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LG Electronics is facing a potentially dire situation as contract negotiations with Qualcomm, its 5G modems supplier, have stalled, reports Reuters. The interim licensing deal that the two companies entered last year is set to expire later this month.
Without a new deal, LG will likely have to completely halt sales of its newly introduced 5G device, the LG V50 ThinQ 5G, which leverages Qualcomm’s 5G modems. According to BNK Securities analyst Park Sung-soon, failing to strike a deal would do “catastrophic damage” to LG’s mobile business, as the company doesn’t currently manufacture chips itself.
Here’s what it means: LG’s squabble with Qualcomm serves as the latest example of how overreliance on chipmakers is a major vulnerability for smartphone manufacturers.
- Apple’s had difficulties navigating its relationship with several chipmakers, reportedly causing it to delay the development of a 5G iPhone. Following a legal dispute with Qualcomm that started in 2017, Apple turned to Intel to produce its smartphone modems. Unfortunately for Apple, this partnership was only met with more issues: Intel reportedly couldn’t deliver on Apple’s deadlines, forcing Apple to settle with Qualcomm for around $4.5 billion and switch back to Qualcomm as its modem supplier. The double switching of suppliers has ultimately slowed down the development of a 5G-compatible iPhone for Apple, as the new device appears to have been pushed beyond 2020.
- Even if smartphone manufacturers can successfully maintain a positive relationship with a chipmaker, they remain exposed to other outside forces that can dissolve such partnerships. In 2018, Chinese smartphone firm ZTE was temporarily cut off from using Qualcomm modems after the US Department of Commerce (DOC)issued an order banning US companies from supplying the firm with key smartphone components. The company was crippled by this loss and was eventually forced to cease “major operating activities.” Given today’s unpredictable political climate and rising trade tensions between the US and China, relying too heavily on outside sources — especially those in other countries — for fundamental components has quickly become a major risk for all smartphone makers.
The bigger picture: Smartphone companies need to bring modem production in-house so that they can better control their supply chains and production timelines.
Bringing modem development and production in-house is by no means an easy feat, as it requires heavy investments in new facilities, machinery, and employee development. But it still seems to be the logical next step for smartphone makers.
Apple, for instance, isreportedly in talks to acquire Intel’s German modem unit in an effort to develop its own tech. In-house modem development and production would enable smartphone makers to avoid potential conflicts with suppliers that could derail operations, as LG’s dispute with Qualcomm threatens to do.
What’s more, proprietary modem production could even become a revenue opportunity if companies choose to sell their own chips to other device makers. Samsung is increasingly seeing the chip market as a growth opportunity, with the firm pledging $116 million to expand its non-memory chip business by 2030.
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