Xiaomi’s reported move to in-house chips could spell trouble for Qualcomm

Fresh reports (link in Chinese) surfaced Thursday that Xiaomi, China’s number one smartphone maker, is planning to use in-house chips for its low- and mid-range smartphones in 2016.

The rumored move, which first appeared earlier this month (link also in Chinese), is notable because of the sheer size Xiaomi has grown to. Any changes in its business verticals will have a rippling effect on other players and suppliers in those industries.

The Chinese upstart was the fourth largest smartphone maker in Q2 by shipments, behind rivals Samsung, Apple, and Huawei.

The move spells bad news in particular for already-struggling chip maker Qualcomm, who supplies Xiaomi with the more lucrative chips in its mid-range and flagship devices. These include the recently launched Mi Note Pro in January ($480) that runs on Qualcomm’s Snapdragon 810, and the Mi 4i in April ($200) that runs on the slower Snapdragon 615.

Xiaomi’s lower-end devices, like the Redmi Note 2 ($168) that launched this month, are already running on chips from Chinese chip maker MediaTek. If we backtrack to last year, we have the case study of Xiaomi-owned Pine Cone Electronics working with Chinese chip maker Leadcore Technology to develop the LC1860 processor. That processor ended up in the low-end Redmi 2A ($96), which proved a lucrative model for Xiaomi and allowed it to keep prices low. Qualcomm’s comparable processor would have reportedly cost double — $8 apiece instead of $4.

Qualcomm recently saw its quarterly profits slide by as much as 46 percent, and is reportedly preparing to lay off several thousand employees. Like an increasing number of technology companies, including Apple, the Calif.-based chip maker is over-reliant on sales from Asia.

In Qualcomm’s case, as much as 84 percent of its annual sales come from this part of the world, as of July data, and Xiaomi is no doubt one of its biggest customers. But the move seems to be part of a wider trend that is leaving Qualcomm in the lurch.

South Korean giant Samsung moved away from Qualcomm’s Snapdragon earlier this year, which it had been expected to supply, opting instead to use its own in-house chips for the flagship Galaxy S6.

It’s not unforeseeable that Xiaomi will ultimately look to do the same with its own flagship devices. For now though, they are still running on Qualcomm’s technology — a Snapdragon 820 is expected to power the Mi 5, rumored for a November release.

Xiaomi is eyeing a U.S. entry for its smartphones in 2016 (it already sells some products there), but owning as many verticals as possible first is a logical move if it wants to compete against local players. Producing its own chips is part of that wider vision of control (much like Apple).

A report in May by the EE Times quoted a Leadcore executive as saying that “Xiaomi wants its own custom-designed processors to differentiate its products and control its destiny.”

Meanwhile, a separate report by a Chinese-language newspaper (via DigiTimes) said that the company has obtained the right to gain access to ARM processor technology.

Xiaomi declined to comment for this story. Qualcomm has not replied to our request for comment, but we’ll update you if we hear back.