Is China Punishing Qualcomm?

Qualcomm has traditionally been in a great position to benefit from the explosion of LTE connectivity around the globe. But as China is tightening the reins on foreign tech companies, the baseband juggernaut may soon experience some interference in China.

Too big for its mobile britches
A recent report by Global Mobile Supplier Association estimates that the compounded annual growth of LTE devices -- the speedy 4G Long Term Evolution connections for mobile devices -- will be 44% over the next two years. This has been great news for Qualcomm, which makes mobile processors with integrated 2G/3G/4G LTE bands for wireless connectivity. Because Qualcomm chips work on most LTE networks, the company has been in a great position to benefit from LTE's worldwide growth.

But while Qualcomm is poised for a huge LTE payoff around the globe, its prospects in China may have recently dimmed. China's National Development and Reformation Commission, or NDRC, which helps decide economic planning and price regulation, is currently investigating Qualcomm for antitrust violations.

The investigation is coming at an interesting time, as China is about to launch its 4G network soon. Qualcomm collects patent royalties on the majority of 3G and 4G devices, and the investigation may be a way for Chinese telecoms to negotiate patent royalties, according to Reuters.

The China effect
The impact of this probe could be significant for Qualcomm considering it makes about one-fifth of its chipset and licensing revenue from China. The company holds the lead in smartphone processors and is currently in its third generation of integrated chips, while its competitors are still on their first generation. This means that Qualcomm has a serious advantage over its competition in China right now. Qualcomm is by far the global leader in integrated baseband processors, and China may be trying to get around paying the company lots of royalty fees as it gears up for its massive 4G launch. 

While it's difficult to estimate how much the antitrust probe could hurt Qualcomm's royalty fees, it's clear the company will have some rough waters navigate in China. But the difficulties in the country aren't specific to just Qualcomm. Cisoc, Microsoft, IBM and others are also hurting in China. Cisco CEO John Chambers has hinted that the slowdown comes from reports of the U.S. National Security Agency spying on China, saying, "China continued to decline as we and our peers worked through the challenging political dynamics in that country."

Qualcomm's current speed bump may have something to do with NSA spying as well. Last month Qualcomm CEO Paul Jacobs told The Wall Street Journal, "[w]e are definitely seeing increased pressure" because of NSA spying and that it's changed how the company operates in China. The Chinese government has been favoring tech purchases from Chinese companies lately, and the latest pressure on Qualcomm may be its way of negotiating for lower tech prices and reducing Qualcomm's place in the Chinese market. Investors should watch for any changes to Qualcomm's royalty fees in China and how hard, if at all, the Chinese government comes down on the company.

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Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends, Apple, Cisco Systems, Facebook, and Google. The Motley Fool owns shares of, Apple, Facebook, Google, International Business Machines, Microsoft, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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