Qualcomm may face record US$1bil antitrust fines in China

Updated: Wednesday January 29, 2014 MYT 11:35:36 AM

Qualcomm may faces record US$1bil antitrust fines in China

BEIJING: Qualcomm Inc, the world’s biggest cellphone chip maker, may be hit with a record fine exceeding $1 billion in a Chinese antitrust probe, raising the specter of harsh penalties for foreign firms facing an increasingly aggressive regulator.

China’s National Development and Reform Commission (NDRC) initiated an investigation into Qualcomm last year and is currently holding talks with the U.S. company, which this month said it was still in the dark about the basis of the scrutiny.

The probe and the potential fine – the amount of which could hinge on negotiations – come as the NDRC zooms in on information technology providers, especially companies that license patent technology formobile devices and networks.

Industry experts say the NDRC, the government’s main economic planning body, is trying to lower domestic costs as China rolls out its faster 4G mobile networks this year.

“It is, in some ways, a game of chicken,” said Yee Wah Chin, a New York-based antitrust expert at law firm Ingram, Yuzek, Gainen, Carroll and Bertolotti.

“While the (fine) money may be very attractive to the NDRC, they would also be happy if Qualcomm were to make all sorts of commitments regarding its technology and the licensing of the technology,” she told Reuters.

San Diego-based Qualcomm, which is scheduled to report quarterly results later on Wednesday, is positioned to reap the vast majority of licensing fees for the chip sets used by handsets in China, the world’s biggest smartphone market. Chinese telecom firms may invest as much as 100 billion yuan ($16.4 billion) in equipment for 4G networks.

Under the anti-monopoly law, the NDRC can impose fines of between 1 and 10 percent of a company’s revenues for the previous year. Qualcomm earned $12.3 billion in China for its fiscal year ended September 29, or nearly half of its global sales.

Lawyers say the fine is likely to be extremely high if Qualcomm fails to make concessions in its talks with the NDRC.

“We intend to continue cooperating fully with the NDRC,” Qualcomm spokeswoman Christine Trimblesaid when asked about the probe.

In December, the head of the NDRC’s anti-price-fixing bureau told state media there was “substantial evidence” against Qualcomm in the antitrust probe. Details, however, remain sketchy.

INCREASING SCRUTINY

The Qualcomm probe is a prime example of the uncertainty foreign firms are grappling with as China’s regulators target key industries to shield consumers from practices that could lead to what they call “unreasonably” high prices.

It also shows the NDRC’s seriousness in using its antitrust rules. In 2011, the agency imposed one of its first major penalties against a foreign company, a $300,000 fine on Unilever Plc for violations of the pricing law.

The NDRC has also slapped Chinese and foreign companies with investigations and fines in the past year.

In August, the regulator fined six infant formula manufacturers, including Mead Johnson Nutrition Co, Danone and Fonterra, a record $110 million after a probe into price fixing and anti-competitive practices.

The anti-monopoly law provision does not specify whether the 10 percent ceiling for fines applies to global or domestic sales, or to a particular product line.

At the lowest legal threshold, the fines on Qualcomm could surpass those in the infant formula cases. Fines at the top of the range would put the Qualcomm case on par with major antitrust rulings in theUnited States and Europe.

“They (NDRC) keep as much discretion for the decision maker as possible,” saidPeter Wang, a China-based antitrust expert with law firm Jones Day. “Technically it would appear they can’t go below one percent, though they have other ways to reduce the fines based on cooperation.”

MAJOR MARKET

Qualcomm is no stranger to substantial fines.

In 2009, South Korea’s Fair Trade Commission fined the company 273 billion won ($252 million), the agency’s biggest ever penalty against a single company, for abusing its dominant position in CDMA modem chips which were then used in handsets made by Samsung Electronics and LG Electronics.

Falling afoul of Chinese regulators would be painful for Qualcomm, which saw revenues in China more than double over the last two years. Revenues, which include domestic sales as well as licenses for devices assembled in China and then exported, rose to $12.3 billion in 2013 from $4.7 billion in 2011.

Shipments of 4G enabled smartphones, many of which use Qualcomm’s technology, are expected to increase by about a third to top half a billion units in Greater China in 2015, according to data firm Canalys, compared with the 385 million units shipped in 2013.

Qualcomm charges handset manufacturers differing royalty rates, which usually range from 1 to 6 percent of the wholesale price of a handset.

Some experts suggest the NDRC’s scrutiny of IT providers stems from its desire to lower domestic costs as China rolls out its 4G mobile networks.

Last year, the NDRC started an investigation of U.S. firm InterDigital Inc to assess antitrust complaints byHuawei Technologies Co related to technologies for wireless devices and networks.

Delaware-based InterDigital has ongoing legal proceedings with Huawei in the United States, Europeand China.

“They (NDRC) have particular markets in mind and they have particular views of what the prices should be in the market,” said New York-based lawyer Chin.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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