China has held back with its Qualcomm settlement. The country’s antitrust watchdogs hit the U.S. chipmaker with a $975 million fine on Feb. 9 and forced it to lower patent fees. That’s helpful for local smartphone makers that rely on Qualcomm’s third and fourth generation mobile technology. Yet the resolution stopped short of explicitly curbing the tech giant’s dominance in the country. Big as China is, it can’t yet afford to shut out foreign technology.
The one-off fine may be the largest in China’s corporate history, but the $117 billion tech group can afford to take the hit: Qualcomm is debt-free and held $32 billion worth of cash and securities at the end of December. But Beijing’s order for Qualcomm to price its royalties based on 65 percent of the selling price of a phone, rather than the whole price, will leave a bruise. Assuming 30 percent of the company’s China revenue in the last fiscal year comes from patents – in line with Qualcomm’s global ratio - a 35 percent reduction in royalties collected would have slashed the group’s revenue last year by $1.4 billion.
Yet China’s antitrust watchdogs have left some leeway for Qualcomm to play tough with its customers. Unlike in Japan or South Korea, Beijing did not explicitly ban the company from “cross-licensing” - where Qualcomm requires clients to make their patents freely available to the chipmaker and its other customers – or from bundling chip sales with license agreements. Rather, Qualcomm has committed to negotiating with Chinese companies “in good faith”. The lack of detail raises the risk Chinese regulators will flex their interpretation of “good faith”, but there’s scope for Qualcomm to retain its dominance and market share.
A likely explanation for the relative lenience is China’s reliance on foreign technology. The country has been aggressively ramping up next generation mobile networks: shipments of 4G smartphones in China will hit 422 million by 2017, up from 152 million last year according to IDC. But more than 90 percent of chips are imported, which means even more reliance on foreign companies for expanding 4G networks. Beijing’s regulators may have a lot of weight, but Qualcomm is still very much in the game.