Ahead of Qualcomm decision, Obama administration leans on China over antitrust issues

During his recent visit to China, President Barack Obama pushed his Chinese counterpart, Xi Jinping, on the use of Chinese antitrust policy to limit royalty fees for foreign companies, according to a Reuters report. The high-level involvement comes as China appears close to nearing a decision on royalty fees that could see Qualcomm (NASDAQ:QCOM) slapped with a $1 billion penalty.

The push by Obama could alter China's calculus on the issue, but it could just as well backfire and undercut his ability to get Xi to make concessions. For Qualcomm, the year-long probe by the Chinese National Development and Reform Commission has been an albatross around its neck, clouding its position in the world's largest smartphone market.

"The United States government is concerned that China is using numerous mechanisms, including anti-monopoly law, to lower the value of foreign-owned patents and benefit Chinese firms employing foreign technology," Patrick Ventrell, a White House National Security Council spokesman, told Reuters. "President Obama raised these concerns about the enforcement of China's anti-monopoly law directly with President Xi when they met in Beijing last month."

According to Reuters, at least 30 foreign firms, including Qualcomm, have come under the scrutiny of China's 2008 anti-monopoly law, which has been aimed--critics say unfairly--at foreign companies competing with Chinese firms.

The report, citing two unnamed sources familiar with the discussions, said Obama did not directly mention Qualcomm by name, though the company is the only major U.S. firm with an ongoing antirust investigation in China related to royalty fees.

Last month Qualcomm warned the probe could hurt its 2015 sales and profit. Qualcomm CEO Steve Mollenkopf said the company's fiscal 2015 outlook takes into account its leadership position in the chipset market but "is tempered by the issues we are facing in China related to our licensing business." Qualcomm declined to comment on the presidential talks, Reuters reported.

China has been looking into Qualcomm's licensing fees from companies that use its patented technologies, mainly CDMA. Qualcomm derives most of its profit from licensing fees and most of its revenue from sales of chipsets and modems.

Qualcomm could be hit with a fine as high as $1 billion related to the Chinese probe, and could also be forced to make concessions that would negatively impact its licensing business. Qualcomm has been struggling to secure licensing revenue from some China device makers, including locally-based OEMs and ODMs, according to Reuters. That's particularly troubling for Qualcomm at a time when Chinese carriers are rolling out LTE networks and more device makers are selling LTE devices.

Qualcomm estimates globally it isn't receiving licensing revenue on more than 200 million handsets as a result of delays in licensing negotiations and unreported sales, out of about 1.3 billion total phones it thinks will be shipped in 2014.

Investors fear any concessions Qualcomm gives on licensing fees could spread to other device makers in other markets.

The fact that the dispute over China's antitrust practices has been elevated to the level of presidential talks underscores the pressure American companies are facing in China. Other administration officials have also raised concerns with high-ranking Chinese officials, including U.S. Treasury Secretary Jack Lew. "I will not speculate on how the U.S. might react to any hypothetical outcome of a specific case," Ventrell, told Reuters.

The report, citing unnamed sources familiar with the Qualcomm probe, said any settlement is likely to include the imposition of fines, a significant cut of licensing fees Qualcomm charges Chinese OEMs for phones sold in China, and the end of cross-licensing arrangements the company places on phone makers using its chipsets. Qualcomm earned about half of its global revenue of $26.5 billion in China for the fiscal year that ended Sept. 28.

For more:
- see this Reuters article

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