Dear Steve,
Let me first clarify about myself that I am a humble blogger at Semiwiki and admire your company as the #1 Semiconductor Fabless Company and #4 in terms of overall semiconductor sales of the top10 semiconductor companies in the world as per 2014 data. Also, I must mention another point of admiration that your company is #2 in terms of R&D expenditure. I neither own a single Qualcomm stock, nor recommend anyone to buy or sell. However, observing the turmoil your company is going through this year, I would hate to see it getting out of the top10 list or even falling into lower ranks in that list. So, I thought of writing this sincere, open letter to you in the spirit of what best Qualcomm could do to stay relevant and even win the war in near future. Of course, there is a substantial struggle going forward, but even a single wrong step can lead the company into further trouble. Think it from a complete neutral perspective; keep the pressure from various sides aside for a while.
It takes years of effort, energy, resources, and what not to build a scale of business like Qualcomm has. It must not be destroyed. Remember the BCG matrix? In a large organization, it generally has all kinds of businesses – Stars, Cash Cows, Dogs, and Question Marks. In Qualcomm, as I see it, it has a great Cash Cow and a Star which has moved into Question. Fortunately, I do not see Dogs there. So, situation is not that bad as it is being projected. Truly speaking these integrated elements of an organization cannot be separated. The Cash Cow has to feed others and get fed in return; there needs to be an unquestionable integrity into that. Yes, there is pressure from investors to split the cow and the star in question. The investors care about short-term returns on their investments. If they can be pacified by other means, that’s it; in the long run they would realize that ‘not splitting’ was a blessing in disguise. Also, a split can be in the form of actually ‘not a split’. Here are the strategies which can be adopted for a win-win from all sides –
Form a Holding Company – Constitute a new Qualcomm Holding Company (QHC). Provide autonomy to QCT and QTL to run as stand-alone businesses with their separate BOD and equity capital. QHC will own both QCT and QTL and it will have participation in the board from QCT and QTL, as well as institutional investors. JANA Partners already has two of their representatives in the Qualcomm board. They can very well represent in QHC. By doing this Qualcomm doesn’t have to actually sell any of its unit and at the same time it can bring more returns to investors. QTL and QCT should keep complementing each other as they have been doing; earnings will be different because of the types of business models in them, but then investors will be compensated according to their holdings in them.
RIF is already on the horizon – You have already announced about RIF. That can provide a breather on cost cutting and pacify investors. However, my sincere opinion would be to cut where the fat is. Often large organizations do a mistake cutting at wrong places. You have to take the pain of identifying the fatty regions in your organization before cutting. If you do that it would be right to cut and would provide short as well as long term benefits as well.
Partner instead of straight M&A – I understand, you want to diversify to bring higher returns to your investors. This can be done in more creative ways than acquiring a company. There are rumours about Qualcomm acquiring AMD to get into server business. This is a good strategy as it augments well with your IoT plan which is gaining strength on Gateway side and the server business can let you enter into the Cloud. However in my view, acquiring AMD and wielding it against Intel to win in the server business could be a long haul.
Similarly, there are other companies being talked about to be the acquisition targets of Qualcomm. Also, QCT is being talked about as the acquisition target of Intel. I would not go into those details here. My simple suggestion to you would be on the following lines –
Identify your immediate battle ground, it’s not server business, it’s China region which is key to mobile processor business today. The mobile business is QCT’s backbone. So, protect that. What’s the key issue there? It’s price war. Who are the main players? They are you, Intel, Spreadtrum and MediaTek. You know your main rival there. Now identify a player among the others who is strong and may need your help. There you go.
Intel too wants to cut the pie in the mobile market. They are aggressively following the China market, rightly. However, they are losing substantial dollars in the mobile business. Given a favourable deal, in my opinion, they should be willing to pursue. Qualcomm has the mobile technology, but you need to cut cost. You have a chance to share mobile technology with Intel and get into manufacturing pact with Intel to cut cost. Both companies can make it a win-win here in the mobile business. Eventually, you will have an answer for your high-end turf in the mobile business too. Today, the route for mobile business starts from China!
Coming to IoT, you stand a great chance to win with your powerful connectivity solution from Atheros acquisition. QCA401x is an ideal, power and cost optimized chip for IoT applications with right amount of memory for holding data and interfacing with several devices. It also has security and various communication protocols including WiFi, IPv6, and http. Similarly, QCA4531 is low-cost solution leveraging Linux environment, good for hub in IoT systems. Also, with your next generation 4G LTE and secure Bluetooth and GPS technology from CSR acquisition, you can bring new dimensions in the IoT connectivity, short as well as long distance. You are good at Gateway solution. To enter the cloud, again get into some kind of agreement with Intel for servers at this point of time. You can expand later. PC business is a no-no, it will not provide growth. For IoT edge devices, just wait for a while. The market will be flooded with edge devices in a few years from now. You can get a better value at low price for edge-device solution at that point of time.
I am leaving it open for the audience to share their views. Their unbiased views can definitely come a long way in rebuilding of the pioneer, innovator, and trend-setter in the fabless world.
Pawan Kumar Fangaria
Founder & President at www.fangarias.com