Qualcomm Continues to Struggle in China

Last week, Qualcomm’s investors got spooked due to the company’s inability to sign deals with some of the biggest handset makers in China and its share price had tumbled on Thursday by 15% before making a 5% recovery on Friday. Two of the biggest smartphone makers in the world, Lenovo Group Ltd. and Xiaomi Corp haven’t made any new patent licensing agreements with the chip maker, as per sources familiar with the matter. Qualcomm’s net profit declined by 44% in the last quarter due to the reduction in the revenue contributed by licensing. Derek Aberle, the President at Qualcomm told investors that some Chinese handset makers had simply stopped making royalty payments for the wireless technology patents while others had underreported their sales.

Investors had been surprised with the current quarter’s earnings guidance as it was below analyst expectations. In February, Qualcomm agreed to pay a sum of $975 million for settling a year-long investigation being conducted by the anti-trust authorities in China. The licensing revenue of the company was supposed to receive a boost due to this agreement in the biggest mobile phone market of the world. Last year, Qualcomm had faced some difficulties in collecting licensing payments in China, but things had actually worsened after the company made a settlement with the government.

During the analyst call, the company stated that chip-technology licensing agreements had been signed with more than 60 Chinese firms including ZTE Corp, TCL Communication Technology Holdings Ltd. and Huawei Technologies Co. Now, the company is girding up to enforce the agreements and take necessary action against smartphone makers who aren’t making their payments and underreporting their sales so as not to pay royalties. An early bird in the wireless technology market, most of Qualcomm’s profits are earned through wireless technology patents as it collects royalties on most of the mobile phones sold worldwide.

Last year, the royalty business of the chip maker earned about $6.6 billion in profit whereas $3.8 billion was generated by its chip business. Xiaomi and Lenovo’s royalty payments would be a substantial sum. The latter is the number four smartphone maker worldwide and its mobile phone shipments between July and September amounted to 18.8 million. The former, on the other hand, holds the number five position and its shipments during the same period were about 18.3 million. Qualcomm has conducted two meetings so far for resolving the conflicts and continuing negotiations. The last one was held of 24th September in Shanghai.

According to sources with knowledge of the matter, once an agreement is made, companies that haven’t made their royalty payments will have to do so. However, smartphone makers are struggling because the Chinese smartphone market has become saturated and this has given then an incentive to delay their payments to 2016. Since 2012, there has been a decline in smartphone shipments in China every year as the market has become saturated. The smartphone unit shipments are expected to rise by only 1% this year. In 2012, the shipments had almost doubled.