Qualcomm (NASDAQ:QCOM) was recently fined for violating U.S. anti-bribery laws in the ways it secured government contracts in China between 2002 and 2012. The Securities and Exchange Commission claims that the mobile chipmaker lavished gifts, travel, and entertainment packages on government officials, hired their relatives, and tried to disguise those bills as legitimate business expenses.
Qualcomm didn't admit or deny those charges, but it agreed to pay a $7.5 million fine to settle them. That fine was barely a slap on the wrist for Qualcomm, which generated $25.3 billion in revenues last year. It's also much lower than the $975 million fine it paid in China last year to settle an antitrust probe into its licensing fees. The case probably also won't cause a big PR backlash in China, since the state-controlled media might be reluctant to shame the so-called "princelings" -- the younger relatives of government or business leaders in Asia -- whom Qualcomm allegedly hired.
Why China matters so much to Qualcomm
Qualcomm might have gotten off easy this time, but the bribery charges raise interesting questions about its heavy dependence on China, which accounted for 53% of its revenue. Both Qualcomm's QCT (chipmaking) and QTL (3G/4G licensing) businesses face tremendous pressure in that market.
The QCT business was hurt by smartphone makers using cheaper application processors and modems from rivals like Taiwanese chipmaker MediaTek. Higher-end OEMs like Huawei also started using their own chips instead of Qualcomm's. The QTL business was hurt by the aforementioned antitrust ruling, which reduced its patent royalties per phone. Meanwhile, Chinese OEMs started underreporting smartphone shipments to pay Qualcomm even lower licensing fees. That revolt forced Qualcomm to push OEMs to sign new licensing contracts.
To address some these issues, Qualcomm deepened its ties with Chinese businesses and local governments. It invested in Xiaomi over four years ago, which helped it become one of China's top smartphone makers. Earlier this year, it formed a new joint venture with the Guizhou province government to design, develop, and manufacture chipsets for data centers. Therefore, it wasn't surprising to see that Qualcomm's attempts to win over the Chinese government had crossed some ethical boundaries over the past few years.
Is this "business as usual"?
Qualcomm isn't the only company to get caught bribing Chinese officials. The SEC recently fined software maker PTC (NASDAQ:PTC) and its subsidiaries $28 million for "providing non-business related travel and other improper payments to various Chinese government officials." The SEC claims that between 2006 and 2011, PTC's subsidiaries provided travel, gifts, and entertainment worth nearly $1.5 million to government officials, and reaped approximately $11.8 million in profits from the contracts related to those payments.
Investment bank JPMorgan (NYSE:JPM) has also been accused repeatedly of hiring "princelings" to tighten its connections with governments across Asia. British pharmaceutical giant GlaxoSmithKline (NYSE:GSK) was fined nearly $500 million in China in 2014 for paying doctors kickbacks for prescribing its drugs. That same year, the SEC fined cosmetics company Avon (NYSE:AVP) $135 million for bribing Chinese officials with luxury handbags, jewelry, and other gifts.
While it might seem that these companies are being reckless, some apologists will note that bribery wouldn't be so easy if Chinese bribery laws were stricter and nepotism and cronyism weren't widely practiced. They might also note that China's protectionist policies, which arguably favor domestic companies over foreign ones, make it tough to get ahead without establishing local relationships.
Nonetheless, the Chinese government has escalated its crackdowns on corruption among government and business leaders. In the U.S., the Department of Justice and SEC have also been hunting businesses that violate the Foreign Corrupt Practices Act.
Should Qualcomm investors worry?
What Qualcomm allegedly did was clearly wrong, and it luckily escaped with just a nominal fine this time, and it probably won't impact its Chinese business in a meaningful way. But looking ahead, Qualcomm and other companies need to rethink how they conduct business in China, since regulators from both sides of the Pacific could clamp down much harder on violators in the near future.