Qualcomm (NASDAQ:QCOM) has established a JV with China's Guizhou provincial government to develop chips for server systems in a move that will diversify QCOM's revenue from selling semiconductors for smartphones. The JV will be a 55/45 split between the Guizhou government and QCOM, respectively, and financial contributions will be made in proportion to the ownership with initial capital of $280m.
In my view, the partnership is a positive for both QCOM and Guizhou in that QCOM is gradually building the trust of the Chinese government at both the national and provincial level so it can smoothly conduct business in China. On the other hand, Guizhou can benefit from this partnership as it looks to grow its big data and cloud computing business. Given that Guizhou is one of the poorer provinces in China, this foreign directed investment via a government JV could drive innovation, job creation and higher wage growth in the region. More important, this JV fulfills the Chinese government's goal of building a bigger semiconductor business in China.
Guizhou is one of the poorer provinces in China with GDP per capita of roughly Rmb26k versus China's national average of Rmb46k. With a population of 35m, equivalent to that of Canada's entire population, this province is certainly not insignificant and the Chinese government is positioning the province to become a major cloud computing hub with the recently launched "big data pilot zone" last year to promote the development of cloud services.
Setting up the operation in Guizhou is advantageous in that there is an abundance of resources, such as water and coal, which will reduce the cost of electricity for big semiconductor and big data companies. The growth of cloud service companies in the region could accelerate further as Guiyang could be home to five of the 200 listed IT firms in the country, employing over 5,000 employees in R&D. With a quality local workforce, QCOM and the Guizhou government can certainly benefit from leveraging local resources. Also worth mentioning, because of the fact that Guizhou is quickly growing to become an R&D hub, companies such as Alibaba (NYSE:BABA) and Uber (Private:UBER) have been setting up operations in the region, which is certainly a positive for the economic development of the region.
QCOM also benefits from investing in Guizhou in that relationship with government officials is essential to get business done in China. Recall that QCOM paid a $975mn fine to settle an antitrust investigation by the Chinese government last year and this investment is part of a series of investments that QCOM is making to appease regulators. Besides the most recent JV, QCOM also invested $150m in Chinese startups and announced a partnership with China's Semiconductor Manufacturing International in chip development. From an economic perspective, the demand for servers is growing rapidly in China as internet companies ramp up their businesses and IDC expects China's server market to reach $6bn by 2020, so there are certainly a lot of business for QCOM to capitalize on.
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