Rock the Boat? China Tips the Boat with Tsunami-like Antimonopoly Fine against Qualcomm.

February 11, 2015

Qualcomm, Inc., has agreed to pay the largest fine in China’s corporate history to settle an antimonopoly claim based on its activities within the Asian superpower. Click here. The San Diego based tech company manufactures computer chips used in smartphones, including those made by Apple, Samsung, LG, and Sony. Click here. Many consider the company to be among the top manufacturers in mobile chips. Click here. The payment of the fine marks the conclusion of a 14-month investigation by the Chinese government into Qualcomm’s operations in China. Click here.
The People’s Republic of China adopted its antimonopoly statute in 2008 for the express purpose of “preventing and restraining monopolistic conducts [and] protecting fair competition in the market, enhancing economic efficiency, safeguarding the interests of consumers and social public interest, promoting the healthy development of the socialist market economy.” Click here. The statute is applicable to conduct that occurs in the form of economic activity within the country, as well as foreign activity that has a restrictive effect on domestic competition. Click here. This statute has provided China’s National Development and Reform Commission (hereinafter “NDRC”), the agency “in charge of the examination and regulation of price-related monopolistic activities” with additional authority to conduct investigations and punish restricted activities. Click here.
Since the law came into effect on August 1, 2008, has handed down some noteworthy fines against high profile companies. In its first investigation into an international company, the NDRC fined six manufacturers of LCD goods a total of $56.8 million. Click here. Shortly thereafter, the NDRC fined two Chinese state-owned liquor companies a total of $71.8 million. Click here. Until recently, this was the largest fine ever issued under the antimonopoly law. Click here. But neither of these fines came close to comparing to the penalty facing Qualcomm.
As a result of the NDRC’s investigation, Qualcomm will pay a $975 million fine. Click here. Additionally, Qualcomm will be forced to offer licenses to its current 3G and 4G essential Chinese patents, with royalties based on 65 percent of the phone’s selling price – a significant decrease from the previous royalty calculation basis of 100 percent of the selling price. Click here.
Despite the penalty’s jaw-dropping effect, the NDRC’s antimonopoly bureau maintains the position that the fine was lenient, representing less than 10 percent of what the statute permitted under the circumstances. Click here. In support of this assertion, the bureau claimed that the motivation for the penalty was to restore fair market competition in China. Click here. However, the fine represents a figure several times the agency’s total fines for all of 2014. Click here.
Others are not so sure that Qualcomm won’t be feeling the effects of this penalty throughout its entire enterprise. The fine alone represents 8 percent of the company’s sales in China, click here, a market that produces fifty percent of the company’s annual revenue. Click here. It will cost the company’s sharedholders nearly 60 cents per share. Click here. This despite the fact that Qualcomm has cooperated fully with the investigation and has agreed not to contest the massive fine. Click here. The fine could also impact similar investigations into the company’s activities in the United States and Europe, which are already underway. Click here. Sanford C. Bernstein analyst Stacy Rasgon believes that the resolution may decrease the market price for Q’s chips globally and may cost Q its deal with Samsung over the Galaxy S phone. Click here.

            Although China is likely glad that Qualcomm’s monopolistic conduct has been addressed and penalized, the imposition of the NDRC’s fine will undoubtedly have a lasting negative effect on the Chinese market.

With Microsoft, Daimler, and other tech companies facing similar NDRC investigations, click here, the resolution of Qualcomm’s case could go a long way in dissuading international tech companies from doing business in China.