Will Budget Mobile Devices Boost Intel Corporation's Sales in China?

By Markets Fool.com

It's no secret that Intel is an underdog in the mobile market compared to ARM Holdings . ARM-licensed designs are found in 95% of smartphones and the majority of tablets worldwide.

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Intel tried to catch up by offering subsidies to mobile device makers that switched to Atom chips, but it was a costly strategy. In 2014, its mobile unit posted an operating loss of $4.2 billion, down from a loss of $3.1 billion the previous year. Despite those steep losses, Intel believes that an aggressive blitz on the Chinese market can help its mobile chips gain market share against ARM's partners.

Shanghai, China. Source: Pixabay.

What China means to Intel
Last year, Intel installed its processors in 46 million tablets, which accounted for roughly a fifth of all tablet shipments worldwide. Chinese customers bought 40% of those tablets, but that's still a tiny figure compared to the 420.7 million smartphones that were shipped to China last year. Within that market, Intel processors likely power less than 3% of all Android devices, according to benchmark specialist AnTuTu.

China accounted for 30% of worldwide connected device purchases in 2014.However, it's a market shaped by "turnkey" solutions, where chipmakers provide reference designs with bundled hardware and software. This lets smaller companies launch cheap smartphones without spending much money on research and development.

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ARM licensees like Qualcomm, Rockchip, Spreadtrum, and MediaTek all offer their own turnkey solutions to ODMs. As a result, plenty of cheap handsets, often cloned from existing designs, have flooded the market and caused average selling prices to plunge. That's bad news for high-end smartphone makers like Samsung , but it's a golden opportunity for Intel.

Intel's turnkey solutions
Intel's turnkey bundle offers its x86 architecture, wireless charging, integrated modems, and RealSense depth camera technology in a single package, which helpsvendors launch a new smartphone within six to eight weeks. And it has several advantages over ARM-based rivals.

First, an ODM can license Intel's solution for smartphones, Windows tablets, and cheap PCs. Intel's x86 chips are compatible with Android and full Windows, while ARM chips aren't compatible with the latter. Second, Intel's new SoFIA chips with integrated modems willhelp ODMs launch Intel-powered smartphones at prices comparable to those of Qualcomm's Snapdragon-powered ones. At IDF in Shenzhen, China, Intel showcased a 4.5" smartphone that cost less than $40, and a 7" tablet priced at $55.

Lastly, Intel claims that devices built with its turnkey solutions have a 20% lower return rate than competing ones. According to Intel, 30 vendors manufactured 350 unique devices based on its designs last year, which were subsequently shipped to 50 countries.

Buying its way into the market
Last September, Intel agreed to buy 20% of China'stwo biggest mobile chipmakers, RDA Microelectronics and Spreadtrum, for $1.5 billion. It also partnered with Rockchip, another leading player in cheap Chinese mobile chips. Intel CEO Brian Krzanich stated that these partnerships don't prevent the companies from using ARM designs, but he expects them to switch over to Intel's x86 designs "within two to three years".

Source: Intel.

These partnerships are basically extensions of Intel's mobile subsidies strategy. The main problem with that strategy is that it sacrifices profits for market share gains, which isn't sustainable over the long term. Although Intel shipped its processors into 46 million tablets last year, the mobile unit (which also includes smartphone chips) reported just $202 million in revenues in 2014 -- down from $1.38 billion in 2013. This means that Intel is basically giving its mobile chips away to gain market share against ARM.

Looking ahead, it will be tough to tell how much Intel is losing on its mobile business, since it combined the unit with its profitable PC business at the beginning of 2015. Intel aims to reduce mobile losses by $800 million this year by using SoFIA chips to offset the BOM difference between ARM-based and x86-based designs. Unfortunately, that might be tough to achieve considering the 4G version of SoFIA won't arrive until later this year.

The key takeaways
Intel's strategies in China might help it win market share, but those gains could come at a steep price. Chinese ODMs are likely thrilled that Intel is selling its hardware and reference designs at such low prices, but it's unclear if that enthusiasm will continue after those discounts end. Meanwhile, Intel's mobile losses could spike as they remain hidden by its PC profits.

The article Will Budget Mobile Devices Boost Intel Corporation's Sales in China? originally appeared on Fool.com.

Leo Sun owns shares of Apple. The Motley Fool recommends Intel. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.