Chinese Smartphone Makers Raise Concerns About a Mega Chip Deal

Two large Chinese smartphone manufacturers said they are against the potential merger of chip giants Broadcom Ltd. and Qualcomm Inc., fearing it could squeeze the mobile companies' profit margins and benefit large global rivals to their detriment.

Executives from China's Oppo Electronics Corp. and Vivo Electronics Corp., which together generate more than 10% of Qualcomm's $22 billion in annual revenue, said they are worried about possible price hikes and other changes that could come down the pipe if Broadcom succeeds in its $105 billion hostile takeover bid for San Diego, Calif.-based Qualcomm.

A third Chinese customer, Xiaomi Corp., said it also has reservations about a merger, which would create the world's third-largest chip company.

Any deal between the chipmakers won't be decided for months. Broadcom, which is currently co-headquartered in San Jose, Calif. and Singapore, in November launched a bid for Qualcomm that was rejected by the latter's board. Broadcom has since proposed replacing Qualcomm's board of directors, and the matter will be put to a shareholder vote in March.

If a deal is reached, it would have to go through antitrust and regulatory reviews in multiple countries. Opposition to a merger from China's largest smartphone makers could hurt efforts by Broadcom to win over Chinese regulators.

Roughly one in three smartphone users in China carry a device from Oppo, Vivo or Xiaomi, according to Kantar Worldpanel ComTech, whose data shows that Apple Inc. has about a 24% market share in China's urban markets.

Qualcomm's total shipments to the three Chinese smartphone makers are more than double its shipments to Apple's suppliers, according to research firm IDC.

Executives from Broadcom and Qualcomm have in recent weeks held discussions with their customers over the merits and drawbacks of a deal.

Broadcom's chief executive Hock Tan said his company has spoken with many Qualcomm customers, including some in China. "They are highly supportive of the transaction," he said a statement to The Wall Street Journal.

"We have heard from many large customers around the world, especially from China, who have serious concerns about a Broadcom acquisition of Qualcomm," a Qualcomm spokesman said.

In December, Mr. Tan traveled to China and met with some customers. The Malaysian-born executive, who has a reputation as a heavy cost-cutter, arrived at one of the customer meetings in a shabby-looking Toyota car, according to an individual at a company he visited.

During an hour-long meeting, the 65-year-old executive claimed that shareholders of Qualcomm weren't happy with how the company was run and that Broadcom saw an opportunity to significantly reduce Qualcomm's operational costs, said a person familiar with the matter.

Executives of Xiaomi, Oppo and Vivo interviewed by the Journal said they are worried Broadcom could hike chip prices if it acquired Qualcomm--and also drastically cut Qualcomm's spending on research and development.

They said that could disadvantage them in the long run, as Qualcomm's spending has in the past given the company and its customers a head start on new mobile technologies. Qualcomm has of late been investing heavily in developing fifth generation, or 5G, wireless technology.

The executives of the three companies, which last November signed a non-binding deal with Qualcomm to purchase $12 billion worth of components over the next few years, also said they might switch to other suppliers if Broadcom succeeds in its acquisition. Though the firms are also Broadcom customers, they generate less revenue for Broadcom than they do for Qualcomm.

To be sure, Qualcomm has had legal battles with many customers and disputes with regulators in multiple countries. The conflicts have stemmed from Qualcomm's business model of charging customers for both its chips and use of its patents, which has led some critics to allege that the company uses its dominant market position in chips unfairly.

Apple has sued Qualcomm for unfair trade practices, and its contract manufacturers have refused to pay royalties to Qualcomm since early 2017.

In China, Qualcomm reached a 2015 settlement with the country's National Development and Reform Commission after the economic planning body accused the company of violating anti-monopoly law and fined it some $975 million. The settlement saw Qualcomm reduce royalty fees for its licenses on mobile technology patents.

During one of Mr. Tan's recent meetings in China, the Broadcom executive said he wanted to revamp Qualcomm's patent and licensing fee arrangements, which customers took to mean they would pay less in licensing fees and more for chips.

"He thought we would support this idea because of immediate cost reduction, but that's not how we see things," said one executive from a Chinese smartphone maker who attended the meeting. The bigger worry for the Chinese phone companies is losing ground in the longer run to global rivals, the executive said.

--Yifan Xie