TOKYO -- Even China's Spreadtrum Communications, a fabless company armed with a better cost structure than most mobile chip vendors, faces the perils of lower margins.
Despite solid third quarter results reported by Spreadtrum last week, Canaccord Genuity technology analyst Michael Walkley lowered his rating on Spreadtrum to "hold" from "buy."
Walkley noted in his latest report that “despite guidance for Q4/12 smartphone solution sales to increase 64% sequentially to 18 million units, Spreadtrum management guided to sequentially flat Q4/12 gross margin.” That leads him to believe “pricing pressure in both the 2G feature phone and EDGE smartphone markets, increased TD-SCDMA smartphone competition and higher operating expenses given Spreadtrum’s aggressive roadmap will result in lower margins than our previous expectations.”
During Spreadtrum conference call on its results, analysts grilled Spreadtrum CEO Leo Li (left) about Spreadtrum’s product pricing and profit margins. Li dodged these questions, doggedly sticking to vanilla responses like, “For smartphones, I think we’re above our corporate margin.”
A closer look at Spreadtrum’s product offerings and its roadmap illustrates the current status of China’s mobile phone market and shifting consumer demand for smartphones. What follows is a snapshot of leading carrier China Mobile’s market and Spreadtrum’s role as described by Li
1.China Mobile’s momentum
China Mobile, which operates China's TD-SCDMA network, has close to 700 million smartphone consumers. Each year, more than 200 million users are replacing their handsets.
2. TD-CDMA market
In 2011, the TD-SCDMA market approached 50 million units. In 2012, “we expect it to be 85 million, which will grow to 140 million units in 2013,” Li said.
Baseband business is very competitive, hence margin pressure is bound to happen, this was the main reason TI shifted to this business. In TD, Marvell, Mediatek and Qualcomm are major competitors for Spreadtrum.
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