Antitrust regulators in Qualcomm's (NASDAQ:QCOM) biggest markets hit the chipmaker with massive fines over the past three years. Those regulators all claimed that Qualcomm's wireless licensing fees, which claimed up to 5% of the wholesale price of every smartphone sold, were too high.
In 2015, Chinese regulators fined Qualcomm $975 million and forced it to lower its licensing fees for Chinese OEMs. In 2016, South Korean regulators followed suit and fined Qualcomm 1.03 trillion won ($910 million) -- a decision it's still trying to appeal. Last October, Taiwanese regulators fined Qualcomm $773 million for similar reasons. Qualcomm's revenues from China and South Korea accounted for 81% of its top line last year, and Taiwan is usually its third largest market.
However, Taiwan's FTC (Fair Trade Commission) recently dropped that fine in favor of a long-term investment deal. The FTC will retain the $93 million Qualcomm already paid, but drop the remaining balance on the condition that Qualcomm invests $700 million into Taiwanese firms over the next five years. The FTC also won't force Qualcomm to lower its licensing fees.
In a statement, Qualcomm stated that its investments "will drive certain commercial initiatives in Taiwan" which will strengthen the country's mobile, semiconductor, and manufacturing sectors. The chipmaker stated that it would "work with the TFTC and sister agencies within the Taiwanese government to implement these initiatives and investments."
Is this a win-win deal for both parties?
This sounds like a win-win deal for Qualcomm and Taiwan's tech sector. Qualcomm gets to invest its cash instead of wasting it on a fine, and Taiwan's tech companies could gain some capital to compete against better-funded rivals in mainland China.
Qualcomm also needs a win in the greater China area after Chinese regulators foiled its takeover bid for NXP Semiconductors amid escalating trade tensions with the US. That blow was humbling, since Qualcomm had invested heavily in Chinese companies to curry the favor of the Chinese government.
Meanwhile, Taiwanese regulators likely realize that its companies appeal to Qualcomm as alternative investments to Chinese companies. That could widen Taiwan's economic and political moats against China, which has been trying to isolate the island nation -- which it considers a rogue province -- from foreign allies and multinational companies.
However, the path that led to this deal wasn't friendly at all. Last October, Qualcomm told Taiwan's state-backed Industrial Technology Research Institute (ITRI) that it would suspend further negotiations regarding 5G collaborations for the country's OEMs and ODMs until the fine was settled. In other words, Qualcomm leveraged the dominance of its wireless patents to force the Taiwanese government to negotiate -- a strategy it probably wouldn't have tried in China.
The tip of the iceberg
The decision in Taiwan is great news for Qualcomm, since it could prevent further damage to the high-margin licensing unit, which generates most of its profits. It also sets up a roadblock for other countries that might be considering similar fines against Qualcomm.
However, Qualcomm's ability to force Taiwan's FTC into a compromise with its wireless patent portfolio highlights a key reason that it's being sued. The European Commission fined Qualcomm €997 million ($1.14 billion) earlier this year on grounds that its exclusive baseband modem deal with Apple (NASDAQ:AAPL) locked other chipmakers out of the market. Apple is also suing Qualcomm for unpaid exclusivity rebates from that deal, and demanding lower licensing fees.
Chipmakers like NVIDIA and Intel claimed that Qualcomm leveraged its wireless patents to force them out of the mobile market. Those claims are a key focal point in an ongoing FTC (Federal Trade Commission) probe in the US, which alleges that Qualcomm charged its rivals inflated license fees for its wireless patents, which forced them to sell pricier chips.
Therefore, Qualcomm won a battle in Taiwan, but it likely did so with the same tactics that landed it in hot water in the first place. If Qualcomm doesn't figure out how to keep growing without weaponizing its wireless patents, it might spark more revolts from regulators and OEMs -- which could eventually cripple its most profitable business.
Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Nvidia. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.