Coverage: Qualcomm pays record fine to China

In a land of state-run businesses, China is fining U.S. chip maker Qualcomm nearly $1 billion for violating anti-monopoly laws. It’s enough to make your head spin to think of such a tightly controlled economy fining a company for having a lock on the market.

Ina Fried had these details about the settlement in her story for Re/code:

Qualcomm said on Monday that it had settled a long-running antitrust probe in China, agreeing to pay $975 million in fines and make changes to its licensing programs there.

As part of the settlement, Qualcomm is offering new licensing terms for its 3G and 4G standards-essential patents, and existing licensees will have the opportunity to use the new terms, effective retroactively to the start of the year.

While the percentage royalty Qualcomm gets will remain the same, it will now receive that royalty on 65 percent of the net selling price, rather than on the full price. Qualcomm also agreed to not require companies that want its chips to adhere to terms of its contract that Chinese regulators found unfair, though the company can still require chip customers to also license Qualcomm’s technology.

“We are pleased that the resolution has removed the uncertainty surrounding our business in China, and we will now focus our full attention and resources on supporting our customers and partners in China and pursuing the many opportunities ahead,” CEO Steve Mollenkopf said in a statement.

The New York Times story by Paul Mozur and Quentin Hardy offered this context about how foreign companies have been watching the case:

In the last decade, foreign technology companies have plowed billions into China in the hopes of tapping into a fast-growing market. Now that the country has the world’s most Internet users and its largest smartphone market, multinationals are bumping into a regulatory ceiling.

The starkest sign of that came on Monday, when the American chip maker Qualcomm said it would pay $975 million for violating China’s antimonopoly law. As part of the deal, Qualcomm will also offer its licenses for third- and fourth-generation communications systems for high-speed wireless data to smartphones, at a sharp discount to what it charges companies elsewhere.

For foreign companies in China, which have faced heightened scrutiny for corruption, monopolistic practices and tax evasion, it is a sign of the times.

Dozens of American, European and Japanese multinationals in the last year have faced a rash of investigations and raids by the Chinese authorities. The Qualcomm settlement is nearly double the amount the Chinese court charged the British drug maker GlaxoSmithKline in September after a criminal trial into bribery.

Don Clark wrote for The Wall Street Journal that other markets might push for a similar royalty deal with the company:

The changes Qualcomm agreed to accept include a different formula for calculating patent royalties on devices sold in China. Qualcomm typically charges about 5% of the wholesale price of a smartphone that uses its third-generation cellular technology, and its deals typically include rights to all of its patent portfolio.

Under the settlement, Qualcomm said it will offer separate licenses for certain patents, with licensees paying 3.5% for devices using only its 4G technology and 5% for 3G-only devices or those that use both cellular technologies. Instead of applying the percentage to the wholesale price of the handset, Qualcomm will apply it to 65% of the net selling price of a device, a slightly lower figure than the wholesale price, the company said.

Qualcomm’s use of the wholesale price as a base for royalties has been a major complaint of handset makers and one of the factors in antitrust complaints against the company in other markets, including the U.S. and Europe.

One lingering question from the settlement is whether regulators in other markets will press for a similar deal from Qualcomm. “Why is 65% the right percentage in China but not everywhere else?” asked Stacy Rasgon, an analyst with Bernstein Research.

Derek Aberle, Qualcomm’s president, said the China settlement was specific to that market. “The laws in other jurisdictions are different,” he said.

Ian King wrote for Bloomberg that the settlement isn’t have too large an effect on the quarter’s projected results:

The company had $31.6 billion of cash and marketable securities at the end of its most recent quarter. While chip sales provided 74 percent of revenue in that period, licensing fees contributed 58 percent of pretax profit. The company has collected more than $30 billion in royalties in the past five years.

The chipmaker said it now projects revenue for the year that ends in September will be $26.3 billion to $28 billion, compared with a Jan. 28 forecast that revenue would be as low as $26 billion. Annual profit excluding certain costs will be $4.85 to $5.05 a share, Qualcomm said, up from an earlier estimate of $4.75 to $5.05.

The result of the investigation may also provide a guideline on how to proceed for non-Chinese companies facing regulatory scrutiny in that nation. Microsoft Corp. and Symantec Corp. also have been the target of Chinese government investigations, fueling concern that the country — the world’s second-largest economy — is using such inquiries to boost its native enterprises.

Investors were happy with the news since it cleared up some uncertainty about the company’s position in China, one of its biggest markets. The company can move forward with a clear revenue stream, albeit slightly lower. But paying $1 billion for monopolistic practices to a Communist country is ironic.