Qualcomm, Audi In Anti-Trust Spotlight; Europe Responds

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Includes: QCOM, VLKAY
by: Doug Young

I've been writing regularly about the flood of anti-monopoly probes against western firms recently, so it seems only appropriate that I end the week with a flurry of new headlines involving cases against chipmaker Qualcomm (NASDAQ:QCOM), luxury car maker Audi (OTCPK:VLKAY), and a long-overdue response from a major western business group. In the first news bit, the anti-monopoly investigator has reportedly nabbed a government insider who was helping Qualcomm in the case against it. The second bit has media reporting the regulator is preparing to levy a large but relatively manageable fine against Audi. And the third bit has the EU's local chamber of commerce calling on China to stop bullying its members.

By this point, it's becoming clear that the anti-trust probes can be grouped into 2 basic categories. One category involves companies like automakers that the government feels are charging unreasonably high prices for their products and services, even though those firms are in competitive sectors. The other group is largely tech companies like Qualcomm that operate in less competitive spaces, and really do have a degree of high control in their markets.

Let's start with the first category which includes the current investigation against Audi, as well as many other automakers including GM (NYSE: GM) and Mercedes-Benz. In all of those cases, Beijing is unhappy about the prices those companies charge for their after-sales parts and services, even though such practice is quite common in many of their other markets.

We've seen reports of numerous investigations against the car makers, but now media are reporting the powerful National Reform and Development Commission (NDRC) is preparing to levy a 250 million yuan ($40 million) fine against Audi. (Chinese article) That would be the first actual fine against any of the companies, and is probably a good indicator of what to expect for other automakers.

The amount looks sizable but still relatively manageable for a company like Audi, which sold 1.6 million of its cars in China last year. The much bigger issue for Audi and all the other car makers will be the price cuts they will have to make to satisfy the NDRC. Those cuts will eat heavily into their China profit margins over the next few years, and could prompt them to slow their investment in the market.

Next let's look at the case involving Qualcomm, which really does have a relative monopoly over high-end chips used to power most of the world's smartphones. Media are reporting that Zhang Xinzhu, a high-level researcher from the prestigious Chinese Academy of Sciences, has been nabbed by the NDRC for accepting 6 million yuan to help Qualcomm fight the case against it. (Chinese article)

This particular development comes after China sentenced 2 foreigners this week to prison, this time for assisting British drugmaker GlaxoSmithKline (NYSE:GSK) in an unrelated probe involving bribery. It also comes after the NDRC made an unusually public warning to Microsoft (Nasdaq: MSFT) not to interfere in an anti-trust probe against it. In that context, this latest development certainly doesn't look good for Zhang Xinzhu, who may now face criminal charges, and also bodes poorly for Qualcomm as it awaits the outcome of the probe against it.

Lastly there's the news from the European Union Chamber of Commerce, which has issued a relatively strong statement complaining that Beijing is bullying its members. (English article) The chamber, which has about 1,800 members in China, said some of those members being probed aren't getting full hearings in their cases, and are being pressured into accepting government punishments.

The EU Chamber previously spoke out last year during a similar wave of anti-monopoly probes against foreign milk powder makers, even though the similarly large US Chamber has remained mum in both instances. (previous post) In this case I have to commend the EU Chamber for speaking up, even though it risks raising the ire of Beijing, as all of these probes really do seem excessive and are far too lacking in transparency.

Bottom line: Qualcomm and Audi could suffer as a result of the latest developments in anti-trust probes against them, while the EU's protest over the probes could bring more transparency.

Disclosure: Author has holdings in QCOM.

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