Qualcomm’s China growth at risk

A staff member introduces the service of 4G mobile network to a customer in Beijing, China. (Xinhua-Yonhap News0

Qualcomm’s growth prospects in the world’s largest mobile-phone market may be under threat after China’s National Development and Reform Commission began an investigation related to an anti-monopoly law.

Qualcomm disclosed the probe yesterday, saying the NDRC advised that specific details are confidential. The San Diego-based company said it knows of no charge by the agency that it violated the law. Qualcomm gets revenue from sales of smartphone chips and collects license fees from wireless providers for the shipment of most Internet-capable handsets.

The Chinese government has been stepping up corporate scrutiny as new leadership expands an anti-corruption drive and cracks down on business practices that lead to increases in consumer prices. China may also be trying to help local competitors such as Spreadtrum Communications Inc. by slowing Qualcomm’s push to broaden the reach of its chips and technology in the country, said Cody Acree, an analyst at Williams Financial Group in Dallas.

“There’s a lot more to this than any kind of antitrust investigation,” said Acree, who has a hold rating on the stock. “To the extent that you can stymie Qualcomm’s efforts, all the better.”

Emily Kilpatrick, a spokeswoman at Qualcomm, said the company won’t comment beyond its initial statement. The shares fell less than 1 percent to $72.49. The stock has gained 17 percent this year.

Qualcomm, the world’s largest maker of chips for smartphones, 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 devices that were assembled in China and sold in other countries. The company yesterday said it will cooperate with the NDRC 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, while the bulk of its profit comes 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.

Spreadtrum, based in Pudong, China, earlier this year agreed to be acquired by Tsinghua Unigroup Ltd., a Chinese state-owned company, for $1.78 billion.

China Mobile Ltd., 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.

Underscoring the importance of the market, company executives said at an analyst day in New York last week that the network shift means Qualcomm will be able to supply chips and get licensing fees from China Mobile.

Now, the NDRC probe raises doubts about that potential licensing revenue, said Gus Richard, an analyst at Piper Jaffray & Co. (Bloomberg)