Qualcomm may be slapped with record antitrust fines in China

Qualcomm Inc , the world's biggest cellphone chip maker, may be hit with a record fine exceeding $1 billion in a Chinese antitrust probe, raising the spectre of harsh penalties for foreign firms facing an increasingly aggressive regulator.

China's National Development and Reform Commission (NDRC) initiated an investigation into Qualcomm last year and is currently holding talks with the U.S. company, which this month said it was still in the dark about the basis of the scrutiny.

The probe and the potential fine - the amount of which could hinge on negotiations - come as the NDRC zooms in on information technology providers, especially companies that license patent technology for mobile devices and networks.

Industry experts say the NDRC, the government's main economic planning body, is trying to lower domestic costs as China rolls out its faster 4G mobile networks this year.

"It is, in some ways, a game of chicken," said Yee Wah Chin, a New York-based antitrust expert at law firm Ingram, Yuzek, Gainen, Carroll and Bertolotti.

"While the (fine) money may be very attractive to the NDRC, they would also be happy if Qualcomm were to make all sorts of commitments regarding its technology and the licensing of the technology," she told Reuters.

San Diego-based Qualcomm, which is scheduled to report quarterly results later on Wednesday, is positioned to reap the vast majority of licensing fees for the chip sets used by handsets in China, the world's biggest smartphone market. Chinese telecom firms may invest as much as 100 billion yuan in equipment for 4G networks.

(Also see: Qualcomm announces it is facing an antitrust probe in China)

Under the anti-monopoly law, the NDRC can impose fines of between 1 and 10 percent of a company's revenues for the previous year. Qualcomm earned $12.3 billion in China for its fiscal year ended September 29, or nearly half of its global sales.

Lawyers say the fine is likely to be extremely high if Qualcomm fails to make concessions in its talks with the NDRC.

"We intend to continue cooperating fully with the NDRC," Qualcomm spokeswoman Christine Trimble said when asked about the probe.

In December, the head of the NDRC's anti-price-fixing bureau told state media there was "substantial evidence" against Qualcomm in the antitrust probe. Details, however, remain sketchy.

Increasing Scrutiny

The Qualcomm probe is a prime example of the uncertainty foreign firms are grappling with as China's regulators target key industries to shield consumers from practices that could lead to what they call "unreasonably" high prices.

It also shows the NDRC's seriousness in using its antitrust rules. In 2011, the agency imposed one of its first major penalties against a foreign company, a $300,000 fine on Unilever Plc for violations of the pricing law.

The NDRC has also slapped Chinese and foreign companies with investigations and fines in the past year.

In August, the regulator fined six infant formula manufacturers, including Mead Johnson Nutrition Co , Danone and Fonterra , a record $110 million after a probe into price fixing and anti-competitive practices.

(Also see: China says it has 'substantial' price-fixing evidence against Qualcomm)

The anti-monopoly law provision does not specify whether the 10 percent ceiling for fines applies to global or domestic sales, or to a particular product line.

At the lowest legal threshold, the fines on Qualcomm could surpass those in the infant formula cases. Fines at the top of the range would put the Qualcomm case on par with major antitrust rulings in the United States and Europe.

"They (NDRC) keep as much discretion for the decision maker as possible," said Peter Wang, a China-based antitrust expert with law firm Jones Day. "Technically it would appear they can't go below one percent, though they have other ways to reduce the fines based on cooperation."

Major market

Qualcomm is no stranger to substantial fines.

In 2009, South Korea's Fair Trade Commission fined the company 273 billion won, the agency's biggest ever penalty against a single company, for abusing its dominant position in CDMA modem chips which were then used in handsets made by Samsung Electronics and LG Electronics.

Falling afoul of Chinese regulators would be painful for Qualcomm, which saw revenues in China more than double over the last two years. Revenues, which include domestic sales as well as licenses for devices assembled in China and then exported, rose to $12.3 billion in 2013 from $4.7 billion in 2011.

Shipments of 4G enabled smartphones, many of which use Qualcomm's technology, are expected to increase by about a third to top half a billion units in Greater China in 2015, according to data firm Canalys, compared with the 385 million units shipped in 2013.

(Also see: China's anti-trust Qualcomm probe may be aimed at 4G royalties)

Qualcomm charges handset manufacturers differing royalty rates, which usually range from 1 to 6 percent of the wholesale price of a handset.

Some experts suggest the NDRC's scrutiny of IT providers stems from its desire to lower domestic costs as China rolls out its 4G mobile networks.

Last year, the NDRC started an investigation of U.S. firm InterDigital Inc to assess antitrust complaints by Huawei Technologies Co related to technologies for wireless devices and networks.

Delaware-based InterDigital has ongoing legal proceedings with Huawei in the United States, Europe and China.

"They (NDRC) have particular markets in mind and they have particular views of what the prices should be in the market," said New York-based lawyer Chin.

© Thomson Reuters 2014