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Qualcomm (QCOM) at Crossroads in China: Should Investors Fret?

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Over the past few weeks, Qualcomm Incorporated (QCOM - Free Report) shares have been skidding as concerns regarding China refuse to subside. With one of the biggest footprints in the communist nation by a U.S.-based firm, the market uncertainties seem to be taking a toll on its stock-market performance. Moreover, as China accounts for the lion’s share of Qualcomm’s revenues, any disruption in local operation is bound to have a ripple effect across the company.

The chip-making firm has a significant presence in more than 12 cities in China, aiming to drive advancements in semiconductors and mobile telecommunications for the larger benefit. The company has been a key supplier of chips and other related components to local smartphone manufacturers like Xiaomi, Huawei and its spin-off brand Honor. However, it appears that Qualcomm is increasingly finding it difficult to maintain its operations in China.

Much of these hardships can be attributed to the continued Sino-U.S. trade spat. The U.S. Commerce Department has long imposed various trade restrictions against China that banned the sale of high-tech equipment, chips, components and related technology to develop high-end smartphones and AI-enabled chips. Despite adding China-based Huawei to the ‘Entity List,’ the newly developed Huawei Mate 60 smartphone is believed to have violated the U.S. trade sanctions. This has forced the U.S. watchdog to enforce stricter trade restrictions while conducting the authenticity of the trade violations.

This, in turn, is believed to have led to a tit-for-tat action against Apple Inc. (AAPL - Free Report) , with various media reports claiming a purported move by Beijing to impose a ban on the use of iPhones in government offices and state-backed entities as part of its concerted effort toward self-reliance. The restrictions on Apple are likely to have a profound effect on Qualcomm, which is one of the leading suppliers to the iPhone manufacturing firm.

Over the years, China has been one of the primary markets for Apple. As the news of the purported ban spread like wildfire, Apple’s shares slumped and wiped nearly $200 billion in market capitalization. This further affected its suppliers like Qualcomm, among others. Qualcomm modems have been a key feature in iPhone models, connecting the device to cellular networks for fast web browsing and instant app access. Built on indigenous technology that requires specialized engineering expertise and broad industry know-how, these modems have been the hallmark of impeccable performance standards.

The impact is further likely to be compounded by the fact that Qualcomm recently entered into a multi-year agreement with Apple to supply Snapdragon 5G Modem-RF systems for all the upcoming iPhone models.

Amid such adversities, Qualcomm is reportedly undertaking job cuts and retrenchments to sustain its business. Local media reports claim that the company has laid off dozens of people from its research and development facility in Shanghai, raising questions about its long-term viability plans.

However, China-based firms like Honor have vouched to continue procuring core chips from Qualcomm despite nationalist calls to support domestic manufacturers. It stated that QCOM chips enable efficient optimization of Honor handsets and enrich its performance standards. Moreover, it has historically supplied older-generation 4G chips to Huawei, which are believed to be safe and do not jeopardize national security interests. Consequently, the company is likely to avoid any penal action by the U.S. Commerce Department regarding any wrongdoings that harm the safety and integrity of the nation.

In the backdrop of these events, we believe that the company will strive to maintain an optimum balance between its China operations and conforming to the national interests of both countries. Although shares did have a knee-jerk reaction triggered by the sudden developments, we expect the company to strike the right chords in the near future.

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