The semiconductor giant posts a solid quarter, but Chinese market is proving to be “uncertain” for the company.

qualcomm logo What is Qualcomm’s ‘challenge’ in China?

Qualcomm executives left an interesting note in the company’s most recent earnings report. While earnings show all is well in the house of Steven Mollenkopf (CEO), China is proving to be a problem.

According to SEC filings, the company’s China problem is two-fold. First, Qualcomm is being investigated by China’s National Development and Reform Commission for what the Commission considers are violations of its anti-monopoly laws. As Qualcomm explains in the filings, it believes it’s under investigation because of “certain interactions” between Qualcomm’s  licensing business and its chipset business with how royalties are calculated in Qualcomm’s patent licenses and how value is exchanged for cross-licenses to patents of the company’s. But as earlier reports indicate, this investigation is merely the continuation of earlier China troubles that involved US regulators accusing the company of violating the Foreign Corrupt Practices Act (FCPA) by giving Chinese officials or those associated with Chinese state-owned enterprises “special hiring consideration, gifts or other benefits.” The timeline is unclear, but it may be that the two investigations are related.

Qualcomm’s next China problem is related to the first. In filings, Qualcomm says that it is involved in a number of disputes with licensees that “are not fully complying with their contractual obligations.” Qualcomm believes that some licensees are also underreporting the number of 3G and 4G devices sold, in order to minimize the royalties payable to Qualcomm.

These two China problems have cast a shadow over Qualcomm’s ability to compete to its fullest extent in the fast growing and lucrative market. In interviews, Qualcomm’s president has said that uncertainty surrounds the company’s China operation.

“We are experiencing some near-term challenges in the licensing business, particularly related to China,” he said to Bloomberg. “This is something that we will take care of. The timing is pretty uncertain.”

“Whatever the resolution will be, it will likely include some form of payment.”

When speaking to the Wall Street Journal, he followed the same line:  “there is a level of uncertainty in China right now that didn’t exist before the investigation.”

Calls for serve punishment

In China the market environment for US technology companies has soured because of an unofficial dictum from Beijing to shift the market in favour of local firms, and, more recently, hostilities over allegations of cyber espionage.

Last year, after targeting western fast food chains in China, and later Volkswagen, China state media — the Communist party’s official mouthpiece — turned its aim to Apple (the iPhone is the smartphone of choice amongst the rich) and criticized it over offering an unfair warranty to Chinese consumers.

The attacks against Western technology companies continue into 2014, with state media calling on Beijing “to punish severely the pawns” of US intelligence for assisting in the theft of Chinese state secrets.

“U.S. companies including Apple, Microsoft, Google, Facebook, etc. are all coordinating with the PRISM program to monitor China,” the People’s Daily said on Weibo. “To resist the naked Internet hegemony, we will draw up international regulations, and strengthen technology safeguards, but we will also severely punish the pawns of the villain. The priority is strengthening penalties and punishments, and for anyone who steals our information, even though they are far away, we shall punish them!”

While Qualcomm doesn’t have the same high-profile as Apple, Microsoft, Google or Facebook, thus is not one of the usual suspects, the company’s China problems may very well be a result from it being caught up in the same dragnet.

China has a burgeoning semiconductor industry that is perfectly capable of manufacturing Qualcomm’s bread and butter: SoCs and basebands. It may be that in a bid to prop up local industry, the powers that be in China are coming down against Qualcomm with their regulatory might. Qualcomm’s local licensees may be very well under orders to underreport sales in order to hurt Qualcomm financially. Other US semiconductor firms without the guanxi of Intel should take heed: their turn for an investigation might be soon approaching.