Qualcomm asks China to ban iPhone production and sales

Source: Content from Sina, thank you.

According to Bloomberg news in the early morning of the 14th Beijing time, Qualcomm has launched a major move in the protracted and fierce litigation battle with Apple. The chip manufacturer filed a lawsuit in a Beijing court, requesting a ban on the production and sale of iPhone phones in China.

San Diego-based Qualcomm wants to trouble Apple in the world's largest smartphone market and cut off production in the country where the vast majority of iPhones are made, accounting for nearly two-thirds of Apple's revenue. Qualcomm spokeswoman Christine Trimble said the company filed a lawsuit in a Beijing intellectual property court, alleging patent infringement and seeking an injunction against Apple.

As soon as the news came out, Apple's stock price fell by more than 0.2% from its intraday high. However, as of press time, Apple's stock price has rebounded to $156.97, up 0.62%. Qualcomm still maintained a slight downward trend.

"Apple uses technology invented by Qualcomm without paying for it," Trimble said. An Apple spokesman did not immediately respond to a request for comment on Friday.

Qualcomm said the lawsuit was based on three non-standard essential patents. They cover power management and the Force Touch touchscreen technology used in current iPhones. Trimble said those inventions are "just a few examples of many other Qualcomm technologies that Apple uses to improve its products and increase its profits." Qualcomm filed the lawsuit in a Beijing court on September 29. The court has not yet made the case public.

Qualcomm and Apple have been engaged in a months-long legal battle over Qualcomm's technology licensing business. While the bulk of Qualcomm's sales come from making chips for mobile phones, the bulk of its profits come from licensing patents that underlie all modern mobile phone systems.

The latest lawsuit comes at a bad time for Apple, which has just released the iPhone 8 and X in hopes of reasserting its market leadership and faces increasing competition from the rapid growth of local Chinese phone makers. Apple's suppliers and assembly plants in China are currently working at full speed to produce as many iPhones as possible before the crucial holiday shopping season, so any disruption to production could be costly. Greater China contributed 22.5% of Apple's $215.6 billion in sales in its most recent fiscal year.

In addition, according to the case acceptance information released by the Beijing Intellectual Property Court on the 12th, the Beijing Intellectual Property Court recently accepted the case in which Apple Inc. sued Qualcomm Inc. for confirmation of non-infringement of patent rights.

Apple is asking the court to confirm that its iPhone and iPad products supporting 3G/UMTS and 4G/LTE do not infringe Qualcomm's Chinese patents No. ZL200380108677.7 entitled "Method and device for data transmission on the reverse link in a telecommunications system", No. ZL200580031592.2 entitled "Efficient signal transmission through access channel" and No. ZL01809657.3 entitled "Apparatus for retransmitting signals in a communication system" (hereinafter referred to as the patents involved). The court also ordered the defendant to compensate the plaintiff for reasonable expenses of RMB 2 million. The case is under further trial.

Let’s review how these two manufacturers went from loving each other to hating each other.

This year, a fierce patent war broke out between Apple and Qualcomm, two giants in the smartphone industry. Patent lawsuits between giants are common in the technology industry, where innovation leads the trend, and Apple and Qualcomm are the most active advocates of patent protection. However, reality is far more imaginative than movies, and the clash between the two giants is full of all the exciting elements of a business war blockbuster: conspiracy, betrayal, anger, and wrestling.

The new scene is led by Qualcomm. They have launched a sales ban in China. The world's largest smartphone chip company announced that it had filed a lawsuit and an injunction with the Beijing Intellectual Property Court of China on September 29, applying for a ban on the sale of iPhones in China. Qualcomm said, "Apple used Qualcomm's technology without paying (licensing) fees."

It is worth noting that the basis for Qualcomm's application to ban the sale of iPhones is that Apple is suspected of infringing on three of Qualcomm's non-standard essential patents, including power management and Force Touch touch-related technologies used in iPhones, rather than Qualcomm's common communication-related standard essential patents. The smartphone power management patent was applied for by Qualcomm as early as 2000. According to Qualcomm, "this is just a small example of the many Qualcomm technologies used by Apple."

Although the growth in recent years has not been as expected, China is still one of Apple's most important markets. Last year, Apple's global revenue of $215.6 billion came from the Greater China market, accounting for 22.5%. This year is the most vulnerable year for Apple. The iPhone X production capacity problem cannot be solved, and the iPhone 8 and 8 Plus are in an awkward situation. If Qualcomm's request is approved, it will undoubtedly deal a heavy blow to Apple. However, even if Qualcomm successfully applies for a sales ban, Apple still has the opportunity to appeal and delay the implementation time as much as possible.

Since the beginning of this year, the two technology giants have been engaged in multiple rounds of litigation over patent licensing fees. Qualcomm has previously applied to ban the sale of some iPhones in the United States, and this time Qualcomm's application for a sales ban in China is intended to further hit Apple. So, what is the hatred between the two technology giants who have cooperated for many years (since the iPhone 4S in 2011)?

All of this starts with the "Qualcomm tax". Every smartphone manufacturer cannot escape the "Qualcomm tax", that is, every 4G LTE smartphone currently needs to pay Qualcomm a patent licensing fee of 5% of the phone's price. However, if you buy Qualcomm's processing chips and baseband chips, you can enjoy a discount on the patent licensing fee.

