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Qualcomm Inc. (QCOM - Analyst Report), the largest mobile chipset developer globally, is expected to gain considerably from China over the near term. This forecast is based on the company’s decision to launch its first smartphone chipset, specifically designed for China, in the second half of 2014. 

Most of the Chinese handset manufacturers prefer a specific type of chipset configuration, known as “Octacore”. This technology makes mobile devices better suited for multitasking along with an improved battery life.

China Mobile has decided to sell five-mode LTE-enabled handsets from Jun 2014. We expect Qualcomm to benefit the most from this decision as the company has an extensive portfolio comprising five-mode LTE chipsets developed on its state-of-the-art baseband technology. The five-mode standard includes LTE, FDD-LTE, TD-SCDMA, WCDMA and GSM.

The Chinese market is characterized as highly price-sensitive. Low-price mobile handsets boast the majority market share.  According to research firm IDC, the average selling price (ASP) of smartphones will decline to $314 in 2014 from $335 in 2013.

The fall in ASP will persist over the next few years and may even go down to $267 by 2018. However, in China, 4G LTE handsets are currently available at an ASP of a mere $130.

Intense competition within smartphone developers and the geographic shift of the core smartphone base from the economically developed western world to low-cost emerging markets are the primary reasons that will lead to the secular fall of ASP.

Another research firm, Strategy Analytics forecasted 15% year-over-year growth in mobile phone sales to a record 430 million units in China in 2014. All these developments are significantly pressurizing the top-line of the mobile chipset manufacturers.

Moreover, aggressive competition in the mobile phone chipset market may hurt Qualcomm’s profits going forward. The company faces intensive competition from low-cost chipset suppliers like Mediatek of Taiwan, VIA Technologies and Spreadtrum Communications of China. Notably, Mediatek’s octacore chipsets are extremely popular in China.

Qualcomm is also facing severe competitive threat from its closest rival, Intel Corp. (INTC - Analyst Report), which has started shipping its first multi-mode LTE baseband modem. Competition is also likely to emanate from formidable competitors, such as Broadcom Corp. (BRCM - Analyst Report) and Nvidia Corp. (NVDA - Analyst Report). Currently, Qualcomm carries a Zacks Rank #3 (Hold).

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