Industry group enters fray in Qualcomm probe

Mobile phone chipmaker Qualcomm Inc may be facing tough headwinds in China after a telecommunications trade union submitted "substantial evidence" to the country's top economic planner in the midst of an antitrust probe.

Mobile Phone China Alliance, comprising some 30 handset makers and telecommunications equipment providers, has submitted an investigative report to the National Development and Reform Commission, calling Qualcomm's business model "detrimental to China's mobile phone industry".

Overcharging on patent fees and bundle-selling of services are two major accusations leveled at the world's largest chip manufacturer, according to the alliance's secretary-general, Wang Yanhui.

"What's happening to China's mobile phone industry now is like what happened to its DVD industry years back," Wang told China Central Television on Sunday.

"Patent holders levied exorbitant licensing fees and grabbed the majority of profits," he said.

Licensing has become a crucial revenue stream for Qualcomm, according to the report, which said it charges from 4 to 6 percent of the wholesale price of a handset. And that does not include chipset charges if mobile phone companies pay to install Qualcomm's chips.

The US giant has even established a subsidiary exclusively for charging patent fees, said Wang, which he said "draws a thin line between proper licensing and monopolistic moves".

Qualcomm was put under antitrust scrutiny in November as Chinese authorities vowed to lay out more assertive plans for antitrust enforcement in six emerging industries.

The government agency has yet to disclose details of the investigation, citing the sensitivity of the issue.

Qualcomm's China-based spokesman couldn't be reached for comment on the latest development.

Its chief executive officer, Paul Jacobs, said in January that he was "not aware of" any activity violating China's anti-monopoly law and that his firm had handed over requested documents to the NDRC, which helps oversee antitrust issues.

A Beijing-based lawyer who is providing legal advice on antitrust issues to Qualcomm said the investigation could last at least a year, because of the complexity of the case.

The lawyer, who declined to be identified, urged the government to take into consideration the time, resources and money that the company has invested in its research and development process.

"It is for the same reason that pharmaceutical producers are sometimes allowed to receive a higher profit in the first couple of years after a new drug is produced. It is a way to protect intellectual rights and encourage innovation," he said.

The probe and the potential fine — which could end up totaling more than $1 billion — come as China gears up for the launch of high-speed fourth-generation LTE mobile communication networks.

As the world's largest smartphone market, China is now the single biggest source of revenue for Qualcomm, representing 49 percent of its sales in the past fiscal year.

Heavyweight smartphone makers, from Apple Inc and Samsung Electronics Co Ltd to domestic players Lenovo Group Ltd and Yulong Computer Telecommunication Technology Co (the maker of Coolpad), all have adopted its telecommunications chipsets.

According to research firm Strategy Analytics, Qualcomm maintained a 53 percent share of the global market for smartphone processors by the second quarter of 2013.

"Royalty rates are critical, notably when we are transitioning into a 4G era," said Coolpad's deputy general manager, Li Bin.

Shipments of 4G-enabled smartphones are expected to top a half-billion units in China by 2015, according to data collector Canalys.

Qualcomm was the star of the 3G era, but its dominant position is being somewhat eroded by companies like MediaTek, maker of cheap smartphone chipsets, said Xu Zhen, a researcher for d1net, an information technology portal in Shanghai.

Qualcomm's current edge lies in its particularly strong adaptation in chips that communicate with both LTE and other older cellular technologies, Xu noted.

"Since the nascent 4G network has yet to be fully established, mobile phone chips should support seamless handovers for both voice and data to cell towers with older network technologies such as GSM. Such smooth transaction can only be, at least for now, realized by Qualcomm," said an analyst with China Mobile Co Ltd, the country's top mobile communication carrier, who declined to be identified.

Qualcomm is no stranger to substantial fines.

In 2009, South Korea's Fair Trade Commission fined the company 273 billion won ($252 million), the agency's biggest ever penalty against a single company, for abusing its dominant position in CDMA modem chips.