Intel Seeks Relevance With Spreadtrum Tie-Up

Aug.28.14 | About: Intel Corporation (INTC)

A headline this morning about a potential new China smartphone chip tie-up for Intel (NASDAQ:INTC) made me realize that this company that once ruled the global semiconductor market has been rapidly losing relevance these last few years. I can remember a time not long ago when finding news about Intel was a huge achievement for any reporter, as the company dominated the market for chips used to power most of the world's PCs. Nowadays, Intel can't even seem to attract the attention of China's anti-trust regulators, who are conducting a series of high-profile probes on top computing names like Microsoft (NASDAQ:MSFT) and Qualcomm (NASDAQ:QCOM).

Of course, anyone who follows semiconductor chips knows that traditional desktop and laptop PCs, the area where Intel dominated, are quickly fading with the rise of a new generation of more mobile products. The new dominant supplier of chips that power many of those products, including smartphones and tablet PCs, has become Qualcomm, hence the recent anti-trust investigation into the company.

Intel certainly has tried to muscle into the market for mobile device chips, but has found little success to date. After failing in a steady string of in-house initiatives, the company now looks set to try another route via M&A or strategic tie-ups, according to the latest media reports. That could be good news for some of the second-tier smartphone chip makers that are struggling to find an audience due to the tough competition from Qualcomm.

According to the latest reports, private smartphone chip maker Spreadtrum has become the main focus of Intel's tie-up efforts, though it's not completely clear what form the tie-up would take. (Chinese article) The reports say the deal could see Intel take a stake of up to 20 percent in Spreadtrum, which would be worth about $300 million, based on the company's most recent valuation when it was privatized late last year.

But the same reports also cite another source saying an equity purchase by Intel is unlikely. Intel itself said it will make an announcement when there's news, which does seem to indicate that some kind of deal is in the works. One other company named as a possible target in the report is Taiwanese chipmaker MediaTek (Taipei: 2454), a larger and more established alternative with a current market value of more than $20 billion.

Both of these companies look like relatively smart partners for Intel, as each has been able to carve out a place in the smartphone chip market despite the intense competition from Qualcomm. Both have found success by making low-cost chips, and also by focusing on a homegrown mobile standard used by leading Chinese telco China Mobile (HKEx: 941; CHL). Intel would bring a huge benefit to either company through its wealth of money to spend on product development, and also its strong connections with many gadget makers.

As I said at the outset of this post, Intel has slowly faded from the China headlines over these last 2 years as PCs rapidly lose ground to smartphones and other mobile devices. I can remember a time when everyone was wooing Intel to set up Chinese factories in their cities, and Chengdu and Dalian both scored major achievements when they were chosen for Intel's 2 major China chip plants.

Nowadays, Intel is discovering what it feels like to become irrelevant, and also what it feels like to be considered a runner-up in markets it used to dominate. The company will indeed become a runner-up to Qualcomm if it succeeds in forging a partnership with Spreadtrum, MediaTek or another second-tier smartphone chip maker. But you have to start somewhere, and either of these companies looks like a strong launch point for Intel's latest attempt at a comeback.

Bottom line: Intel's choice of Spreadtrum as its new smartphone chip partner looks like a good one, positioning the company for a comeback starting in the important China market.

Disclosure: Author has holdings in QCOM.