Qualcomm’s ‘Beijing Beatdown’ Helps Xiaomi et al

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February 13, 2015 by ...

Beijing has its sites set on gunning down foreign firms. It annoys the communist party that even though China is second only to the USA in R&D spending its companies are still technological laggards. Even if they could not measure up to America at the top of the hill, you’d think they could make a better showing for themselves. After all, China invests more in tech development than Japan, Germany, France, South Korea and the UK combined. One would think that with all those Beijing bucks backing them that the Chinese would have more to show for themselves, but of course they don’t.

In order to promote hometown heroes, Beijing makes it as difficult as possible for foreign firms. Good examples are how Google, Facebook, YouTube and so many others are blocked. This allows weaker Chinese firms such as Baidu, Weibo and we gat to thrive. Blocking or impeding internationals is one component of this anti-foreign rhetoric.

Another component is direct attacks in the name of the law. For example, China aggressively pushes its anti-monopoly codes to show that it is moving towards being a ‘rule of law’ country. But yet those same rules are merely used against non-Chinese firms. They are essentially a tool to marginalize any company which does not call China home.

Such was the case with Qualcomm. Under the auspices of ‘protecting China against evil foreign monopolies’, Beijing levied a record near $1 billion fine on the chipmaker. Aside from forking over over 15% of Xiaomi’s total sales in a fine, Qualcomm also had to lower their profit margins. Now they can only charge license fees on 65% of the total value of a handset, versus the full 100% they had previously charged. This is a direct attack on Qualcomm whose profits will shrink but also help Chinese chipset makers.

Another thing this does is to allow Chinese phone makers to earn more profit. They are receiving a subsidy on 35% of license fees that all other firms must pay. For example, if forced To abide by Qualcomm’s T&C’s, they would be on the hook for $20 on a $200 handset. Now they only must pay, $13.5, however. What a great deal for Xiaomi, for no other reason than receiving Beijing’s support, they lower costs substantially.

The same can not be true of a firm such as Samsung which is Korean. The Korean license will still be charged at 100% of cost. In other words, their license fees are .35x cost of unit higher than Xiaomi. Considering that Samsung phones can cost twice as much as Xiaomi, this means that such fees can be the difference between 12% and 9% profits for the quarter.

Interestingly enough, the communists utilize CCP ‘logic’ by saying that the attack on Qualcomm , “will help promote fair competition for technology innovators.”

Which is funny if they consider Xiaomi, a knockoff king, as an innovator.

The bottom line is thatBeijing is flexing its muscles and too few companies are willing to call them out on this.

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