TELECOMS: China Tries Concilliation In Qualcomm Settlement

Bottom line: Qualcomm’s settlement of a Chinese antitrust probe shows Beijing will be more open when taking similar actions against foreign firms, though it’s unlikely to take such a conciliatory stance with domestic companies.

Qualcomm settles China antitrust probe

After several months of reading reports that China was on the verge of wrapping up its antitrust probe of US telecoms chip giant Qualcomm (Nasdaq: QCOM), I’m happy to report that a landmark settlement of the deal has finally come. Headline writers will inevitably focus on the eye-catching figure of nearly $1 billion, which is the record amount that Qualcomm has agreed to pay to settle a probe that has lasted more than a year. But I’m most impressed by the unprecedented atmosphere of conciliation that came with this particular negotiation, which marks a huge change for Beijing regulators who are used to making decisions unilaterally with limited or no input from affected companies.

All that said, it’s also important to note that Beijing itself had come under huge pressure to be fair in its settlement of this particular case. Foreign companies have complained quite loudly during the past year about a series of antitrust probes by Beijing that seem to unfairly target major multinationals. US President Obama even joined the chorus late last year, when he personally raised the subject in a meeting with Chinese President Xi Jinping. (previous post) In that case, he expressed concern that China might be trying “to lower the value of foreign-owned patents and benefit Chinese firms employing foreign technology,” according to a statement issued later by Washington.

Beijing appears to have accepted some of the suggestions and outside pressure, resulting in this landmark settlement that looks costly to Qualcomm but also reasonably fair. The headline figure will see Qualcomm pay a record fine of about 6 billion yuan, which translates neatly to the amount of $975 million — falling just below the more psychologically important $1 billion mark. (company announcement)

There are quite a few details on the settlement in the announcement, and I’ll admit that I’m not intimately familiar with the company’s technology licensing practices that are at the heart of the new deal. One key element appears to be Qualcomm’s decision to reform its previous practice of forcing companies to buy rights to large numbers of its patents, even if they were only interested in a much smaller number. Another key element appears to be the lowering of the licensing fees it charges for many of its patents, which are critical elements of the technology used in most of the world’s mobile networks today.

Qualcomm was quick update its outlook for the current fiscal year with relatively positive numbers. The company largely left its revenue guidance unchanged for the current fiscal year, though it slightly raised the lower end of its range. It lowered its profit guidance to account for the big fine, but again left the number largely unchanged from previous guidance when excluding the effects of the penalty.

Investors seemed to welcome the news, bidding up Qualcomm shares by nearly 3 percent in after-hours trade. The fact that Qualcomm’s guidance remains largely unchanged looks relatively positive, as it indicates the company probably got most of the conditions it was seeking in its settlement with the powerful National Reform and Development Commission (NDRC). As part of the deal, Qualcomm said it won’t dispute the NDRC’s final decision.

The next big question becomes: What does this deal mean for Qualcomm’s future and also for companies under similar regulatory scrutiny? The answer for Qualcomm is that this marks the end of a painful chapter, though it’s possible it could see some more pain if other governments follow with similar probes. More broadly speaking, the development does appear to show that western companies may get fairer treatment by Beijing in similar ongoing and future antitrust probes. But Chinese firms are unlikely to benefit much, since they have far less clout and lack powerful allies like Barack Obama.

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