Cracking the Qualcomm anti-monopoly case

Xu Kunlin headed the investigation into the semiconductor giant, which was fined $975 m, and now talks about his role at the NDRC
Xu Kunlin headed the investigation into the high-profile case against Qualcomm Inc, the United States-based semiconductor giant.

The company was fined a record $975 million in February by the National Development and Reform Com-mission in a landmark anti-trust probe after it agreed to modify its technology licensing practices in China.

The country is a major market for Qualcomm with about half of its $26.5 billion in revenue last year coming from here.

It is now even more crucial after 4G LTE networks were rolled out by China Mobile Communications Corp and other wireless operators. This year, the number of 4G LTE subscribers in China is expected to rise to 350 million from about 100 million in 2014.

Chinese smartphone manufacturers need to license Qualcomm's technology to protect themselves from patent lawsuits. Part of the deal with the NDRC was to reduce those licensing fees to companies such as Huawei Technologies Co Ltd and Xiaomi Corp.

During the case, one man was key to the investigation. Xu, 51, was the chief of the price supervision and anti-monopoly bureau before becoming the director of two other departments at the NDRC.

Below are abstracts from his interview with the Chinese-language Oriental Outlook, which was published on Monday.

Since the Qualcomm case lasted 14 months, what kind of pressure were you under?

The pressure had nothing really to do with the length of the case. We were involved in 28 rounds of negotiations, including eight between myself and Qualcomm president (Derek Aberle). In the first round of talks, he brought six vice-presidents to introduce their business model. The main purpose was to explain and defend their way of doing business. We were fully prepared for that and raised questions concerning all the different aspects. The first meeting lasted for more than two hours. In the second round, he brought eight vice-presidents.

So what happened after that?

Qualcomm then handed over a report that was written by Zhang Xinzhu, a member of the Chinese Academy of Social Sciences who sat on the commission advising the government's anti-trust authority. We felt this was a conflict of interests, so he was removed from the commission.

On Oct 9, 2014, you were named the chief of the price supervision bureau at the NDRC. This must have been a day of mixed emotions as we understand talks were tough?

The meeting only lasted about half an hour. We made no progress and negotiations were hard. I understood the company's concerns as they absolutely wanted to keep their business model. But from our view, we wanted to change that, so Qualcomm eventually accepted the fine.
Tell us your reflections about the case?

China's anti-monopoly law enforcement came into its own during the investigation. It was related to intellectual property abuse. At times, it can be difficult to draw the line between intellectual property abuse and intellectual property protection. There were very few previous cases we could refer to. Qualcomm had been under investigation in the European Union, Japan and South Korea, but never admitted monopoly status.

In August 2014, the European Union Chamber of Commerce in China issued a public statement regarding the anti-trust department's law enforcement procedures. It questioned the impartiality of the investigation. How did you deal with that?

I refused to meet with them at first because they issued the statement before talking to us. But the chamber later said it was a misunderstanding. As for the transparency questions they raised, the details of a monopoly case "can, but not necessarily, be made public" according to Chinese law. Some companies have asked us not to reveal details of investigations because it could damage their image. We respected their concerns.

The US chamber of commerce complained about the behavior of investigators who raided the Mercedes-Benz's Shanghai office during a price-fixing probe in August 2014. The German auto giant was later fined $56.5 million by the NDRC. What was your reaction to this?

Well, the practice of mounting a raid to gather information is carried out by our US counterparts. Acquiring first-hand information is critical during an anti-trust case. If we had not raided the offices, key information would have simply disappeared. US anti-monopoly agents use the same techniques.

The other complaint against the NDRC was that it did not allow companies being investigated to hire lawyers. What are your comments on that?

During the Qualcomm case, there was a local lawyer on the spot all the time in our discussions.

Overseas critics say you have gone to great lengths to single out foreign companies. What is your response?

Investigating overseas companies accounts for only 10 percent of our workload. But we still need to improve a number of things. Now, we will publicly announce penalty notices, but information that companies believe contains business secrets will not be made public.

There was a great deal of media attention in 2011 when the NDRC launched anti-trust investigations against China Telecom and China Unicom, both State-owned companies. How did you feel about this?

We had to investigate because we received reports with detailed information. When the anti-monopoly law came in (2008), companies did not take it seriously. Investigating SOEs was a challenging job. But in the end, the telecommunication carriers finally agreed to revamp their business operations.

You once said punishment is not the goal. So, what is the object of these investigations?

It is simply to create a level playing field for businesses to operate on. We investigated six liquid crystal display panel manufacturers, including Samsung (in January 2013). It was the first time an overseas company was punished. (The six companies, including Samsung, were fined $57.5 million for price-fixing). The case resulted in opening up the market to other companies (that made LCD screens) and helped Chinese consumers (as prices came down on those products).

Maybe you can tell us how the bureau gathers evidence?

We have two departments. Each one has four investigators and they have quite a heavy caseload. We talk to all the relevant parties in gathering information.

The NDRC's anti-monopoly division has expanded over the years. How big is it now?

In December 2009 when I joined the bureau, there were only two people handling anti-trust cases. By July 2011, the price supervision bureau was renamed the bureau of price supervision and anti-monopoly. The number of staff also increased to 46.

Does the NDRC work with overseas organizations?

We work very closely with our counterparts in the EU. We have sent three teams of investigators to work with them. We also have annual minister-level discussions with the US law enforcement agencies.

Company timeline

・ 1985: Qualcomm was founded in California. The company starts working on CDMA, a unique digital wireless technology used by the United States military for secure communications.

・ 1991: Qualcomm goes public and issues 4 million shares on the Nasdaq in New York.

・ 1995: Hutchison Telephone Co Ltd, based in Hong Kong, launches its first commercial CDMA service.

・ 1999: Qualcomm joined the S&P 500 Index and has developed close links with the telecommunications industry in China.

・ 2007: The company became the world's leading mobile chipset provider. It supplies integrated circuits (chipsets) to manufacturers of advanced 3G mobile devices.

・ 2009: South Korea fines Qualcomm more than $200 million after an anti-monopoly case.

・ 2013: Investigations into the company start in China.

・ 2015: Qualcomm is fined $975 million for violating China's anti-monopoly law.