This is as much a war for technology leadership between countries as it is companies, and between a competitive telephony market vs. one that is dominated by a single vendor.
Qualcomm has been identified as a national treasure by the U.S. administration, which moved to prevent what appeared to be an Apple-orchestrated hostile takeover of the company by Broadcom last year. Apple has been fighting to destroy Qualcomm’s income, which largely goes to R&D and benefits Apple’s competitors, who bring out ever cheaper, better smartphones, undercutting Apple’s prices and clearly having an adverse effect on Apple’s sales. What seemed strange is that the FTC, whose mission is supposed to be focused on protecting the U.S. consumer, came out in favor of Apple, even though crippling Qualcomm would have a massive adverse effect not only on smartphone competition in the U.S. but U.S. technology leadership. This week, both the Department of Defense and the Department of Energy met with the FTC, but they don’t seem to get why the FTC is on the wrong side either, claiming national security is at risk.
In the background, Huawei is being pilloried by the U.S. government, but positions as the 5G leader in much of the media, bringing into question Qualcomm’s actual leadership and pointing out that the big picture is that this is a battle between countries, not companies. In addition, the company battle is between Huawei and Qualcomm, not Apple and Qualcomm, for technical leadership. I expect Huawei will eventually emerge as the technology winner, largely because it has the full support of its government, the Chinese market is expected to be three times the U.S. market by 2030, and Apple is aggressively trying to kill Qualcomm.
Huawei
Huawei is an impressive company, ranked second in the smartphone market, ahead of Apple and behind Samsung. It builds a high-quality smartphone that rivals Samsung and Apple offerings at what is typically a more aggressive price. Like most large companies in China, it has significant Chinese government influence, which has led to allegations that its devices are used for spying on the U.S. and other foreign governments. (Doing this would be suicidal for the firm’s global aspirations but, once dominant, things would likely change.)
These allegations are problematic on two fronts. First, Huawei doesn’t just sell smartphones, but a host of networking products, including the switches used to connect smartphones to their networks. These carrier products are extremely aggressively priced and were flowing very well into the carriers, both domestically and abroad, due to the acceptable quality and huge value they represented.
Concerns that these products were either compromised, or more likely could be compromised as part of its support, had Huawei broadly blacklisted not just by the U.S. government but by a critical number of U.S. allies.
China was slow to realize the value of patents, but since it has, did the country has been turning out a lot of them. But Huawei’s patents appear to be more focused on quantity than quality and designed to protect all of Huawei’s business, not just handsets. This means, if you were to do a patent comparison between Huawei and Qualcomm, you shouldn’t just count patents but also assess the strength and value of those patents. Huawei may have more, but Qualcomm, by nature of its business, should have better handset patents due to the company’s tighter focus.
Having said all of that, Huawei is effectively an end-to-end infrastructure vendor with the switches and a significant market power with phones. Should both become dominant, it would be nearly impossible for any other vendor, including Apple, to compete in the resulting ecosystem because unique features enabled between the Huawei switches and phones should force competing vendors to exit the market as unable to compete (it might force a merger between Apple and Cisco, for instance). This is somewhat like the kind of lock that AT&T once had on the telecom market. While it would take a decade or more to achieve, that kind of dominance is incredibly hard to break once established.
A world where a vendor partially controlled by the Chinese government controlled the majority of communications would be problematic to any other government.
Qualcomm
While Huawei is a solutions vendor producing complete products and increasingly not only vertically integrated, but ecosystem integrated (phones to switches), Qualcomm is a component vendor and a market maker. This means it spends a lot of time influencing and driving standards and its patents are designed to be licensed, with licensing being a major part of the firm’s business model. It lacks the patent breadth that Huawei has but its focus raises the quality of what it does have because its patents are more tightly targeted at the modem market and build on each other, making it far more difficult to work around them.
This isn’t about the quality of each firm’s work, as both do high quality work, but the difference in the nature of both firms. Qualcomm licenses and makes a considerable amount of income from those licenses, which forces a different kind of rigor when it comes to patent creation than Huawei, where the patents are mostly defensive or protective to assure Huawei isn’t adversely damaged by patent litigation or doesn’t lose an edge due to a competitor stealing its IP.
This also means that Qualcomm can drive industry advancements like 5G much better than Huawei can. While Huawei is bigger than Qualcomm, it is contained within its own product set, while Qualcomm’s technology extends across the entire vendor ecosystem worldwide.
Qualcomm was the first to launch a commercial 5G chipset while Huawei could have had the first 5G phone in market, but won’t. (The advantage, or one of them, to vertical integration is potentially faster time to market.) But, if Qualcomm didn’t do all the initial groundwork to bring 5G to market, Huawei’s 5G phones would likely only work with Huawei 5G switches; most of those appear to be in China, so the worldwide launch of 5G would have been delayed, likely by a year or more.
Wrapping Up: Digital Dominance
This is as much a war for technology leadership between countries as it is companies, and between a competitive telephony market vs. one that is dominated by a single vendor. Huawei could easily become the equivalent of China’s AT&T with even greater world power and, if it is successful, competition would all but dry up. Qualcomm assures competition between vendors, but its much smaller size means it needs help to hold off what otherwise might be that Chinese government-backed telephony takeover.
