Fishing for chips

Updated 2017-06-12 09:32:44

Chinese smartphone makers realize processor supplies are key to achieving global supremacy

In the 9 billion global smartphone market, dominance in the domestic and Indian segments may encourage Chinese handset makers to dream of ejecting Apple and Samsung from the pinnacle, but the reality is far removed.

Chinese vendors still have several loose ends to tie up, none starker than their poor control over key sections of the supply chain, particularly chips, or processors, the engines that drive the handset hardware -the brain, if you will.

This painful truth came to torment Huawei Technologies Co Ltd, the current leader of the Chinese smartphone pack, recently.

All hell broke loose when Richard Yu, CEO of its consumer business unit, admitted in his Weibo post last month that shortage of top-end chips forced Huawei to use a mix of relatively less efficient flash memory cards and high-performance universal flash storage or UFS cards in its flagship P10 smartphone.

The UFS chip is faster than a typical flash memory card, and is essential for high-resolution games and movies.

Yu stressed the P10 hardware cocktail was not meant to save money but ensure a steady supply of shipments and timely delivery of orders.

But irate consumers bombarded Huawei with complaints.

Two red flags went up immediately.

One, anything that undermines a chip is a strict no-no.

Two, Huawei's marketing campaign for the P10 high-lighted a chip-related specification as one of the stand-out features, which stood negated by the company's late admission of truth.

"The (Huawei P10) incident is the latest example of Chinese smartphone vendors' overreliance on foreign chips. This factor has subjected their delivery schedule to the influence of supply chain partners," said Xiang Ligang, a telecom expert and CEO of cctime.com, a telecom industry website.

Agreed Jia Mo, an analyst at Canalysys. "The Huawei incident mirrors a broad problem in China's burgeoning electronics sector. Though China is a manufacturing powerhouse in computers, smartphones and other electronic gadgets, the country banks on foreign players for most processors."

Stated differently, Chinese smartphone manufacturers are years away from self-reliance in, and mastery of, chip-making,which is currently the preserve of global majors such as US multinational Qualcomm, and South Korea's Samsung and SK Hynix.

Qualcomm Inc is the undisputed leader of the global mobile processor market -this is borne out by the fact that all the seven Chinese brands among the world's top 10 smartphone labels depend on it for chips, especially in the premium segment.

It's a truth that does not sit well with the fact that China's smartphone giants have posted exponential growth in both home and overseas markets in 2016.

Domestic shipments for the country's top three vendors Huawei, Oppo and Vivo touched 224.2 million units, up more than 80 percent year-on-year, while their overseas shipments reached 91.8 million units, up about 70 percent year-on-year. Together, they accounted for 21.6 percent of the global smartphone shipments in 2016, according to data compiled from IDC.

But that may count for nothing eventually without reliable supplies of top-end chips, the key to successful forays into, and dominance of, the premium smartphone segment.

Dominance in the premium smartphone segment has strategic significance because it not only indicates technological prowess but generates massive profits.

For instance, in the first quarter of this year, Apple's iconic top-end iPhones, which are powered by in house chips, earned .1 billion, or 83.4 percent of profits of the global smartphone segment, according to Strategy Analytics, a market research firm.

So, having the ability to make top-end chips will likely also help Chinese companies to better manage other supply chain partners, experts and company executives said.

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