AH SnapDragon Qualcomm 1.7

President Obama Discusses Chinese Antitrust Policies With President Xi Jinping

December 16, 2014 - Written By David Steele

We’ve written about the Chinese investigation into Qualcomm over the last few months and how it’s drawing to a conclusion, but it appears that we are not the only interested party! During recent talks, United States President Barack Obama has discussed the situation with Chinese President Xi Jinping regarding the use of Chinese antitrust policies to limit royalties for foreign companies, which is at the centre of the investigation into Qualcomm. Essentially, President Obama is concerned that China is using one or more mechanisms (such as anti-monopoly law) to lower the value of foreign-owned patents and to benefit domestic (Chinese) businesses using these patents. This is going to be something of a test as to how much influence each President can have on the Qualcomm case and both sides of the equation have much to lose! It’s unusual for Presidents to try to influence commercial matters although the source notes that Qualcomm were not directly referenced during the Presidential conversation. It just so happens that Qualcomm are the only American business currently under Chinese investigation! At least thirty foreign businesses have been investigated by the Chinese authorities associated with their 2008 anti-monopoly law and many critics claim that it is being used to unfairly target those successful businesses and to give Chinese firms an advantage. The Chinese authorities have said that their policies are fair and transparent.

The investigation into Qualcomm may result in the American company paying fines of over $1 billion, but in the scheme of their annual earnings, this is not even a fortnight of cash. What’s far worse is the implications of changes to Qualcomm’s license arrangements, which could weaken the prices and terms it levies Chinese companies to use its patents. This is bad news for Qualcomm as they own many patents associated with 4G LTE, which is in its infancy in mainland China and is seen as a high growth area over the coming few years. Qualcomm is already struggling to secure licensing revenue from some Chinese manufacturers and estimates that across the world, it believes it will be owed licensing revenue on over 200 million handsets out of 1.3 billion sold during 2014, although it isn’t clear how large a proportion of these are Chinese.

Ultimately, Qualcomm is in the business to make money for shareholders and a key difficulty is how do investors cope with uncertainty: how does one value a market leading business that is being pushed into weakness in one high-growth part of the world? How does one assess the threat of this licensing weakness spreading elsewhere? For the year to the end of September, Qualcomm’s global revenue was $26.5 billion and about half of this was derived from China so as you can see, there are huge implications going forwards. Qualcomm Chief Executive Officer, Steve Mollenkopf, said in November that the company’s 2015 outlook takes into account its leadership position but “is tempered by the issues we are facing in China related to our licensing business”. Competition between chipmakers (actually, between all businesses) is a good thing as it encourages, innovation. However, if Qualcomm are to continue being a market leader, they need to be able to compete fairly across the world marketplace.