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Chipmaker's CEO builds bridges in China as the company faces a significant antitrust fine.

Qualcomm Looks to Soften China Antitrust Blow

Robert Clark
News Analysis
Robert Clark
7/25/2014
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Chipset giant Qualcomm faces a hefty fine and a cut in royalty fees as the antitrust probe into its China patent licensing reaches its final stage.

After an eight-month inquiry, the National Development and Reform Commission (NDRC) has determined that Qualcomm Inc. (Nasdaq: QCOM)'s 4G licensing fees are a monopoly under the Anti-Monopoly Law. This is not illegal in itself, but the logic of the process is such that a stiff penalty is inevitable, with domestic media suggesting it could amount to as much as US$1 billion.

The San Diego-based chipmaker, which derives two-thirds of its profit from royalties and sells significant volumes of its processors in China, also appears to have come around to that view. (See Qualcomm Announces Record Third Quarter Fiscal 2014 Results.)

CEO Steve Mollenkopf flew into Beijing Thursday on his third visit to the country since becoming CEO in March. He met with officials, including Premier Li Keqiang and the NDRC, and held a press conference to announce a $150m fund to invest in Chinese startups. Just three weeks ago the company said it would collaborate with Shanghai fab SMIC on 28nm wafer production. (See Qualcomm Commits Up To $150 Million to Strategic Venture Fund in China and SMIC and Qualcomm Collaborate on 28nm Wafer Production in China.)


For more communications processor market coverage and insights, check out our dedicated Comms Chips content channel here on Light Reading.


If Qualcomm feels like it has a target on its back, it isn’t alone among foreign firms in China. In 2013 milk powder companies were fined $110 million for price-fixing, while pharmaceuticals firm GlaxoSmithKline is embroiled in a bribery scandal featuring a sex tape involving its former China chief, and even Starbucks has come under fire for selling expensive coffee.

But analysts point out that while xenophobia may not be far from the surface, high-profile foreign firms are being singled out as a politically safe way of signalling to domestic companies that they need to clean up their act.

IN addition, the Chinese also feel they have a reasonable case against Qualcomm. The say that, as a rule of thumb, patent licensing fees for various technologies shouldn't cumulatively account for more than 10% of the sale price: Qualcomm on its own levies a 5% royalty fee.

Qualcomm has said the uncertainty created by the probe has meant it has had difficulty in collecting from customers -- including one large, unnamed firm -- prompting a 6.65% slide in its stock price Thursday to end the day at $76.17.

If that's not troubling enough, the Financial Times reports that Qualcomm might have to settle by foregoing royalties for LTE TDD, the variant of 4G being deployed on a massive scale by China Mobile Ltd. (NYSE: CHL) and in some areas by the country's other two main operators. (See China Issues More 4G Licenses and China Holds Key to LTE TDD.)

Chinese critics point out this isn't Qualcomm's first brush with competition law. In 2009 the Korean competition regulator fined Qualcomm a record $207 million for abusing its market power over Korean vendors when it held 99.4% of the CDMA chip market.

Meanwhile, Qualcomm continues to produce healthy financial results. For its fiscal third quarter that ended June 29, the company posted record revenues of $6.81 billion, up 9% from a year earlier, and net income of $2.24 billion, up 42%.

— Robert Clark, contributing editor, special to Light Reading

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R Clark
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R Clark,
User Rank: Blogger
7/28/2014 | 8:44:32 AM
Re: QCOM Antitrust article
Thanks for the clarification @QCOM1. In my story I did try to suggest the enthusiasm of the China media both for the probe and the widely-embraced figure of US$1bn.  The NDRC never takes calls from foreign media, and the Qualcomm CEO declined to take any questions on the matter at his Beijing presser, so I didn't bother reaching out to either party to check the figures.
danielcawrey
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danielcawrey,
User Rank: Light Sabre
7/26/2014 | 12:48:01 PM
Re: QCOM Antitrust article
Qualcomm has done quite well in charging high fees for its intellectual property. It almost seems as if the Chinese government in partiuclar is not happy with that. 

It's also pretty clear that the state-run Chinese companies that use Qualcomm's technology that they would love to get a hold of it to better compete on costs - a influential factor in all of this for sure. 
kq4ym
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kq4ym,
User Rank: Light Sabre
7/26/2014 | 8:57:00 AM
Re: QCOM Antitrust article
All the news about governments going after foreign firms for all sorts of alleged wrong doing and for using unfair business practices makes me wonder what's really  going on. Are the governmentss legitimately targeting these companies or is it a case of changing the rules during the game? One would think international companies and their lawyers would dot the "i" and cross the "t" before they engage. But, maybe it still a case that laws and business contracts are so complex now, that it's likely a government agency can find fault no matter how diligent the company lawyers?
QCOM1
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QCOM1,
User Rank: Light Beer
7/25/2014 | 1:49:38 PM
QCOM Antitrust article
Re: QCOM  antitrust article

Yours and several articles suggest QCOM could face a "hefty fine... as much as US$1B..",  using  QCOM's revenue by geographical area  figure of about one half of its revenues being from China.

Last December you wrote on this subject, more realistically estimating that number--

"...  Officially, 49% of Qualcomm's 2012 revenue came from China, although most of that was from the assembly of chips sold elsewhere. In reality, the real figure is estimated to be around 20%...."

Per QCOM's  10K - " We distinguish revenues from external customers by geographic areas based on the location to which our products, software or services are delivered, or for QTL licensing revenues, the invoiced addresses of our licensees...."

I believe it's much less than 20%, perhaps $900 million in royalty revenue (200M devices, $150 ASP, and 3% royalty rate) plus another $1 in chipset sales to the domestic Chinese market.  This would yield about a $200 million penalty at the maximum 10% of revenue rate, not the $1 billion being floated around.
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