For the past 14 months, Qualcomm Inc. has been under government investigation regarding anti-competitive practices and it has decided to put an end to it by agreeing to pay the largest fine in China’s corporate history; $975 million, referred as China Antitrust Dispute. According to the terms of the deal, Qualcomm will also be required to reduce the royalty rates that it charges on patents in China, which would be beneficial for the local smartphone makers such as Xiaomi and Huawei. Qualcomm said that the end of the investigation and the agreement will eliminate a major source of concern for the company’s investors. After this announcement, there was a 2.8% increase in the share price of the San Diego-based chipmaker.
The continuously expanding high-speed 4G network in China has increased the demand of smartphones with leading-edge technology, but the antitrust probe has clouded the opportunities available to Qualcomm. This has also given rise to problems for the company in collecting royalty payments from handset makers. In a statement made on Monday, Qualcomm said that the finding of the National Development and Reform Commission (NDRC) that it had violated antitrust law would not be contested by the company. Derek Aberle, Qualcomm president was asked about the effect of China’s resolution on other antitrust probes into the company in United States and Europe.
He said that their authority was fully respected, but it was doubtful that they would reach the same conclusions. The earnings estimate for the full-year was reduced by the firm as the cost of the fine was placed at about 58 cents per share, but the company did raise the lower-end of its revenue forecast slightly. The CEO of Qualcomm said that they were really pleased that the dispute was resolved because the uncertainty from the business was eliminated and the chip maker could now participate in the wireless market in China easily.
In recent weeks, intensified discussions had been held in Beijing over one of the most contentious cases under the 2008 antimonopoly law in China, which had led to meetings between the NDRC and Qualcomm executives. The fine of $975 million is about 8% of the chip maker’s sales in China in 2013 even though the law dictates that 10% of sales must be paid. The head of the anti-monopoly bureau of NDRC, Xu Kunlin, explained that this was because Qualcomm had given its full cooperation to the investigators. He said that their primary purpose wasn’t issuing a fine. It was to ensure fair competition in the market, which had been stifled by Qualcomm.
The terms of the agreement state that the licenses to its current 3G and 4G essential Chinese patents separately from others as they are widely used by Chinese handset makers. The agreement is applicable to all phones sold within China and for each device, royalty will not have to be paid on the full price, but will be calculated on 65% of the selling price. It has been speculated by analysts that Qualcomm’s licensing deals elsewhere will also be impacted by its licensing deals in China.