U.S. Chipmaker Qualcomm Terminates Joint Venture with China
Qualcomm Inc., the U.S. company that makes the chips used in many popular smartphone models, has decided to terminate a joint venture with the government of China’s Guizhou province.
The company established by this venture in 2016, Huaxintong Semiconductor Technologies (HXT), will reportedly cease operations by April 30.
The report on HXT’s demise, published on Thursday by The Information, cited ten anonymous employees of the company. Neither HXT nor Qualcomm made an official announcement as of Friday morning.
The joint venture was expensive, consuming about $570 million in investments from the U.S. company and the Guizhou government, but evidently underperforming. Previous reports by The Information quoted employees who said long-term projects began winding down in early April after HXT replaced its CEO.
The company was founded to produce chips for the powerful servers in data centers. Qualcomm was to provide technology for the venture, while Guizhou is a relatively poor province that has been trying to attract tech business by offering cheap labor, real estate, and electricity.
The Information posited a number of reasons for HXT’s failure, including a questionable choice of architecture for the chips it produced, Qualcomm miscalculating the difficulty of breaking into a market dominated by rival Intel, and Qualcomm becoming distracted by a fierce legal battle with Apple.
Another problem was political interference from the Chinese side of the partnership, which owned 55 percent of HXT versus 45 percent for Qualcomm. The venture was disturbingly politicized from the beginning:
The pairing of the two parties was routine. When U.S. tech companies expand into China, they often have to form joint ventures with local partners, taking a minority stake in the new entity while ceding control to their Chinese counterparts.
Politics were central to the pact. The Guizhou location selected for the venture had a dynamic provincial chief, Chen Min’er, a rising star now seen as a potential successor to China’s President Xi Jinping.
Qualcomm, meanwhile, was eager to cultivate closer ties with Beijing, people familiar with Qualcomm’s thinking said. In 2015, China’s antitrust authorities had fined Qualcomm $975 million for violating the country’s competition laws. As part of a settlement deal, Qualcomm was required to invest in the Chinese economy.
One bit of leverage Beijing held over Qualcomm was the company’s desire to buy a Dutch chipmaking firm called NXP. “Chinese regulators would eventually become the lone holdouts among authorities around the world holding up approval of the $44 billion deal,” The Information noted.
This delicate relationship with Chinese politicians appears to have kept Qualcomm from making some tough business decisions that would have displeased the Chinese. Gaining approval for the NXP deal and keeping the Chinese from developing their own domestic chip companies were mentioned by insiders as reasons the American company took pains to keep China happy, which meant pouring more money into ventures Qualcomm might otherwise have restructured, scaled back, or ended sooner.
Qualcomm continually expressed a commitment to keeping HXT afloat in China even as it cut costs in the United States and laid off employees.
The South China Morning Postexplained on Friday that China is pulling foreign companies into these joint ventures as part of its “Made in China 2025” plan to achieve a dominant position in global technology:
China is on a drive to build leadership and more self-sufficiency in strategic technology areas as part of its wider “Made in China 2025” (MIC2025) policy plan. At the heart of the plan is the country’s semiconductor industry, in part because advances in chip technology can lead to breakthroughs in other areas of technology, handing the advantage to whoever has the best chips – an edge that currently is out of Beijing’s reach.
The SCMP noted that one of the rules imposed on these partnerships by the Chinese Communist government “requires foreign operators to partner with domestic data centers so that data on Chinese citizens is stored within the country and not on overseas servers.”
HXT launched its flagship product in November, the StarDragon 4800 commercial-grade core processor, intended for use in both government and private data centers. Chinese media declared the chip “competitive with mainstream high-end chips for servers in the international market” and fully compliant with “China’s commercial cryptographic algorithms.”
HXT might be doomed unless the insiders are wrong and U.S. and Chinese partners announce measures to keep the venture afloat, but Qualcomm is sitting very pretty at the moment. Its legal war with Apple may have been exhausting, but it was also very rewarding, as Apple agreed to a $5 billion settlement plus patent royalties on iPhones to Qualcomm.
The deal will likely make Qualcomm the undisputed king of 5G wireless chips in the U.S. market, facing only South Korea’s Samsung and China’s Huawei as global competitors. Qualcomm has long been seen as the key player in preventing China from developing a significant lead in 5G wireless, which is so much faster and more robust than 4G that it stands to revolutionize computing and make entirely new applications of wireless technology possible, with an accordingly dramatic impact on the global economy.