Qualcomm Inc. (QCOM:US), the world’s largest maker of chips for smartphones, said China’s National Development and Reform Commission began an investigation related to an anti-monopoly law.
The NDRC has advised that specific details of the probe are confidential, Qualcomm said today in a statement. The San Diego-based company isn’t aware of any charge by the agency that it violated the anti-monopoly law. The Chinese government has been stepping up corporate scrutiny recently, as new leadership expands an anti-corruption drive and cracks down on business practices that lead to increases in consumer prices.
Qualcomm gets revenue from chip sales and collects license fees from wireless providers for the shipment of most Internet-capable phones. The company’s push to expand the reach of its technology and chips in China may be leading the government to examine its dominance, especially as the country tries to foster a local chip industry capable of competing with overseas suppliers, said Gus Richard, an analyst at Piper Jaffray & Co.
“China wants to give as much advantage to their indigenous chipmakers as they can,” said Richard, who rates the shares the equivalent of a hold. “They care a lot about communications infrastructure and cell phones. I don’t think China’s going to pay them.”
Emily Kilpatrick, a spokeswoman at Qualcomm, said the company won’t comment beyond the statement. The shares fell less than 1 percent to $72.49 at the close in New York. The stock has gained 17 percent this year.
Qualcomm got 49 percent of its $24.9 billion in sales from China in the fiscal year that ended in September, with some of that coming from phones that were assembled in China and sold in other countries. The company today said it will cooperate with the NDRC’s probe. Qualcomm was invited to a meeting about antitrust regulations in July by the country’s commerce ministry, a spokeswoman said at the time.
The company gets the majority of its total revenue from chips that run smartphones, and the bulk of its profit from licensing technology that is central to modern cell-phone networks and handsets. That means even phone-service providers that don’t use Qualcomm chips pay royalties for use of its patents. The company collected technology-license fees on more than a billion phones in fiscal 2013 and sold more than 700 million chips.
China Mobile Ltd. (941), the world’s largest wireless carrier, hasn’t paid Qualcomm licensing fees after opting to use an alternative technology for its current data network that the Chinese government said wasn’t covered by the U.S. company’s patents.
Qualcomm said it expected that to change next year, as China shifts to a new higher-speed technology for mobile networks called long-term evolution, or LTE. Last week at the company’s analyst day in New York, executives said the network shift means Qualcomm will be able to supply chips and get licensing revenue from China Mobile.
The inquiry may be part of a broader investigation by the Chinese government agency aimed at keeping consumer prices from rising too quickly, and may not be a challenge to Qualcomm directly, said Mark McKechnie, an analyst at New York-based Evercore Partners LLC. He recommends buying the shares.
“This looks like more of a broader effort over in China,” he said. “It’s probably more about the chips than the royalties.”
In the market for the most advanced Internet-capable phones, Qualcomm has a share of about 60 percent and profit margins of less than 20 percent, McKechnie said. That indicates it’s facing tough competition and makes it more difficult to show evidence of a monopoly, he said.
The Qualcomm probe is the latest example of the challenges that overseas companies have faced as they try to expand in the world’s most populous country.
China’s state-controlled media last month accused Starbucks Corp. (SBUX:US) of charging too much for coffee and said Samsung Electronics Co.’s smartphones don’t work properly. International Business Machines Corp.’s China revenue slipped 22 percent in the third quarter as state-owned companies started delaying orders, including mainframes and servers.
In August, the Chinese government fined six dairy companies including Danone for fixing the prices of infant formula products, and five Shanghai-based gold retailers and a local trade association for manipulating jewelry prices.
The August fine over baby-formula price fixing, a combined 669 million yuan ($110 million) for dairy companies also including Mead Johnson Nutrition Co. (MJN:US), was a record for violating anti-monopoly laws.
Another high-profile probe into a foreign company this year centered around London-based GlaxoSmithKline Plc. Four senior executives from the company were detained in July on suspicion of economic crimes.
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