China Is Calling

It's no secret that China is becoming not only an important market for smartphones and tablets -- even Amazon (AMZN) recently launched its Kindle tablet and e-reader in that market -- but a number of homegrown players and supplier are emerging. Is it surprising? No, not really, because for some time companies like Google's (GOOG) Motorola Mobility and Sony (SNE) have used third-party, contract manufacturing in China to produce mobile phones and other products. We've seen some of these players in the past, like BenQ, and recent ones, like Pantech, try to break into the branded-product game. Some have had modest success, others have not, but companies like Huawei and ZTE are breaking into the big time. As one might expect with the rise in Chinese handset vendors, we're starting to see a growing number of Chinese fabless semiconductor companies enter the power amplifier market. That market already has a number of formidable suppliers in Skyworks Solutions (SWKS), RF Micro Devices (RFMD), TriQuint Semiconductor (TQNT), Avago (AVGO) and a few others. According to reports, however, gallium arsenide foundries like Win Semiconductors and IQE PLC, which acquired Kopin's (KOPN) III-V business, are seeing a pick-up in orders from emerging Chinese players including Vanchip, Beijing RF Microelectronics, Jiangsu Zhongpu Technology and RDA Microelectronics as they procure smartphone business from Huawei, Lenovo and ZTE. Even Taiwan-based MediaTek (TPE: 2454), which competes in the application processor and baseband markets with Qualcomm (QCOM) and others, has entered into the power amplifier space through its Airoha Technology business. In many respects, we have seen this movie before nearly 15 years ago when there was a rush of companies into the power amplifier space just as the mobile phone market was set to explode. What happened was average selling prices came under pressure and both margins and earnings fell at those companies -- some recovered while others exited. The same has happened time and again in the light emitting diode (LED) industry with Cree (CREE). It's the basic booming market and growing excess supplier capacity issue -- we've seen it before and we'll see it again. While there is currently enthusiasm around RF Micro shares -- Northland is bullish and sees the company benefiting from Spreadtrum (SPRD) share gains in the Chinese smartphone market. The issue with share gains is at what price. After all, Northland notes that RFMD's wins are in low-end Chinese smartphones, which likely carry two or three RF bands. Not only are those wins likely to be price sensitive, but the other question is what's the positioning on those bands -- is it exclusive or is there another player in the mix? While I am bullish on smartphone growth -- only 1.5 billion vs. an install base of more than 5 billion mobile phones -- I'll be watching these emerging players and the impact of any success they may have in the coming quarters. I suspect the initial signs will be seen at some of the weaker smartphone PA companies first. To me that means TriQuint Semiconductor and Anadigics (ANAD). Generally, one can buy a basket of smartphone suppliers in August and sell them near the end of the year to ride the seasonal build. Soon after, however, the seasonal dip happens and these new players could make that an even steeper ride down for RF suppliers than we have seen in recent years.

China Is Calling

A number of players and suppliers emerge in China's smartphone market.

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