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San Diego’s Qualcomm still dominates the mobile chip-making industry. But it’s not untouchable, as a perfect storm of regulatory scrutiny, falling market share and pressure to stay on top in China’s ultracompetitive smartphone market has made clear.
Qualcomm, one of the largest employers in San Diego County, revealed more signs of weakness Wednesday in its latest earnings report. The company plans to cut 15 percent of its global workforce as part of a plan to reduce costs by $1.4 billion, said company CEO Steve Mollenkopf during an investor conference call Wednesday. That reduction will translate to more than 4,500 positions, based on the company’s latest employee count.
It’s unclear how many positions will be eliminated at its headquarters in Sorrento Valley. But the plan involves closing offices and reducing the number of temporary workers.
Company officials also said revenues in the third quarter fell 14 percent from a year ago, to $5.8 billion. Net income plummeted to $1.2 billion, a 47 percent drop. Following the call, Qualcomm’s stock value fell 1.4 percent in after-hours trading.
“Not much is going well (for them,) really,” said Stacy Rasgon, a Southern California-based analyst who tracks semiconductor companies like Qualcomm. “The stock is cheap … but that’s a bad set-up for a tech stock.”
Layoffs and government probes are far from uncommon for a tech firm of Qualcomm’s size and influence. Consider Microsoft, which recently announced it was cutting 7,800 jobs. Eight months earlier, it agreed to pay Chinese officials $140 million to settle tax-evasion charges. Fellow chip powerhouse Intel has long wrangled with regulatory fines in Europe.
Still, many analysts say Qualcomm’s regulatory and market challenges are becoming a deepening concern for its execs. Here are some threats likely keeping them up at night.
The China Issue
In February, Qualcomm agreed to pay a $975 million fine to settle allegations that it violated anti-monopoly laws in China.
That case centered on the company’s lucrative licensing program, which charges companies royalties for use of its patented technology. The licensing division, which generates a majority of the company’s profits, must charge lower royalty fees per headset as a result of the settlement.
Ultimately the fine was a drop in the bucket for the company – and many mobile-industry insiders say Qualcomm came away with a better deal than expected.
Still, the company’s worries in China aren’t over.
“It is unclear whether the fine will address the second part of the problem — help Qualcomm enforce contractual agreements with local licensees and collect patent fees owed,” economist Panos Mourdoukoutas, wrote in a recent Forbes column. “After all, China is a country in which there is a long held belief that intellectual property is a public good to be consumed for free by all.”
In other words, Qualcomm is still vulnerable in China.
It’s clear why the company was so quick to address China’s regulatory concerns. China boasts the biggest smartphone market in the world and almost 50 percent of Qualcomm’s revenues come from that country. Any major rifts with government officials or clients there could spell big trouble.
Mounting Regulatory Scrutiny
The other problem with the China settlement is that it set some dominoes in motion. Antitrust watchdogs in other parts of the world have started to initiate their own probes into Qualcomm’s business practices.
Last week, the European Commission – the executive body for the European Union – launched two investigations to look into whether the company:
• Offered monetary incentives to clients if they agreed to buy certain mobile chipsets only or semi-exclusively from Qualcomm, giving the company an unfair advantage over rivals.
• Sold certain chipsets below cost, again hindering fair market competition.
Qualcomm was also hit with an anti-trust investigation in South Korea in February.
Nor is it immune from scrutiny at home. Qualcomm disclosed an FTC investigation in the fall. That probe also looks at whether the company’s licensing model is fair.
A company spokeswoman declined to comment on the company’s latest regulatory follies.
It’s unclear how these probes will shake out. If they result in significant changes in Qualcomm’s business model, then the mobile chip giant could suffer big, said Rasgon, the analyst.
“If it’s just a fine, it’s not that big of a deal,” he added.
Less Market Share, More Competition
It’s not just regulators. The market seems to be working against Qualcomm, too.
The smartphone industry is fiercely competitive and rapidly changing, which means even a more established company like Qualcomm must stay on its toes.
It has maintained its dominance in the cellular chip market for years, but competitors are starting to chip away at its market share. The firm controlled 80 percent of the LTE baseband chip market in 2014, down from 95 percent a year earlier, according to research firm Strategy Analytics. (Those chips can support LTE, a high-speed mobile network that’s becoming more common around the world.)
A number of headwinds are worsening financial conditions for Qualcomm.
One recent major loss was Samsung. The Korean tech firm opted to develop and use its own mobile processor chips in its latest Galaxy smartphones instead of using Qualcomm’s hardware. The move to go in-house was likely motivated by cost-cutting, which has been key to satisfying consumer demand for cheaper smartphones.
Its issues in Asia run even deeper. Chinese officials are fervently encouraging businesses to end relationships with U.S. tech firms in favor or local ones.
The snowballing Asia threat has even started to make its way to the States.
Qualcomm rival MediaTek, the top chip supplier in the China smartphone market, made its U.S. debut in September.
But “U.S. debut” doesn’t really do justice to how uncomfortable Mediatek is probably making Qualcomm: The firm didn’t just set up shop in the same country, or the same state or even the same city. It’s doing business in Sorrento Valley, basically next door to Qualcomm.