Why? Because Qualcomm's 130,000 patents not only cover the chip field, but also involve mobile communications and even the necessary technologies for many basic operations of smartphones. Regardless of whether a smartphone uses Qualcomm chips, it inevitably uses the necessary patents developed by Qualcomm and relies on Qualcomm's research and development results, so it needs to pay Qualcomm a "bribe".

According to Qualcomm's patent licensing operation, mobile phone manufacturers must pay Qualcomm a certain percentage of licensing fees based on the selling price of the mobile phone. However, this is also a long-standing practice in the communications industry. Motorola, Ericsson, and Nokia all determine licensing fees based on the selling price of mobile phones.

Apple iPhone has always used its own A-series processor chips, but has long purchased baseband chips from Qualcomm (starting from iPhone 4s). In addition, Apple also needs to pay patent licensing fees to Qualcomm. According to US media reports, Apple has reduced the Qualcomm tax paid by each mobile phone to more than ten dollars per mobile phone through years of negotiations, and needs to pay Qualcomm a total of about US$2 billion in patent fees each year.

However, as part of the agreement reached between the two parties, Apple's condition for obtaining a price reduction was that it promised not to challenge Qualcomm's patent status, nor to actively push regulators to conduct antitrust investigations against Qualcomm, but only to passively cooperate with the investigations. In the past few years, both Qualcomm and Apple have reached the peak of their respective performance and stock prices.

But a ruling at the end of last year changed the relationship between the two giants and was also the fuse of the patent war between Apple and Qualcomm. In December last year, after two years of investigation, the South Korean regulatory authorities determined that Qualcomm was suspected of forming a monopoly in patent licensing and baseband chips, and imposed a high fine of US$854 million on it. This was tantamount to adding insult to injury for Qualcomm, which had just suffered a US$950 million antitrust fine in China the previous year.

While Qualcomm appealed in two places, it quickly found the manipulator behind the scenes. According to Qualcomm, this was jointly promoted by Apple and Samsung. The executives of the two companies (probably Apple CEO Cook and Samsung Vice Chairman Lee Jae-yong) had conspired against Qualcomm at the Sun Valley Conference in the United States in 2015; Apple urged Samsung to use its influence in South Korea to pressure regulators to impose heavy penalties on Qualcomm.

Qualcomm said in the documents submitted to the US regulator that Apple executives asked Samsung to be "proactive" and that this was "the best opportunity for Qualcomm to reduce its patent licensing fees." In Qualcomm's view, Apple's move has destroyed the gentleman's agreement between the two parties. But this statement was denied by Apple. Apple's general counsel Bruce Sewell clarified that "Apple only said to Samsung at the time, 'You are in Korea, you should pay careful attention to this case.' This is just a common conversation between the two CEOs." Samsung remained silent on this.

Qualcomm believes that Apple has been actively pushing regulators in South Korea, Taiwan and other places to investigate and punish its patent licensing operations. Because of this, Qualcomm decided not to return the preferential royalties for purchasing Qualcomm baseband chips to Apple, which was the direct reason why Apple sued Qualcomm in January this year. Just this week, the Taiwan regulator issued a $773 million fine to Qualcomm.

Three weeks later, the US Federal Trade Commission (FTC) launched an antitrust investigation against Qualcomm, dealing a heavy blow to the company. Samsung and Intel, two of Qualcomm's direct competitors, cooperated with the investigation, hoping that the FTC would force Qualcomm to lower its patent licensing fees. Samsung is not only the largest customer of Qualcomm's Snapdragon chips, but also a competitor of Qualcomm in the field of smartphone chips and an important source of Qualcomm's patent licensing fees.

To Qualcomm's surprise, Apple officially launched a war against Qualcomm three days later, demanding that the California court order Qualcomm to return the $1 billion in licensing fees and lower future patent licensing standards. Although the two sides have been negotiating to reduce patent fees over the past few years, Apple's lawsuit has broken the relationship between the two companies.

Then in April this year, Apple announced that it would stop paying Qualcomm for patents involved in the lawsuit, and again accused Qualcomm of charging too high patent licensing fees. That month, Qualcomm filed a breach of contract lawsuit against Apple, denying all of Apple's allegations and accusing Apple of interfering with the contracts between its suppliers and Qualcomm.

Since 12% of Qualcomm's patent licensing revenue comes from Apple, Apple's refusal to pay has directly forced Qualcomm to lower its earnings forecast. Qualcomm expects that due to the impact of Apple's patent lawsuit, the revenue of its patent licensing business will drop by 47% to $1 billion in the third quarter of this year, dragging down the company's overall revenue by 13%.

Under this series of blows, Qualcomm's stock price has fallen from around $70 at the end of last year to $50, and its market value has evaporated by nearly 30%. In Qualcomm's view, these are all measures taken by Apple to reduce patent licensing fees. Qualcomm executives publicly stated that everything Apple did was to force Qualcomm to lower prices.

In response to Qualcomm's complaint, the US International Trade Commission announced in August this year that it was investigating Apple's iPhone for allegedly infringing on six Qualcomm patents. Qualcomm also requested that the US ban the import of several iPhone models suspected of patent infringement (i.e. iPhone versions using Intel baseband chips). Qualcomm's application to ban the sale of iPhones in China is also a follow-up to Qualcomm's retaliatory lawsuit against Apple. However, competition between businesses is all for profit, and I believe that the two sides will eventually shake hands and reach an out-of-court settlement.

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