Qualcomm's quandary

The stock market is crazy. Qualcomm, the world's biggest cellphone chip maker, has just been hit with a record fine of $975 million (882 million euros) in a Chinese antitrust probe, and what happens to its share price? It shoots up. Qualcomm shares were up 3 percent after the news of the fine was reported last Wednesday. The probe by China's National Development and Reform Commission (NDRC) found that Qualcomm violated the country's anti-monopoly law and charged unfairly high licensing fees.

Beijing is thin-skinned when it thinks that western companies are ripping off the Chinese with dubious business practices. The record fine was imposed after 14 months of investigations and numerous raids. The authorities can demand a fine of up to 10 percent of a company's annual revenue. Amounting to 8 percent of its sales in China, $975 million is still 20 percent off the maximum amount.

However steep the fine may be, investors and Qualcomm's managers are relieved that the issue is finally resolved. In 2014 around 50 percent of the company's revenue ($26.5 billion) was generated in China. It has no desire to jeopardize its standing there by appealing against the fine. An expensive mobile market is better than no mobile market, when that market is the world's biggest.

There has been no discussion about whether or not the price should be determined by the market rather than by the state.

Western countries, it should be pointed out, make sure there is sufficient competition in the market in order to guard against monopolies and protect fair prices.

Good timing

The timing of the case was interesting, coinciding as it did with the flurry of investment triggered by the development of the new 4G network. We will never know if the world's largest smartphone-chip maker was really over-charging, but it's significant that the highspeed 4G or LTE network became available in China just a month after the investigation was launched.

Smartphone manufacturers have been seeing booming sales ever since. Chipmaker Qualcomm gets a piece of the pie, too. But Beijing knows what it needs to do to give homegrown industry a bit of a leg-up. And investor reaction proves it right.

From now on, the Americans will only take 65 per cent of the original prices for licenses in China. The other side of the coin is that Chinese smartphone companies like Huawei, Lenovo or Xiaomi get a discount of 35 percent on chips from Qualcomm, a development it could view in a positive light. The reduced margin will be offset by selling more of the now more-favorably priced licenses.

Good deal

Against this background, it's easy to understand why managers feel they're getting a good deal. If Chinese companies get a 35 percent discount, they are sure to sell more licenses. And this is why Qualcomm has upgraded its predictions for revenue and profit for the coming year.

We don't need to feel too sorry for Qualcomm. Let's call it development aid for China. It shows once again how shifting power relations can change when it comes to setting the rules of the game. Ten years ago China would not have been in a position to take this sort of action. The moral of the story is that you have to take a very close look at things when a western company complains about China.

Foreign companies are becoming increasingly annoyed that they are subject to much more scrutiny than their Chinese competitors. Sometimes, this is directed against the right targets and sometimes it isn't. A survey conducted last fall by the US Chamber of Commerce showed that half of the US companies asked deemed the actions of the authorities "selective and subjective."

Good business

Complaining is indeed part of good business strategy, and the Chinese authorities don't only have Americans in their sights. British pharmaceutical giant GlaxoSmithKline was hit with a $492 million dollar fine for bribery just last September. Things can get rough in the car industry, too. Twelve Japanese car component suppliers were recently fined $202 million. They were quite justifiably accused of setting excessive minimum prices for spare parts and servicing.

The authorities also went after German car manufacturers like Audi, BMW and Mercedes. The argument that a Louis Vuitton bag also costs more in China than in Paris is hardly tactical. But as long as the sales figures look good it's a case of grin and bear it.

The Chinese government knows that as long as western manufacturers earn even a relatively insignificant bit more by being in the market than not in it they will stay. Such cases will more than likely increase. Because in China the motto is: China belongs to Chinese firms and higher revenues can, even on their own, make quite a difference on the stock market.

One of Germany's leading experts on China, Frank Sieren has lived in Beijing for 20 years.