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NDRC's strike against Qualcomm

2014-03-05 15:29 Caijing Web Editor: Li Yan
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China's National Development and Reform Commission (NDRC) confirmed it had launched an anti-monopoly investigation into US mobile chip giant Qualcomm Inc. (Qualcomm), after receiving complaints from relevant associations and companies that the company was charging higher prices in China than it does in other countries.

At a price supervision and anti-monopoly work press conference held Feb 19, Xu Kunlin, head of the price supervision and anti-monopoly bureau at the NDRC, said the investigation into Qualcomm is ongoing.

At present, Qualcomm is the world leader among global mobile communications chip design companies. In the 3G era, Qualcomm led the development of immense 3G technology standards and obtained numerous basic patents in CDMA communications. As a result, most global chip manufacturers and terminal manufacturers must pay patent "protection money" to Qualcomm if they manufacture any 3G devices; on the other hand, in terms of development and integration, the strength of Qualcomm's technology far exceeds its competitors, and the company is currently able to provide chip solutions for all the world's 3G and 4G system standards, a feat which no other chip designer can match.

Qualcomm has held the top position in the global chip market for six consecutive years since 2007, and its share of the 3G mobile phone market in China is about 40 percent. The company's huge advantage in technology is only expanding with the arrival of the 4G era. China Mobile's procurement of TD-LTE terminal chips in the second quarter of 2013 is a typical example: over 60 percent of the chips were designed by Qualcomm.

According to information disclosed by domestic mobile phone operators, with Qualcomm's absolute advantage in the current "5-mode 10-frequency" program, for every 4G phone that uses the its program in the future, Qualcomm will take patent licensing fees, chip program costs and other expenses totaling more than 20 percent of the sales price. However, the relative net profit of most Chinese mobile phone manufacturers is only 5 percent of the total price, making it difficult for manufacturers to afford Qualcomm's fees.

A Beijing-based lawyer and participant in an NDRC think-tank on the issue told Caijing that the investigation into Qualcomm is still in a sensitive period and cannot be discussed openly, but suggested "looking into the Huawei-IDC case" as a reference.

In October last year, the Guangdong Provincial Higher People's Court ordered US firm InterDigital Communications (IDC) to pay Chinese technology giant Huawei 20 million yuan in compensation for monopolistic practices.

Under China's existing legal framework, it would not be difficult for the NDRC to order Qualcomm to pay antitrust penalties. But behind the seemingly calm investigation is a deep psychological game between the two sides. As China's telecom industry moves from the era of 3G to 4G, a new round of reshuffling has already begun. Current trends indicate that this uncertainty brought by the NDRC's investigation will give more opportunities for small businesses and have positive effects on domestic enterprises and national technical standards.

If Qualcomm does not want to be punished, it will, like IDC, need to show its "willingness to compromise" by actively cutting prices on chips and patent license fees.

For domestic mobile phone providers, this will greatly ease the cost pressure coming from supply chain prices, which will make it so domestic mobile phone makers don't necessarily lag behind foreign competitors like Apple and Samsung at the start of the 4G era. For ordinary consumers, the possibility of a shift in core costs will impact the positioning and popularity of 4G mobile phones.

This will also impact the market pattern of the three main telecom operators, as well as the strategic development interests of the country's communication industry. "In terms of current chip technology, Qualcomm is the only provider of chips that can simultaneously support all 3G and 4G network standards, which helps to promote TDD-LTE technology standard which China has a higher intellectual property rights (IPR) share of," said You Yunting, an IPR lawyer at Shanghai Dacheng Law Offices. "China Mobile has to spend hundreds of billions of yuan to deploy TD-LTE. If low- and middle-end phones cannot be rolled out because of the high price of Qualcomm chips, and use of its 4G network isn't maximized, [China Mobile] will lose hundreds of millions of yuan daily."

Public data shows Qualcomm achieved total revenues of US$ 24.87 billion in fiscal year 2013, nearly half of which (US$ 12.3 billion) came from the Chinese market. For such a large market, Qualcomm will not take the risk of an early exit lightly.

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