Qualcomm Sinks as South Korea Says Chipmaker Is Breaking Law

Updated on
  • Regulator proposing fines, changes to chipmaker's practices
  • Qualcomm says allegations `not supported by the facts'

Qualcomm Inc.’s stock sank to its lowest level in more than four years after South Korea’s Fair Trade Commission accused the chipmaker of violating local competition law in the way it licenses technology to customers.

The regulator proposes fining the company and forcing it to modify its business practices, Qualcomm said Tuesday in a statement. The commission sent a “case examiner’s report” to the U.S. company, beginning the process of allowing Qualcomm to respond to the allegations.

“The allegations and conclusions contained in the examiner’s report are not supported by the facts and are a serious misapplication of law,” Qualcomm said. “Our patent licensing practices, which we and other patent owners have maintained for almost two decades, and which have facilitated the growth of the mobile communications industry in Korea and elsewhere, are lawful and pro-competitive.”

Qualcomm gets the majority of its profit from licensing patents that cover some of the fundamental technology of modern phone networks. The chipmaker has faced regulatory challenges across the globe and earlier this year paid a fine and agreed to charge a smaller percentage on locally sold handsets in China. The company also is the subject of regulatory investigations in the U.S. and Europe.

“The allegations in the report are troubling, and specifically call out Qualcomm’s practice of charging device-level royalties as violating Korean competition law,” Stacy Rasgon, an analyst at Sanford C. Bernstein, wrote Wednesday in a note to investors. “At this point we have no idea what the Korean Commission will determine, nor what remedies might be imposed, and whatever happens this will drag on for years.”

Shares Plunge

Qualcomm shares fell 9.4 percent to $48 on Wednesday in New York, their lowest close since October 2011. The stock has declined 35 percent this year. Only three companies on the Philadelphia Stock Exchange Semiconductor Index have performed worse than Qualcomm in 2015.

South Korea is home to Samsung Electronics Co. and LG Electronics Inc., among the world’s handset makers and two of Qualcomm’s top three customers. The San Diego-based chipmaker charges fees based on the selling price of handsets, which South Korea is now challenging. The commission argues that the fee should be based on the price of the semiconductor component that uses the technology.

“Qualcomm has a dominance in South Korea,” said Claire Kim, an analyst at
Daishin Securities Co. in Seoul. “The Korean government can no longer tolerate this because Samsung is Korea’s biggest company, whose revenue doesn’t seem all that rosy.”

Lengthy Fight

Qualcomm said the process of fighting its case with the Korean regulator will “take some time,” without providing details, and it didn’t specify the potential size of the fine. The Fair Trade Commission declined to comment on the case.

The company earlier this month predicted sales and profit that fell short of some analysts’ estimates as it struggles to collect licensing fees in China, sending its stock tumbling. Local companies in the world’s biggest market for phones have been avoiding signing up or under paying and the American company isn’t making as much progress at it had hoped in reversing that since the settlement with the Chinese government.

Qualcomm is preparing to step up its efforts -- including possible legal action -- against some of the Chinese holdouts and expects to get paid in full eventually, President Derek Aberle said.

(An earlier version of this story was corrected to fix the name of the semiconductor stock index.)

— With assistance by Jungah Lee

(Updates with closing share prices.)
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