MIDTERM EXAMINATION
GLOBAL AND INTERNATIONAL TRADE
CASE STUDY: Qualcomm in China
COMPANY AND INDUSTRY BACKGROUND
Qualcomm was founded in 1985 by Dr. Irwin Jacobs, a former engineering professor. Under
Jacobs’s leadership, the company developed a digital communications technology for wireless
phones known as code division multiple access (CDMA). Introduced in 1989, CDMA became one
of the three main technologies used in digital wireless phones. CDMA and the two other digital
wireless communications technologies, TDMA (which stands for time division multiple access)
and GSM (which is a form of TDMA and stands for global system for mobile
communications),are the digital technologies used to transmit a wireless phone user’s voice or
data over radio waves using the wireless phone operator’s network.
CDMA works by converting speech into digital information, which is then transmitted in the
form of a radio signal over the phone network. These digital wireless phone networks are
complete phone systems comprised primarily of base stations, or “cells,” which are
geographically placed throughout a service or coverage area. Once communication between a
wireless phone user and a base station is established, the system detects the movement of the
wireless phone user and the communication is handed off to another base station, or cell, as
the wireless phone user moves throughout the service area.
Qualcomm has more than 800 patents on CDMA, and essentially owns this standard for digital
wireless phones. The company licenses its technology to equipment manufacturers in return for
royalties on the sale of any equipment, such as base stations and handsets. The equipment
manufacturers sell the equipment to service providers. Thus, for example, Qualcomm might
license its technology to Motorola, which then makes base stations and handsets that are
based on CDMA technology.
In turn, Motorola might sell the CDMA equipment to a service provider, such as Verizon, which
offers wireless phone service to consumers in the United States. Every time Motorola makes a
sale, Qualcomm collects a royalty based on a percentage of the price of that equipment
(Qualcomm has not reported that figure, but it is believed to be 4 per cent of the value of the
equipment). Qualcomm also makes and sells “chipsets” based on CDMA technology to
equipment manufacturers who then place those chipsets into base stations and handsets.
Some 90 per cent of CDMA phones contain chipsets manufactured by Qualcomm. In 2004,
Qualcomm generated record revenues of $4.88 billion and net profits of $1.72 billion. The great
advantage claimed for CDMA over competing standards is that it uses radio spectrum more
efficiently than GSM or TDMA. Qualcomm states that CDMA equipment has three times the
capacity of comparable GSM or TDMA equipment, thereby enabling service operators to attain
the same capacity with a lower investment in network equipment such as base stations.
, Because the wireless service industry is very price competitive, any technology that promises to
lower costs for service operators should gain an advantage in the marketplace.
However, CDMA was a latecomer to the digital communications market and by 2004 was still in
third place behind TDMA and GSM with 26 per cent of the world market. A big reason for this
was that in the early 1990s, the European Union backed GSM as the standard for digital
communications technology. At the time, Europe led the world in the adoption of wireless
phone technology. Since European firms such as Ericsson and Nokia were major suppliers of
GSM equipment, this decision benefited them.
Although CDMA equipment can, in theory, handle more data traffic than comparable TDMA or
GSM equipment, the larger installed base of TDMA and GSM subscribers means that companies
making this equipment benefit from substantial economies of scale, which to some extent
nullifies the cost advantage associated with CDMA technology and helps explain the continued
dominance of these standards. Also, since far more GSM handsets are sold than CDMA
handsets, economies of scale mean that GSM handsets are less expensive than CDMA handsets.
By the end of 2004 there were over 1.6 billion wireless subscribers worldwide, some 340 million
of which used CDMA technology. Forecasts called for the total number of wireless subscribers
to grow to 2.5 billion by2009. Among the wireless technologies, CDMA was registering the
fastest growth rate. CDMA is now the most widely used technology in the United States, where
47 per cent of the nation’s 160 million wireless phone subscribers in 2004 used CDMA
equipment. CDMA also has a large and growing presence in Latin America and the Asia Pacific
region. The laggard in CDMA penetration is Europe, where GSM dominates and CDMA
technology had less than 10 million subscribers in 2002.
Looking forward, the success of Qualcomm will be driven by two related factors. First, there is a
shift to a new generation of technology, known in the industry as 3G or third-generation
wireless technology. This new generation of digital wireless technology is designed to handle
much greater amounts of data at rapid down-load speeds, enabling subscribers to download
multimedia applications, such as streaming video or audio, onto their wireless phones,
effectively turning the handsets into small computers that are able to access the Internet from
anyplace at any time. Two versions of CDMA technology have been developed for 3G,
CDMA2000 and WCDMA. While Qualcomm developed CDMA2000, WCDMA was developed by
rival telecommunications firms Nokia and Ericsson.
However, Qualcomm’s patents cover both versions of the technology, and the firm will earn
royalties no matter which version is used by a particular service carrier, although Qualcomm
favors CDMA2000 and reportedly makes greater royalties from it. Both CDMA 3G technologies
will have to compete with a 3G version of the popular GSM technology, known as GPRS, which
was introduced in 2002.
