Despite Massive Setbacks in China, Qualcomm Still Benefits

China's government is coming down hard on Qualcomm, causing the company to lose lucrative royalty revenue.

Jul 30, 2014 at 7:00PM

Qualcomm (NASDAQ:QCOM) isn't a stranger to China. But while the company's done business in the region for decades, lately China hasn't been too kind to Qualcomm. The country is already in the middle of investigating the company for monopoly practices and, to make matters worse, Qualcomm recently said Chinese businesses aren't paying device royalties owed to the company.

Same country, new problems
In addition to selling mobile processors, the company makes much of its revenue from baseband chips that connect mobile devices to cellular networks. Qualcomm is a leader in the mobile chip space, typically being several generations ahead with its chip technology than other companies. The Chinese government's investigation into Qualcomm's business practices isn't anything new, but last week a state-run newspaper said the company indeed does have a monopoly on wireless communication standards.

Receiving a monopoly ruling against Qualcomm doesn't necessarily mean it broke any Chinese antimonopoly laws, but the investigation is hurting the company's revenue. The company said last week in an SEC statement that the monopoly probe made it harder to collect licensing fees for its technology.

As The Wall Street Journal recently said, Qualcomm makes about 29% of its revenue from licensing its 3G and 4G patent technology, but makes about 77% of its pretax profits from those fees. As China clamps down on the company, those important royalty fees are being squeezed.

Though the company hasn't specified just how much its royalties are suffering, Qualcomm said in a statement:

We also believe that certain licensees in China currently are not fully complying with their contractual obligations to report their sales of licensed products to us (which includes certain licensees underreporting a portion of their 3G/4G device sales and a dispute with a licensee) and that unlicensed companies may seek to delay execution of new licenses while the NDRC investigation is ongoing.

So not only is the monopoly probe hurting current licensing negotiations, but some companies in China are underreporting the amount royalty fees they owe to Qualcomm.

Qualcomm just ended its fiscal third third quarter 2014 and beat most analysts' expectations. The company posted revenue of $6.81 billion, up 9% year over year. But the uncertainty from China leaves the company in a difficult position in one of it's most lucrative markets.

Still lots of potential
Despite the setbacks, there's no way Qualcomm can back off of its China ambitions. The country is in the middle of a major 4G LTE rollout, which will bring both chip and baseband revenue for the company, as well as additional licensing royalties.

China Mobile (NYSE:CHL) -- the world's largest mobile network by subscribers -- has already launched part of its TD-LTE network, increasing its number of 4G subscribers from 1.3 million in February to 14 million at the of June. By the end of 2014, China Mobile says it will have 50 million 4G subscribers.

China Mobile was the first network carrier in China to receive government licenses to sell 4G LTE connectivity to consumers. China Telecom and China Unicom just received LTE test licenses last month and are limited to just 16 cities. But these licenses are step in the right direction in boosting the country's 4G connections and creating better competition between the three major carriers. China Mobile has 790 million subscribers alone, and less than 2% of those customers are currently connected to a 4G network.

China is one of Qualcomm's largest markets right now and accounted for nearly half of all the company's revenue in fiscal year 2013. Despite the investigation into Qualcomm and its impact on licensing revenue, as China Mobile and other telecoms expands their 4G coverage, the huge increase in those network connections will help push the company's royalty revenues even higher, and open up new avenues for the company to sell its baseband chips to smartphone makers.

Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends China Mobile. The Motley Fool owns shares of 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers