All is not well for Qualcomm Inc. (NASDAQ:QCOM), the largest manufacturer of wireless chipsets globally, as the company may have to settle for lower royalty payment for its technology licensing in China.
In Nov 2013, the Chinese regulatory authority, National Development and Reform Commission (NDRC), had initiated a probe into the company’s monopolistic practices in that country. Following that, the NDRC determined that Qualcomm is exercising monopolistic power in the country. Recently, the regulator stated that it is trying to wrap up the case as soon as possible.
A major cause of concern for Qualcomm at present is that following suit, other countries may also adopt stringent licensing norms like China to help their indigenous handset developers. This may land the company’s worldwide contracts with smartphone behemoths Apple Inc. (AAPL) and Samsung in trouble. The company might also have to forego royalties of TDD-LTE as a settlement in China. Such unfavorable actions will severely impair Qualcomm’s patent portfolio and consequently its highly profitable patent licensing business globally.
Over the last five years, Qualcomm has generated approximately $30.5 billion in licensing revenues. Bloomberg reported that the company was willing to incur a higher fine (one-time penalty) in order to keep its royalty rate unchanged. However, the Chinese authorities invalidated the proposal.
China provides a major growth opportunity to Qualcomm as China Mobile Ltd. (NYSE:CHL), China Unicom Ltd. (NYSE:CHU) and China Telecom Corp. Ltd. have ramped up the deployment of 4G LTE (either TDD or FDD format) in recent times.
Qualcomm is currently involved in a royalty dispute with a major customer in China. Moreover, a few small companies haven’t agreed to a royalty payment as the NDRC is yet to come up with its decision. A few companies are also under-reporting the number of phones sold, for which they should have ideally paid license fees.
Qualcomm generates approximately 29% of its total revenue from the licensing business however, this business accounts for almost 77% of the company’s net profit. China – the largest emerging market – contributed approximately 49% of Qualcomm’s total revenue in fiscal 2014 (ended Sep 2014). Accordingly, industry observers feel that the company will have to pay a hefty fine and may also have to face a cut in royalty fees going forward.