Shelter for Qualcomm

Increasingly reliant on China

In the early days of mobile telecommunications, there were two means of transmitting data wirelessly: GSM and CDMA. In 1987 the EU ruled that all member states had to use the GSM standard, closing the market to companies that worked with the alternative. One such company was Qualcomm.

But a few years later a vast new market opened up for Qualcomm: China decided that its mobile networks would utilise both GSM and CDMA. This was not simply good fortune. According to the New York Times, Qualcomm had lobbied the Clinton administration to push Beijing into accepting its CDMA standard as part of the deal for China’s WTO admission.

But perhaps Qualcomm benefitted too much from its early victory. By 2013 China began investigating the firm for violating antitrust laws. The case was eventually settled in 2015, with Qualcomm paying $975 million and revising its contracts with local handset manufacturers to offer cheaper rates. It also offered to move more manufacturing to China, and to assist local companies in developing their own technology.

As part of that pledge Qualcomm formed a joint venture with the Guizhou government – the province trying to become China’s Big Data hub (see WiC375). Qualcomm put $140 million into the JV, called Huaxintong Semiconductor, for a minority stake (see WiC358).

Much to the chagrin of Washington, Huaxintong is developing computer chips that can be used in Chinese supercomputers. Previously, the US Department of Commerce had blocked Intel, another chip manufacturer, from exporting them to China, claiming the supercomputers they were to be installed in were engaged in nuclear weapons research.

(In fact, the security implications of a country having superior computing capacity extend far beyond nuclear weaponry.)

So how has China convinced Qualcomm to seemingly work against the interests of its home country? Robert Atkinson, president of the Information Technology and Innovation Foundation, told the New York Times: “This is what China does better than anybody else… They have a large carrot and a large stick, and they have a market no CEO can walk away from.”

In the time since Qualcomm settled its lawsuit, China has increased pressure on other foreign firms to share technology with domestic businesses, creating regulations limiting access to the market for those that don’t comply.

Many foreign firms resist at first but they have slowly acquiesced. Apple, for example, recently announced it would open its first data centre in China, also in Guizhou.

But a few days after the New York Times piece was published, China News Service ran an article entitled “Why does Qualcomm need the Chinese market?” that made a different case.

Qualcomm, it asserted, needs Chinese firms as a testing ground for new technologies, in order to better compete with rivals like Intel and Nvidia (Qualcomm’s Snapdragon processor has been used by five of mainland China’s top smartphone brands and according to Strategy Analytics has a leading 42% of the global smartphone application processor market). China News Service conceded that Chinese firms benefit too from Qualcomm’s superior technology and (now) more favourable prices.

Qualcomm’s next big strategic bet is on the yet more sophisticated chips used to power driverless cars – and it knows China as the world’s largest automobile market is going to be vital to the sales of autonomous vehicles. Indeed just as with the mobile phone’s chips – where China proved critical to Qualcomm’s dominance – the issue of who designs the chip driving the car of the future may be heavily influenced by the Chinese market.

Not everyone, however, is happy with this budding friendship. Apple has filed two lawsuits in Beijing against Qualcomm: one accusing it of abusing a monopoly, and the other alleging that the chip manufacturer had failed to uphold its pledge to sell its goods at a reasonable rate in China. Bloomberg notes that Apple, like other smartphone makers, has become reliant on Qualcomm for the modem-chip that “performs the crucial function of connecting a phone to the network and the internet”.

Beijing has always been fluid in its interpretation of intellectual property rights and this spat – whatever the outcome – is not likely to undermine that tactical stance. But it will test how much of a “win-win” relationship Qualcomm has developed in China.

In an ironic twist, the Cupertino company is now facing its own antitrust suit in China as well. Over the last few months Apple has been buffeted by complaints about its decision to collect a 30% ‘tax’ on in-app tipping (see WiC364). Last week a group of 28 software developers took the issue to court, joining an antitrust suit that accused Apple of charging “excessive fees”, Reuters reports.

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