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By Spencer E. Ante, Carlos Tejada and Don Clark
Qualcomm Inc. (QCOM) said a Chinese government agency is investigating the chip maker under the country's anti-monopoly law, a probe that comes amid rising tensions affecting U.S. companies in the fast-growing market for high-tech products.
The disclosure follows comments by Qualcomm's chief executive acknowledging U.S. restrictions on Chinese companies and revelations about surveillance by the National Security Agency are impacting its business in the critical market.
But close scrutiny of Qualcomm's business practices in Asia began long before recent NSA revelations. The company is the largest maker of processors and communications chips for mobile phones, serving customers that include Apple Inc. (AAPL) and Samsung Electronics Co. (005930.SE) It has a particularly dominant position in the high-speed technology called LTE that Chinese carriers are moving to adopt.
Qualcomm charges patent royalties to handset makers that use its chips, and dealings associated with that business have triggered antitrust cases in South Korea and Japan. The company is appealing adverse rulings in both countries.
The company said Monday it isn't aware of any activity that violates the anti-monopoly law and will continue to cooperate with the National Development and Reform Commission, which partly oversees antitrust issues and commenced the investigation.
Qualcomm's announcement comes amid growing security tensions between the two superpowers and as China uses its five-year-old antimonopoly law to push down prices in a variety of industries ranging cars to baby formula, including markets with foreign companies. Experts say the efforts are part of a move to keep a lid on inflation, even as the new law helps give Beijing a greater say in the global marketplace.
Chinese companies have invested heavily in technology industries, helping to build industry giants like Huawei Technologies Co. (002502.SZ) and ZTE Corp. (0763.HK, 000063.SZ) Much of the investing has come amid prodding by Beijing, which wants to shift away from China's traditional dependence on cheap manufacturing to sell innovative products that can compete globally.
Qualcomm maintained a 53% share of the global market for smartphone processors in the second quarter of 2013, according to Strategy Analytics. It beat most rivals to market with chips that can use LTE networks, and is particularly strong in chips can also communicate using older cellular technologies.
The company's share of such LTE chips stood at greater than 98% in 2012, estimate Will Strauss, an analyst with Forward Concepts.
Meanwhile, companies that want to combine LTE with older technologies face the prospect of paying Qualcomm a patent royalty. "A lot of people dislike that," Mr. Strauss said.
In semiconductors, China lags well behind foreign competitors, in some cases using acquisitions to try to catch up. In July Tsinghua Unigroup Ltd., a state-run company, agreed to acquire Spreadtrum Communications (SPRD), and earlier this month it struck a deal to acquire RDA Microelectronics Inc. (RDA), a wireless chipset maker.
Qualcomm recorded about $12.3 billion in revenue from China in the fiscal year ended in September, or 49% of the company's total revenues. At an analyst meeting in New York last week, Chief Executive Paul Jacobs discussed the prospects of even larger sales in China as LTE networks begin launching in 2014.
Separately, in an interview with The Wall Street Journal, Mr. Jacobs said the de facto U.S. ban on telecom gear maker Huawei Technologies and revelations about NSA spying are impacting its business in the fast-growing country. Recently, Cisco Systems Inc. (CSCO) executives suggested that Chinese customers, particularly those with government ties, may be cutting purchases of U.S. tech gear in response to fallout from such issues.
"We are definitely seeing increased pressure," Mr. Jacobs said. "All U.S. tech companies are seeing pressure."
Mr. Jacobs stopped short of saying the pressure hurt its sales, but he did say it affected the way the company operated in China.
"[You] have to be very cautious," he said. "We are always very careful with whatever steps we take. How we sell. How we interact."
Qualcomm tries to be a good partner with some local Chinese manufacturers and build some of its computer chipsets in mainland China, Mr. Jacobs said. The company doesn't build cutting edge technology there, but it does build some older trailing technologies in China.
Mr. Jacobs said it is "very delicate balancing act that goes on. There's no question there is an impact."
Mr. Jacobs said Huawei employees have complained to him about the U.S. negativity toward some Chinese companies. A U.S. congressional investigation last year concluded that Huawei and ZTE Corp. pose security risks to the U.S. because their telecom equipment could be used for spying on Americans. Huawei and ZTE have repeatedly denied the allegations.
"Many countries do this where the local company can complain and get government support for them," he said.
Since 2009 when China used the new anti-monopoly law to break apart Coca-Cola Co.'s (KO) $2.4 billion effort to acquire a Chinese juice maker, Beijing has shown its willingness to use the law against foreign companies.
Still, domestic companies haven't been immune. Two years ago, the NDRC said it was looking into state-run telecom giants China Unicom (HK) Ltd. and China Telecom Corp. for potential anti-monopolistic practices. The two later said they would increase broadband speeds and lower prices.
Write to Spencer E. Ante at spencer.ante@wsj.com, Carlos Tejada at carlos.tejada@wsj.com and Don Clark at don.clark@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
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