CHIPS: Qualcomm Sues Meizu, MediaTek Presses Taipei

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Bottom line: Qualcomm and Meizu are likely to reach a new licensing agreement after the former sued the latter, pressuring Meizu’s profits, while Taipei will reach a compromise with local chip makers that would allow mainland investment in the sector.

Qualcomm sues Meizu over chip license

Two high-tech chip stories are in the headlines today, reflecting the complex dynamics now taking place in the market between China and the rest of the world. In both cases, the common theme is that China wants to build up its own manufacturing base for high-tech chips that power everything from cars to smartphones and home appliances. It’s already the world’s biggest consumers of such chips, since it manufactures many of those devices. But it doesn’t design or produce most of the actual chips, which is an extremely high-tech business that also carries high profit margins.

Topping the headlines is word that leading global telecoms chip maker Qualcomm (Nasdaq: QCOM) has sued Meizu, the Alibaba-backed (NYSE: BABA) mid-sized player in China’s ultra competitive smartphone market. This particular action comes a year after Qualcomm was fined a record amount by Beijing for anti-competitive behavior, and this particular lawsuit looks like a direct result of that settlement, which I’ll explain shortly.

The second headline has leading Taiwanese telecoms chipmaker MediaTek (Taipei: 2454) saying it will take part in upcoming negotiations aimed at getting the new China-wary government in Taipei to relax its stand on Chinese investment in Taiwan’s chip sector. This particular story began when several companies based in China’s Tsinghua University announced plans to purchase stakes in 3 Taiwan chip firms last year. That quickly drew response of big concerns by a newly elected administration that is wary of growing Chinese influence.

Let’s begin with the Qualcomm story, which has the US chip giant suing Meizu in a Beijing court for illegal use of its intellectual property. (company announcement; Chinese article) This story stems directly from an anti-trust investigation against Qualcomm, which saw the National Reform and Development Commission (NDRC), China’s state planner, levy a record fine of nearly $1 billion against the US company last year and tell it to change its licensing practices. (previous post)

Qualcomm has been forced to renegotiate its licensing deals with all of its China clients to comply with the settlement. It says it tried to negotiate such a deal with Meizu, but that the Chinese company has been dragging its feet while continuing to use the technology. Meizu says it hasn’t been notified of the lawsuit yet, and that it remains in communication with Qualcomm.

Foot-Dragging

As a longtime China watcher, I can say with relative confidence that Meizu and most other Chinese smartphone makers were quite happy when Qualcomm was punished, since all are under huge pressure to reduce their costs due to stiff competition. I suspect that Meizu and many of the others haven’t paid a penny to Qualcomm since their previous agreements became null and void. But now Meizu and the others are reluctant to resume payments that will immediately undermine their already-hurting financial performance.

Next there’s MediaTek, which competes directly with Qualcomm and is one of Taiwan’s most successful chip designers. New reports quote MediaTek saying it will join a contingent of Taiwanese chip makers who will directly negotiate with the administration of new President Tsai Ing-wen in the next few months. Taiwan’s current laws ban mainland companies from buying more than 20 percent of local chipmakers, but Tsai has indicated that even that amount may be too much. (previous post)

MediaTek’s addition to the growing cries of protest comes after Morris Chang, one of the industry’s most respected figures and chairman of leading chip company TSMC (Taipei: 2330; NYSE: TSM), offered a potential compromise to the growing stalemate. (previous post) His plan involved allowing Chinese companies to buy stakes in Taiwan chip makers, without giving them any board representation. I do suspect this rising chorus of protest from such an important industry will put huge pressure on Tsai’s administration to moderate its position. Accordingly, perhaps we could see a formal compromise that would allow some form of investment by the middle of the year.

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