Go East, Young Chipmaker

For Qualcomm, India and China are risky growth bets

For wireless highflier Qualcomm Inc. (QCOM ), India represents everything right and everything risky in the company's global game plan. On Dec. 28, Indian conglomerate Reliance Group (RELH ) will march into 600 cities, offering cheap calling plans with jazzy features such as wireless games and text messaging. The service uses Qualcomm's patented chip designs and could become Qualcomm's wedge in the world's fastest-growing cellular market. But Reliance already faces a host of difficulties, including legal challenges by competitors and sluggish response from consumers, many of whom are too poor to afford any phone service.

At the moment, these troubles may seem trivial. Qualcomm is at the peak of its powers, having swung from a $578 million loss in 2001 to a profit of $360 million in the year ended Sept. 29. Chip shipments for the six-month period ending next March should hit 52 million units--nearly double the volume for the same period a year earlier, largely due to anticipated demand in India and Qualcomm's other big new market, China. Investors have taken note, bidding Qualcomm's shares up 46% since July 1, to $38. In the same period, the Philadelphia semiconductor index fell 19%.

Irwin M. Jacobs, Qualcomm's CEO and chairman, would like to convince Wall Street that India and China are the next two chapters in his triumphant tale. And shareholders long to believe him. Why? Because beyond 2003, many analysts think Qualcomm could face a slowdown in its core markets: the U.S. and South Korea. And in Europe, plans to roll out a new generation of cell phones incorporating Qualcomm technology have hit the skids.

That puts the growth burden on India and China. And though the cell-phone markets in those countries are largely virgin territory, political, economic, and competitive pressures stand in Qualcomm's way. "By pinning its hopes to Asia, Qualcomm is taking on a potentially huge downside risk," says Legg Mason Inc. analyst Craig Mallitz.

Jacobs is optimistic about India--and not without reason. Qualcomm's chips deliver a technology called CDMA, which allows cellular networks to support more simultaneous calls than competing approaches such as Europe's GSM standard. So CDMA networks are cheaper to operate and hence well suited to developing countries, Jacobs contends. India's Reliance, for example, aims to offer plans starting at a rock-bottom $12.37 a month.

But as Qualcomm has learned, superior technology isn't always the deciding factor. CDMA is losing out to GSM worldwide, with only about 20% of phones sold incorporating the much-admired technology. Now, just as Reliance gears up for its launch, India's telecom regulators have been sued by Hutchison Telecom and others, who claim that Reliance has been allowed to exploit an unfair price advantage. While the lawsuit won't delay Reliance's CDMA launch, it could deter some customers and slow the takeoff.

Qualcomm faces challenges in China, too. China Unicom Ltd. (CHU ), which launched its CDMA service late last year, had to slash the price of the average $350 phone to meet its goal of recruiting 7 million subscribers by the end of the year. Analysts predict Unicom will eventually stop subsidizing the phones. That could dampen the prospects for Qualcomm, which has already made huge concessions to get its foot in the door in China. For example, the company accepts royalties of just 2% of the manufacturer's selling price for phones made in China, compared to an average of 5% elsewhere.

Jacobs wants China and India to be bastions of CDMA. In July, he opened a 43,000-square-foot research and development center in Beijing. In India, Qualcomm vowed to invest $200 million in Reliance's CDMA rollout--then held back the gift when Reliance failed to order CDMA equipment by agreed-upon deadlines. But Qualcomm could change its mind yet again. "It's about showing our support for their efforts," he says. Clearly, in both India and China, CDMA needs all the support it can get.

By Arlene Weintraub in Los Angeles, with Manjeet Kripalani in Bombay and Bruce Einhorn in Hong Kong

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