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Qualcomm last week announced a patent licensing agreement with fast-rising Chinese smartphone maker Xiaomi, an important bit of good news for a chip-making company that has seen its share of challenges both inside and outside of China.
Under the agreement, Xiaomi will license Qualcomm’s patents to build and sell smartphones that connect to cellular networks via 3G or 4G, and pay royalties to Qualcomm for the devices they sell.
The deal is a good one for both companies. For Xiaomi, it gives them the ability to manufacture smartphones with modems integrated into the devices’ systems-on-a- chip (SoCs) using a license from a top-tier chip maker. For Qualcomm, the agreement bolsters the company’s image both in China and with its licensing business. Its image has not been as strong as expected in recent quarters following an investigation by Chinese regulators that was settled earlier this year and ongoing negotiations with some Chinese device makers over how they are reporting sales and royalties.
“I do think that with every new licensing agreement we conclude, especially with more prominent licensees—and Xiaomi is one of them—we gain momentum,” Eric Reifschneider, senior vice president and general manager of Qualcomm Technology Licensing (QTL), said in a post on the company blog. “It’s another sign that we are moving forward successfully with our licensing business in China.”
Qualcomm officials in February announced the company would pay a $975 million fine and make changes to its business practices in China to settle an antitrust investigation by the country’s National Development and Reform Commission (NDRC) that lasted more than 14 months. The chip maker has since been working with device OEMs in the country to reach licensing agreements in line with the NDRC settlement.
During a Nov. 4 conference call to discuss the company’s quarterly financial numbers, Qualcomm President Derek Aberle said the chip maker had offered its 3G and 4G Chinese patents to device makers that already were licensees and some that weren’t. Qualcomm already had reached an agreement with Huawei Technologies, and Aberle said it also had recently reached deals with ZTE and TCL, bringing the number of agreements with Chinese vendors to more than 60.
However, he said negotiations with some OEMs were taking longer than expected, and that some had stopped reporting some of their sales and royalties, which hurt Qualcomm’s revenues. In the fiscal fourth quarter, device sales by Qualcomm licensees was $58.3 billion, below the low end of the company’s guidance and out of line with what Qualcomm officials said were total device sales. Aberle said he expects some OEMs to eventually pay the royalties that are owed, and that Qualcomm will move against those device makers that the company believes is not operating in good faith.
“We are not satisfied with the gap that exists between the global 3G/4G device sales and total reported device sales, and we are highly focused on taking actions to close that gap and collect catch-up payments from prior period under-reporting as quickly as possible,” Aberle said, according to a transcript from Seeking Alpha.
Qualcomm Boosts China Efforts Through Xiaomi Licensing Deal
During the same conference call, CEO Steve Mollenkopf said that “QTL remains a source of significant strength for Qualcomm and we are confident in our long-term QTL business outlook based on continued growth of 3G/4G across mobile devices and new product categories, as well as our continued innovation in new mobile technologies.”
Over the year, Qualcomm also had made other moves to grow its presence in China. In December 2014, the company announced it was investing $40 million in Chinese companies, a move that come months after the company launched a $150 million fund for the Chinese market. In June, the company said it is partnering with Huawei, Chinese foundry Semiconductor Manufacturing International Corp. and others in creating the SMIC Advanced Technology Research and Development Corp., a joint venture that will push R&D toward next-generation chips for both the Chinese market and abroad.
The Chinese market is getting attention from a number of chip vendors, including Intel and companies in the OpenPower effort.
It’s been a tough year for Qualcomm beyond the challenges in China. Samsung late last year said it wouldn’t use Qualcomm’s 64-bit ARM-based Snapdragon 810 in its Galaxy X6 smartphone, reportedly over heating problems. However, Samsung said it would use the chip maker’s new Snapdragon 820 in its upcoming Galaxy X7 device.
At the same time, the company has been under pressure from activist investor Jana Partners to restructure the company, return more money to shareholders and possibly split in two, separating its chip-making business from its licensing unit. In July, the company announced a plan to slash $1.4 billion in annual costs by cutting 15 percent of its workforce.