Savvy U.S. chipmakers are hitching their wagons to Chinese smartphone makers, willing to sacrifice profit margins to boost sales volumes in the world's second-largest mobile phone market.

As demand in developed economies stagnates, a handful of component suppliers, including Qualcomm Inc and Synaptics Inc, have left competitors in their wake by expanding in China, where sales of cheap phones made by home-grown companies eclipse pricier models made by Samsung Electronics Co Ltd and Apple Inc.

Increased exposure to China has diluted chipmakers' gross profit margins to somewhere in the mid-40 percent range from an average of nearer 50 percent 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 in China was the main driver of a 39 percent jump in global smartphone shipments during the quarter ended September 30, according to data published by market research firm IDC.

IDC forecasts that annual smartphone shipments in China, already an $80 billion market, will rise in value to $120 billion by 2017. That's 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; companies such as Lenovo Group Ltd, ZTE Corp and Xiaomi Tech - the rising star of cheap, made-in-China 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 San Jose, California-based supplier of touchscreen chips.

In its financial year ended June 29, Synaptics reported a 10 percent rise in revenue from China, a market that accounted for about 60 percent of the company's revenue in the period. None of the companies mentioned in this article provided data about their margins in China relative to the United States and other regions. Jeffrey Schreiner, analyst at brokerage Feltl & Co, estimated Synaptics' long-term gross margins in a range of 46 percent to 48 percent as its sales to China grow, compared with 48 percent to 50 percent in developed markets. "The trade-off is that you're going to chase the growing part of the market with high volumes," he said.

Shares of Synaptics, which also supplies chips to Taiwanese smartphone maker HTC Corp's One model and Sony Corp's water-resistant Xperia - both of which are popular with Chinese consumers - have risen about 60 percent this year. Its shares have outperformed those of competitors such as Audience Inc, Atmel Corp and Maxim Integrated Products Inc - each of which has been stung by inventory reductions at Samsung, their No. 1 customer, and are only now beginning to move into China in a big way.

By: DocMemory
Copyright © 2023 CST, Inc. All Rights Reserved