China's anti-trust investigation into Qualcomm, the world's biggest smartphone chip maker, is likely tied to the impending $16 billion rollout of commercial fourth-generation services by China's big telecoms carriers.
The probe by the National Development and Reform Commission (NDRC), China's top economic planning body and price regulator, is a likely pre-emptive measure that will allow China's telecom providers to gain leverage in royalty negotiations ahead of the rollout of new high-speed mobile networks, analysts said.
China Mobile (Beijing, China), China Unicom (Beijing, China) and China Telecom (Beijing, China) are investing more than 100 billion yuan ($16.4 billion) in system equipment for the next-generation wireless networks, which are expected to be introduced nationwide over the coming year.
Qualcomm (San Diego, CA, USA) is positioned to reap the vast majority of licensing fees for the chip sets used by handsets in the world's biggest smartphone market, providing the San Diego-based chipmaker with a fresh source of royalties.
"This is a big deal for Qualcomm," said Alen Lin, a telecoms analyst at BNP Paribas in Hong Kong. "For the first 6-9 months Qualcomm will be the only chipset provider that can support a handset using both 3G and 4G in the China market."
China is a key market for Qualcomm as smartphone growth shifts from the United States to developing countries. Qualcomm reported $12.3 billion in revenue from China in the 12 months through September, almost half its total revenue. Many of the smartphones made in China are exported, however, so the Chinese market actually accounts for about a fifth of Qualcomm's chip shipments and licensing revenue, according to Raymond James analyst Tavis McCourt.
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The three carriers, including China Mobile, the world's biggest mobile carrier with 759 million subscribers, are upgrading their infrastructure to LTE, or Long-Term Evolution, so customers can enjoy speedier Internet and data access. With Broadcom Corp (Irvine, CA, USA), Intel Corp (Santa Clara, CA, USA) and other chipmakers missing targets for their own LTE components, Qualcomm is the main player in LTE.
"Qualcomm ultimately makes its money from royalties," said Duncan Clark, chairman of BDA, a Beijing-based technology consultancy.
At Qualcomm's annual investor day last week, CEO Paul Jacobs and other executives focused on China and the upcoming LTE rollout as big opportunities to sell more smartphone chips and collect new royalties as LTE is implemented.
"We suspect this investigation is related to the forthcoming launch of TD-LTE by China Mobile in early 2014 and the negotiations on chip pricing and license pricing between Qualcomm and Chinese-based handset (makers) that are likely occurring right now," McCourt wrote in a note to clients.
Qualcomm said on Monday it was not aware of any anti-trust violations, but would cooperate with the NDRC probe. The NDRC has launched nearly 20 pricing-related probes of domestic and foreign firms in the last three years, according to official media and research published by law firms.
The NDRC, which was contacted by telephone and fax, provided no immediate comment on Tuesday. The commission advised Qualcomm it had commenced an investigation relating to China's Anti-Monopoly Law, the U.S. firm said. China's official Xinhua News Agency on Sunday quoted an NDRC official as saying regulators would broaden their anti-trust investigations to include more industries, including telecoms.
Beijing may also have an eye on supporting local chipset suppliers in competing with Qualcomm, the global leader in 4G technology. In recent months, the government has increased its efforts to use market power to promote local software and hardware.
Although Chinese smartphone makers such as Lenovo (Beijing, China), ZTE Corp (Shenzhen, China) and Xiaomi Tech (Beijing, China) have emerged to help meet demand for low-end handsets, China has struggled to develop a local mobile Internet standard.
"China's domestic chipset manufacturers are in disarray," said BDA's Clark. "They're trying to re-boot their whole chipset industry."
In recent months, organizations affiliated with the Chinese government spent nearly $3 billion to buy Chinese mobile chipmakers Spreadtrum Communications Inc (Shanghai, China) and RDA Microelectronics Inc (Shanghai, China). Both have technology that competes with Qualcomm's.
For Chinese regulators, one area of likely interest is whether Qualcomm is licensing its chipset patents on a fair, reasonable and non-discriminatory basis, analysts said.
They point to a recent battle between Huawei Technologies (Shenzhen, China) and InterDigital Inc (Wilmington, DE, USA) in which the Shenzhen-based networking equipment manufacturer claimed the U.S. wireless technology developer charged a royalty rate far above what it obtained from Apple Inc (Cupertino, CA, USA) and Samsung Electronics (Seoul, South Korea). In October, the Guangdong High Court awarded Huawei 20 million yuan ($3.28 million).
($1 = 6.0926 Chinese yuan)
(Additional reporting by Noel Randewich, Sinead Carew, Soham Chatterjee, Michael Martina, Paul Carsten and Matthew Miller; Editing by Rodney Joyce, David Gregorio and Ian Geoghegan)