China's National Development and Reform Commission (NDRC) initiated
an investigation into Qualcomm last year and is currently holding
talks with the U.S. company, which this month said it was still in
the dark about the basis of the scrutiny.
The probe and the potential fine — the amount of which could hinge
on negotiations — come as the NDRC zooms in on information
technology providers, especially companies that license patent
technology for mobile devices and networks.
Industry experts say the NDRC, the government's main economic
planning body, is trying to lower domestic costs as China rolls out
its faster 4G mobile networks this year.
"It is, in some ways, a game of chicken," said Yee Wah Chin, a New
York-based antitrust expert at law firm Ingram, Yuzek, Gainen,
Carroll and Bertolotti.
"While the (fine) money may be very attractive to the NDRC, they
would also be happy if Qualcomm were to make all sorts of
commitments regarding its technology and the licensing of the
technology," she told Reuters.
San Diego-based Qualcomm, which is scheduled to report quarterly
results later on Wednesday, is positioned to reap the vast majority
of licensing fees for the chip sets used by handsets in China, the
world's biggest smartphone market. Chinese telecom firms may invest
as much as 100 billion yuan ($16.4 billion) in equipment for 4G
Under the anti-monopoly law, the NDRC can impose fines of between 1
and 10 percent of a company's revenues for the previous year.
Qualcomm earned $12.3 billion in China for its fiscal year ended
September 29, or nearly half of its global sales.
Lawyers say the fine is likely to be extremely high if Qualcomm
fails to make concessions in its talks with the NDRC.
"We intend to continue cooperating fully with the NDRC," Qualcomm
spokeswoman Christine Trimble said when asked about the probe.
In December, the head of the NDRC's anti-price-fixing bureau told
state media there was "substantial evidence" against Qualcomm in the
antitrust probe. Details, however, remain sketchy.
The Qualcomm probe is a prime example of the uncertainty foreign
firms are grappling with as China's regulators target key industries
to shield consumers from practices that could lead to what they call
"unreasonably" high prices.
It also shows the NDRC's seriousness in using its antitrust rules.
In 2011, the agency imposed one of its first major penalties against
a foreign company, a $300,000 fine on Unilever Plc for violations of
the pricing law.
The NDRC has also slapped Chinese and foreign companies with
investigations and fines in the past year.
In August, the regulator fined six infant formula manufacturers,
including Mead Johnson Nutrition Co, Danone and Fonterra, a record
$110 million after a probe into price fixing and anti-competitive
The anti-monopoly law provision does not specify whether the 10
percent ceiling for fines applies to global or domestic sales, or to
a particular product line.
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At the lowest legal threshold, the fines on Qualcomm could surpass
those in the infant formula cases. Fines at the top of the range
would put the Qualcomm case on par with major antitrust rulings in
the United States and Europe.
"They (NDRC) keep as much discretion for the decision maker as
possible," said Peter Wang, a China-based antitrust expert with law
firm Jones Day. "Technically it would appear they can't go below one
percent, though they have other ways to reduce the fines based on
Qualcomm is no stranger to substantial fines.
In 2009, South Korea's Fair Trade Commission fined the company 273
billion won ($252 million), the agency's biggest ever penalty
against a single company, for abusing its dominant position in CDMA
modem chips which were then used in handsets made by Samsung
Electronics and LG Electronics.
Falling afoul of Chinese regulators would be painful for Qualcomm,
which saw revenues in China more than double over the last two
years. Revenues, which include domestic sales as well as licenses
for devices assembled in China and then exported, rose to $12.3
billion in 2013 from $4.7 billion in 2011.
Shipments of 4G enabled smartphones, many of which use Qualcomm's
technology, are expected to increase by about a third to top half a
billion units in Greater China in 2015, according to data firm
Canalys, compared with the 385 million units shipped in 2013.
Qualcomm charges handset manufacturers differing royalty rates,
which usually range from 1 to 6 percent of the wholesale price of a
Some experts suggest the NDRC's scrutiny of IT providers stems from
its desire to lower domestic costs as China rolls out its 4G mobile
Last year, the NDRC started an investigation of U.S. firm
InterDigital Inc to assess antitrust complaints by Huawei
Technologies Co related to technologies for wireless devices and
Delaware-based InterDigital has ongoing legal proceedings with
Huawei in the United States, Europe and China.
"They (NDRC) have particular markets in mind and they have
particular views of what the prices should be in the market," said
New York-based lawyer Chin.
($1 = 6.0480 Chinese yuan)
(Additional reporting by Paul Carsten in
Beijing and Miyoung Kim in Seoul; editing by Miral Fahmy)
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