US firms give up margins for China volumes
Chipmakers take advantage of huge demand from the mainland for cheaper components
Savvy United States chipmakers are hitching their wagons to Chinese smartphone makers, willing to sacrifice profit margins to boost sales volumes in the world's second-largest market for mobile phones.
Increased exposure to China has diluted chipmakers' gross profit margins to somewhere in the mid-40 per cent range from an average of nearer 50 per cent in developed markets, analysts estimate. The rewards lie in the huge volumes demanded by Chinese handset makers.
"The guys that have traditionally been focused on the developed markets are now starting to see a slowdown," said Stewart Stecker, research analyst at asset management firm AlphaOne Capital Partners. "The guys that are most focused on emerging markets are seeing healthy growth rates."
Brisk demand for low-priced Android devices on the mainland was the main driver of a 39 per cent jump in global smartphone shipments in the third quarter of this year, according to data published by market research firm IDC.
IDC forecast annual smartphone shipments on the mainland, already an US$80 billion market, would rise to US$120 billion by 2017. That is 460 million handsets in need of chips, filters and other components.
A new wave of Asian smartphone makers has emerged to help meet this demand for low-end handsets, including Lenovo, ZTE and Xiaomi Tech - the rising star of cheap, mainland-made smartphones.
"We end up selling more lower-end components into China, which tend in general to be a little lower-margin," said Rick Bergman, chief executive of Synaptics, a California-based supplier of touch-screen chips.
Synaptics reported a 10 per cent rise in revenue from China in its last financial year to June, with the mainland accounting for about 60 per cent of its revenue.
Shares of Synaptics, which also supplies chips to Taiwanese smartphone maker HTC's One model and Sony's water-resistant Xperia - both popular with mainland consumers - have risen about 60 per cent this year.
They have outperformed shares of competitors such as Audience, Atmel and Maxim Integrated Products, which have been stung by inventory reductions at Samsung, their No1 customer, and are only now beginning to move into the mainland in a big way.
Qualcomm accounts for nearly half of global sales of the "baseband" chips that connect mobile phones to cellular networks. It derived nearly half its revenue from the mainland in the financial year to September, up from 32 per cent in 2011.
