By Spencer E. Ante, Carlos Tejada and Don Clark
Qualcomm Inc. (QCOM) said a Chinese government agency is
investigating the chip maker under the country's anti-monopoly law,
a probe that comes amid rising tensions affecting U.S. companies in
the fast-growing market for high-tech products.
The disclosure follows comments by Qualcomm's chief executive
acknowledging U.S. restrictions on Chinese companies and
revelations about surveillance by the National Security Agency are
impacting its business in the critical market.
But close scrutiny of Qualcomm's business practices in Asia
began long before recent NSA revelations. The company is the
largest maker of processors and communications chips for mobile
phones, serving customers that include Apple Inc. (AAPL) and
Samsung Electronics Co. (005930.SE) It has a particularly dominant
position in the high-speed technology called LTE that Chinese
carriers are moving to adopt.
Qualcomm charges patent royalties to handset makers that use its
chips, and dealings associated with that business have triggered
antitrust cases in South Korea and Japan. The company is appealing
adverse rulings in both countries.
The company said Monday it isn't aware of any activity that
violates the anti-monopoly law and will continue to cooperate with
the National Development and Reform Commission, which partly
oversees antitrust issues and commenced the investigation.
Qualcomm's announcement comes amid growing security tensions
between the two superpowers and as China uses its five-year-old
antimonopoly law to push down prices in a variety of industries
ranging cars to baby formula, including markets with foreign
companies. Experts say the efforts are part of a move to keep a lid
on inflation, even as the new law helps give Beijing a greater say
in the global marketplace.
Chinese companies have invested heavily in technology
industries, helping to build industry giants like Huawei
Technologies Co. (002502.SZ) and ZTE Corp. (0763.HK, 000063.SZ)
Much of the investing has come amid prodding by Beijing, which
wants to shift away from China's traditional dependence on cheap
manufacturing to sell innovative products that can compete
globally.
Qualcomm maintained a 53% share of the global market for
smartphone processors in the second quarter of 2013, according to
Strategy Analytics. It beat most rivals to market with chips that
can use LTE networks, and is particularly strong in chips can also
communicate using older cellular technologies.
The company's share of such LTE chips stood at greater than 98%
in 2012, estimate Will Strauss, an analyst with Forward
Concepts.
Meanwhile, companies that want to combine LTE with older
technologies face the prospect of paying Qualcomm a patent royalty.
"A lot of people dislike that," Mr. Strauss said.
In semiconductors, China lags well behind foreign competitors,
in some cases using acquisitions to try to catch up. In July
Tsinghua Unigroup Ltd., a state-run company, agreed to acquire
Spreadtrum Communications (SPRD), and earlier this month it struck
a deal to acquire RDA Microelectronics Inc. (RDA), a wireless
chipset maker.
Qualcomm recorded about $12.3 billion in revenue from China in
the fiscal year ended in September, or 49% of the company's total
revenues. At an analyst meeting in New York last week, Chief
Executive Paul Jacobs discussed the prospects of even larger sales
in China as LTE networks begin launching in 2014.
Separately, in an interview with The Wall Street Journal, Mr.
Jacobs said the de facto U.S. ban on telecom gear maker Huawei
Technologies and revelations about NSA spying are impacting its
business in the fast-growing country. Recently, Cisco Systems Inc.
(CSCO) executives suggested that Chinese customers, particularly
those with government ties, may be cutting purchases of U.S. tech
gear in response to fallout from such issues.
"We are definitely seeing increased pressure," Mr. Jacobs said.
"All U.S. tech companies are seeing pressure."
Mr. Jacobs stopped short of saying the pressure hurt its sales,
but he did say it affected the way the company operated in
China.
"[You] have to be very cautious," he said. "We are always very
careful with whatever steps we take. How we sell. How we
interact."
Qualcomm tries to be a good partner with some local Chinese
manufacturers and build some of its computer chipsets in mainland
China, Mr. Jacobs said. The company doesn't build cutting edge
technology there, but it does build some older trailing
technologies in China.
Mr. Jacobs said it is "very delicate balancing act that goes on.
There's no question there is an impact."
Mr. Jacobs said Huawei employees have complained to him about
the U.S. negativity toward some Chinese companies. A U.S.
congressional investigation last year concluded that Huawei and ZTE
Corp. pose security risks to the U.S. because their telecom
equipment could be used for spying on Americans. Huawei and ZTE
have repeatedly denied the allegations.
"Many countries do this where the local company can complain and
get government support for them," he said.
Since 2009 when China used the new anti-monopoly law to break
apart Coca-Cola Co.'s (KO) $2.4 billion effort to acquire a Chinese
juice maker, Beijing has shown its willingness to use the law
against foreign companies.
Still, domestic companies haven't been immune. Two years ago,
the NDRC said it was looking into state-run telecom giants China
Unicom (HK) Ltd. and China Telecom Corp. for potential
anti-monopolistic practices. The two later said they would increase
broadband speeds and lower prices.
Write to Spencer E. Ante at spencer.ante@wsj.com, Carlos Tejada
at carlos.tejada@wsj.com and Don Clark at don.clark@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires