China Chases Qualcomm On Prices, Security
Leading cellphone chipmaker Qualcomm (Nasdaq: QCOM) has become the latest foreign firm to encounter resistance in China following the Edward Snowden spying scandal, as Beijing shows it can also play the national security card to the detriment of big western tech firms. But in this case, the US chip giant is not only seeing sales to its Chinese customers drop, but is also facing scrutiny from China’s powerful state planner on allegations of monopolistic behavior. Both of these developments show that Beijing is quite capable of using the national security pretext to play tit-for-tat games with Washington, potentially costing US tech firms billions of dollars in lost China sales.
I won’t comment too much on whether the concerns of Beijing are real or whether they’re more retaliatory for Washington’s decision last year to ban the sale of equipment from Huawei and ZTE (HKEx: 763; Shenzhen: 000063) to US telcos over security concerns. More importantly, Beijing is trying to show Washington that the China market has become increasingly important to US companies, especially the nation’s telecoms sector that is spending billions of dollars to upgrade to 4G services.
The bad news for Qualcomm first splashed into the news late last week, when CEO Paul Jacobs revealed that the company’s sales were being affected by fallout from the Snowden spying scandal. (English article) Jacobs didn’t elaborate, but his comments sounded similar to earlier ones from networking equipment giant Cisco (Nasdaq: CSCO) and IT services specialist IBM (NYSE: IBM), which both also said their China business had recently started to slow following the scandal. (previous post)
In a new twist to the story, media are now reporting that Qualcomm has said it is being investigated for monopolistic behavior by China’s powerful state planner, the National Development and Reform Commission (NDRC). (English article) Qualcomm now earns about half of its revenue from China, with the company reporting $12.3 billion in sales to the market for the 12 months through September. So clearly the China market is critical to Qualcomm.
The investigation appears to be part of a broader series of probes by the NDRC, which has named telecoms as one of 6 industries it is targeting for anti-competitive pricing investigations. The others include aviation, , consumer goods, vehicles, pharmaceuticals and home appliances. Some analysts are saying the Qualcomm investigation may be designed to pressure the company to lower the royalties it collects from Chinese cellphone makers for use of its patented technology as the nation gets ready to launch 4G services nationwide.
The Chinese have complained for years that Qualcomm’s influence in mobile technology is too big, and in many ways I agree with this view. The company was one of the earliest developers of the technology called CDMA, which forms the foundation for all 3G and 4G technologies now in use. It has used its clout to build its position as the world’s dominant maker of high-end chips that now power many of the world’s most expensive smartphones.
But all that said, the market is still quite competitive for the lower-end cellphone chips that account for a big portion of the China market. Others in that highly competitive market include Taiwan’s Mediatek (Taipei: 2454), as well as China’s own Spreadtrum (Nasdaq: SPRD) and US company Marvell Technology (Nasdaq: MRVL).
At the end of the day, it really doesn’t matter if Qualcomm, Cisco or IBM engages in monopolistic behavior, or whether their products and services pose a risk to China’s national security. What does matter is that Chinese companies, especially its big telcos, will make their purchasing decisions at least partly based on Beijing’s agenda, which appears to now include a scale-back of purchasing from US companies. I expect this campaign will eventually subside and things will return to normal in a year or so. But in the meantime, Qualcomm and the other big US tech firms can expect to post weakening China sales over the next few quarters.
Bottom line: Qualcomm’s softening China sales are the result of Beijing’s displeasure in the aftermath of the Snowden spying scandal, as well as the company’s dominant market position.
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