The second factor driving Qualcomm’s success is the penetration of CDMA technology into
developing markets where there is still large potential for new subscriber adoptions,
GLOBAL AND INTERNATIONAL TRADE
CASE STUDY: Qualcomm in China
COMPANY AND INDUSTRY BACKGROUND
Qualcomm was founded in 1985 by Dr. Irwin Jacobs, a former engineering professor. Under
Jacobs’s leadership, the company developed a digital communications technology for wireless
phones known as code division multiple access (CDMA). Introduced in 1989, CDMA became one
of the three main technologies used in digital wireless phones. CDMA and the two other digital
wireless communications technologies, TDMA (which stands for time division multiple access)
and GSM (which is a form of TDMA and stands for global system for mobile
communications),are the digital technologies used to transmit a wireless phone user’s voice or
data over radio waves using the wireless phone operator’s network.
CDMA works by converting speech into digital information, which is then transmitted in the
form of a radio signal over the phone network. These digital wireless phone networks are
complete phone systems comprised primarily of base stations, or “cells,” which are
geographically placed throughout a service or coverage area. Once communication between a
wireless phone user and a base station is established, the system detects the movement of the
wireless phone user and the communication is handed off to another base station, or cell, as
the wireless phone user moves throughout the service area.
Qualcomm has more than 800 patents on CDMA, and essentially owns this standard for digital
wireless phones. The company licenses its technology to equipment manufacturers in return for
royalties on the sale of any equipment, such as base stations and handsets. The equipment
manufacturers sell the equipment to service providers. Thus, for example, Qualcomm might
license its technology to Motorola, which then makes base stations and handsets that are
based on CDMA technology.
In turn, Motorola might sell the CDMA equipment to a service provider, such as Verizon, which
offers wireless phone service to consumers in the United States. Every time Motorola makes a
sale, Qualcomm collects a royalty based on a percentage of the price of that equipment
(Qualcomm has not reported that figure, but it is believed to be 4 per cent of the value of the
equipment). Qualcomm also makes and sells “chipsets” based on CDMA technology to
equipment manufacturers who then place those chipsets into base stations and handsets.
Some 90 per cent of CDMA phones contain chipsets manufactured by Qualcomm. In 2004,
Qualcomm generated record revenues of $4.88 billion and net profits of $1.72 billion. The great
advantage claimed for CDMA over competing standards is that it uses radio spectrum more
efficiently than GSM or TDMA. Qualcomm states that CDMA equipment has three times the
capacity of comparable GSM or TDMA equipment, thereby enabling service operators to attain
the same capacity with a lower investment in network equipment such as base stations.
, Because the wireless service industry is very price competitive, any technology that promises to
lower costs for service operators should gain an advantage in the marketplace.
However, CDMA was a latecomer to the digital communications market and by 2004 was still in
third place behind TDMA and GSM with 26 per cent of the world market. A big reason for this
was that in the early 1990s, the European Union backed GSM as the standard for digital
communications technology. At the time, Europe led the world in the adoption of wireless
phone technology. Since European firms such as Ericsson and Nokia were major suppliers of
GSM equipment, this decision benefited them.
Although CDMA equipment can, in theory, handle more data traffic than comparable TDMA or
GSM equipment, the larger installed base of TDMA and GSM subscribers means that companies
making this equipment benefit from substantial economies of scale, which to some extent
nullifies the cost advantage associated with CDMA technology and helps explain the continued
dominance of these standards. Also, since far more GSM handsets are sold than CDMA
handsets, economies of scale mean that GSM handsets are less expensive than CDMA handsets.
By the end of 2004 there were over 1.6 billion wireless subscribers worldwide, some 340 million
of which used CDMA technology. Forecasts called for the total number of wireless subscribers
to grow to 2.5 billion by2009. Among the wireless technologies, CDMA was registering the
fastest growth rate. CDMA is now the most widely used technology in the United States, where
47 per cent of the nation’s 160 million wireless phone subscribers in 2004 used CDMA
equipment. CDMA also has a large and growing presence in Latin America and the Asia Pacific
region. The laggard in CDMA penetration is Europe, where GSM dominates and CDMA
technology had less than 10 million subscribers in 2002.
Looking forward, the success of Qualcomm will be driven by two related factors. First, there is a
shift to a new generation of technology, known in the industry as 3G or third-generation
wireless technology. This new generation of digital wireless technology is designed to handle
much greater amounts of data at rapid down-load speeds, enabling subscribers to download
multimedia applications, such as streaming video or audio, onto their wireless phones,
effectively turning the handsets into small computers that are able to access the Internet from
anyplace at any time. Two versions of CDMA technology have been developed for 3G,
CDMA2000 and WCDMA. While Qualcomm developed CDMA2000, WCDMA was developed by
rival telecommunications firms Nokia and Ericsson.
However, Qualcomm’s patents cover both versions of the technology, and the firm will earn
royalties no matter which version is used by a particular service carrier, although Qualcomm
favors CDMA2000 and reportedly makes greater royalties from it. Both CDMA 3G technologies
will have to compete with a 3G version of the popular GSM technology, known as GPRS, which
was introduced in 2002.
The second factor driving Qualcomm’s success is the penetration of CDMA technology into
developing markets where there is still large potential for new subscriber adoptions,
