United States-based mobile chip giant Qualcomm faces the prospect of paying a record fine in an antitrust investigation in China. Some analysts think such an eventuality would erode Qualcomm’s competitive power, providing an opportunity for Asian chipmakers to increase their market share, while handset makers will able to bolster their profitability on lower costs. But could this just be wishful thinking?
Qualcomm has been long criticized for being discriminatory in dealing with clients. It is charging Chinese handset makers 5 percent of a smartphone’s ex factory price for its patent fees, while Apple and Samsung are just taking 4 percent of the handset’s production cost.
Ex factory price is the price a maker sells the finished products to clients or retailers, excluding other charges such as delivery costs and taxes. Production price, meanwhile, is lower than the ex factory price as it represents the cost of making or assembling the product.
The hefty fees that Chinese handset makers pay for chip patents have eaten into their profits. Huawei founder Ren Zhengfei has been complaining about the low profitability in the segment. He once said that “we can only earn 30 yuan for each handset”, which is quite below what is expected for a high technology business.
Qualcomm may change its discriminatory pricing practices as the antitrust investigation nears its conclusion. And fairer treatment towards Chinese handset makers might help in lifting their profitability by up to 2 percentage points, according to the National Business Daily.
Other chipmakers such as Taiwan-based MediaTak and Shanghai-based Semiconductor Manufacturing International will also benefit from the investigation.
This is so because Qualcomm’s Chinese and Taiwanese peers have to pay for certain core technologies of the US chip giant, which are likely to get cheaper as a result of the antitrust probe.
More importantly, Chinese authorities may ban Qualcomm’s other unfair practice. Because of its strong bargaining power, the US company charges small players for using its patents, but it can use others’ patents for free.
It would be a relief for local chipmakers if Chinese authorities rule that such practices are illegal.
But small rivals won’t be able to take much business away from Qualcomm, given its efforts to maintain technological superiority. Last year the US chip behemoth invested US$4.96 billion in its research and development department alone, seven times what MediaTak spent for the period.
The National Development and Reform Commission (NDRC), which is leading the antitrust probe into Qualcomm, has confirmed the company’s monopolistic practices and is now looking into its sales data. Chances are the chipmaker may face up to 7 billion yuan (US$1.1 billion) in penalty, Securities Times reported last month.
That may be a big fine, but the company raked in US$12.3 billion in China for the financial year ended September 2013, or about half of its total sales.
Qualcomm president David Aberle is preparing for the worst, saying that “some loss would be probable”. Qualcomm’s share price has fallen over 10 percent since Aberle made the comment late last month, erasing over US$13 billion from its market value.
Qualcomm has faced similar probes in other Asia countries. It has been found guilty of monopolistic practices in South Korea and Japan.
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