s flagship continue to maintain strong sales with the support of Snapdragon’s 8 series chips.

Qualcomm openly opposes the ban.

As early as the end of May this year, John Vinh, an analyst at KeyBanc Capital in the United States, predicted that Huawei would soon reach a patent licensing agreement with Qualcomm, and would also purchase Snapdragon 8 series chips from Qualcomm to make up for the supply difficulties of its Hisilicon chips due to the limited supply chain. According to mainstream media reports in the United States, Qualcomm has been lobbying the US government for the past few months, hoping to obtain an export license from the BIS of the US Department of Commerce to supply Snapdragon mobile chips to Huawei’s 5G mobile phones.

For Qualcomm, they do not compete with Huawei in the field of terminal hardware; If we can supply Huawei with Snapdragon flagship chips, it will not only win each other, but also benefit the development of the whole industry. As for Huawei, if it can get Snapdragon’s flagship chip, it can ensure that it will continue to maintain its competitiveness in the high-end field of smart phones even if Kirin stops production, and save its own strength, waiting for the improvement of domestic chip manufacturing technology in the future.

This is not the first time that Qualcomm has called on the US government to release Huawei. Although it has its own Kirin chip, Huawei has been sourcing Snapdragon chips from Qualcomm for smartphone products in the mid-market. After the US Department of Commerce listed Huawei in the entity list last year, Qualcomm CEO Molenkov made it very clear that he hoped to continue cooperation with China partners no matter how the situation changed. Qualcomm will continue to focus on the development of 5G and will not be affected by government policies. In addition, Qualcomm, together with Silicon Valley giants such as Google and Intel, lobbied the US government to relax the ban and continue to supply chips to Huawei.

In September last year, in a speech to China media, including Sina Technology, Morenkov said that Qualcomm has been trying to supply Huawei, despite the regulatory problems faced by the US government. At that time, Morenkov said, "Every American company will be restricted by trade supervision to a certain extent, but in fact, Qualcomm has restarted its supply to Huawei and has been trying to ensure continuous supply in the future."

Despite the recent deterioration of the political environment, Qualcomm’s management has been speaking out against the current, calling for attention to the common interests between the two countries, and stressing that the two countries have opportunities to achieve win-win growth through cooperation in many fields. Qualcomm President An Meng said last month that Qualcomm has cooperated with China’s mobile communication industry for more than 25 years, which is a stable force in the technology industry, while China is leading the development of the world’s 5G industry.

Balance of interests in competition and cooperation

The U.S. government banned Huawei mainly because of political factors. They were worried that Huawei’s rising position in the communications industry would bring "national security risks" to the United States. Their purpose is to limit Huawei’s business to China as much as possible, which is also the main reason why the United States is trying to dissuade Britain, Australia, Japan, France, Italy and other allied countries from adopting Huawei’s 5G equipment. On the contrary, major American technology companies have always opposed the government’s ban on Huawei.

In fact, Qualcomm and Huawei have always had a benign relationship of cooperation and competition. On the one hand, both companies are investing heavily in the research and development of mobile communication technology, and each has its own advantages in the formulation of 5G communication standards, which objectively accelerates the pace of 5G commercialization; On the other hand, Huawei has been purchasing a large number of chips from Qualcomm and is an important customer of Qualcomm. This multi-year patent licensing cooperation also means that the two companies have found a balance of interests. Moreover, both companies are jointly expanding the smart phone market, especially popularizing 5G communication technology. It is in the fundamental interests of Qualcomm and Huawei to enlarge the whole ecosystem.

China is not only the largest smartphone market in the world, but also the largest smartphone production and supply chain base in the world, the most valued mobile communication market and partner base in Qualcomm, and the largest revenue source country in Qualcomm. In the American science and technology industry, Qualcomm, Apple, Microsoft and Intel have been firmly cultivating the China market and supporting the industrial development of China, and have always supported the common growth of Sino-US cooperation.

Although there are some negative factors in the current policy environment because of the US government, which is beyond the control of one or two companies, the trade and cooperation between Chinese and American technology companies will continue. Even under the current gloom, there is still room for competition and cooperation between Chinese and American technology companies, and there is a balance of interests for common benefits, especially in the 5G era.

Disclaimer: The market is risky, so you should be careful when choosing! This article is for reference only, not as a basis for trading.