Qualcomm, a leading wireless communications chip supplier worldwide, has emerged a winner with Apple’s iPhone 6 models. A tear-down analysis by iFixit revealed five Qualcomm chips in the iPhone 6 and iPhone 6 Plus. However, the good news may be offset by Qualcomm’s lingering antitrust probe in its Chinese LTE smartphone market. Last week, China’s anti-monopoly regulator—the Anti-monopoly and Price Supervision Bureau under the National Development and Reform Commission—said that the anti-monopoly investigation on Qualcomm has concluded and is in the process of fine estimate.

The alleged monopolistic practices include calculating licensing fees based on an entire mobile phone, charging licensing fees for technologies with expired patents and bundling licensing for necessary and unnecessary technologies. For instance, Chinese mobile phone manufacturers normally pay chip suppliers five percent of the price for a chip as licensing fees, but Qualcomm charges them five percent of the price for an entire mobile phone. Given that smartphones are far more expensive than basic feature phones, licensing fees, nearly as much as the actual cost for chips, become extremely burdensome for manufacturers. In 2013, Qualcomm collected $7.6 billion in licensing fees globally, half of which was from China.

Under the Chinese anti-monopoly law, China’s anti-monopoly regulator can impose fines of between one percent and ten percent of a company’s revenues for the previous year. The rate depends on the extent and time period over which the company abuses its dominant market status. Consequently, Qualcomm may be liable for a record fine of more than $1 billion.

Qualcomm may also face an SEC suit over China bribes. According to China’s anti-monopoly regulator, Qualcomm hired Xinzhu Zhang for $800 an hour. Dr. Zhang is an anti-monopoly expert from Chinese Academy of Social Sciences, a government-owned research institute. He is one of the authors of an analytical economy report Qualcomm submitted to the regulator. Dr. Zhang also admitted that he has accepted $200,000 bribes from Qualcomm.

The Foreign Corrupt Practices Act (FCPA) makes it unlawful for US citizens and corporations to make payments to foreign government officials to assist in obtaining or retaining business. In China, most research institutes and think tanks are owned and funded by the government. Further, their employees often have official governmental titles and act as experts or consultants in the process of law making and enforcement. As a result, unlike the situation in the USA, making payments to an employee from a Chinese research institute may be equal to bribing a government official in term of both the effect and the FCPA jurisdiction.

 

Peiyuan Guo

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One Response to Trouble for Qualcomm in China and the U.S.

  1. anonymous says:

    Qualcomm’s licensing scheme and leveraged chip sale practice have been challenged around the world, including US, Europe, and Asia (both Korea and Japan). However, only Korea has successfully levied fine against Qualcomm. Qualcomm has a strong track record in fighting off allegations. What is difference this time? Can China truly take on Qualcomm?