Should we pay the price of Innovation?

I agree that this question sounds stupid: nobody is forcing me to buy an innovative product, or even a gadget, if I don’t want to pay a high price, I just don’t buy the product. But it seems that some people don’t really think that way. The story is related to Qualcomm sales in China, and recently announced partnership with SMIC…

The Partnership (the fact)

From the joint Press Release: SAN DIEGO – July 03, 2014 – Semiconductor Manufacturing International Corporation (“SMIC”; NYSE: SMI; SEHK: 981) and Qualcomm Incorporated (NASDAQ: QCOM), have announced that SMIC and Qualcomm Technologies, Inc., a subsidiary of Qualcomm Incorporated, are working together in connection with 28nm process technology and wafer manufacturing services in China to manufacture Qualcomm® Snapdragon™ processors. Qualcomm Technologies’ Snapdragon processors are purpose built for mobile devices. SMIC is one of China’s largest and most advanced semiconductor foundries, and Qualcomm Technologies is one of the world’s largest fabless semiconductor vendors and a world leader in 3G, 4G and next-generation wireless technologies. This collaboration will help accelerate SMIC’s 28nm process maturity and capacity, and will also make SMIC one of the first semiconductor foundries in China to offer production locally for some of Qualcomm Technologies’ latest Snapdragon processors on 28nm node, both PolySiON (PS) and high-K dielectrics metal gate (HKMG).

This PR sounds like both companies are enjoying a new partnership, maybe showing that one of the partners is getting higher benefit: “This collaboration will help accelerate SMIC’s 28nm process maturity and capacity, and will also make SMIC one of the first semiconductor foundries in China to offer production locally for some of Qualcomm Technologies’ latest Snapdragon processors on 28nm node…”. If you further analyze, “Qualcomm will help SMIC accelerate 28nm process maturity” sounds like the customer is devoting resources to help the supplier filling the technology gap with foundry competitors. If you prefer, this PR sounds like Qualcomm is paying an entry ticket to stay active and continue to sale Snapdragon on the Chinese market. Maybe this deal does not look any more like a win-win deal? The good question is to know why Qualcomm had to sign such a partnership?

I found a possible answer in this article from Junko Yoshida, Chief International Correspondent, EETimes “China’s SMIC-Qualcomm 28-nm Deal: Why Now? “, here is an extract:

Antitrust investigation in China
Since China launched an antitrust probe into Qualcomm late last year, speculation abounds that Chinese authorities are probing ways to coerce Qualcomm into collaborating with their electronics industry.
Qualcomm reportedly faces penalties that may exceed $1 billion. The National Development and Reform Commission (NDRC), China’s main planning body, raided Qualcomm’s Beijing and Shanghai offices last year.
The NDRC has used the anti-monopoly law to target technology companies for practices that could lead to what it calls “unreasonably” high prices. In February, the Chinese regulator said it suspects Qualcomm of overcharging and abusing its market position.

So the Chinese regulator (NDRC) considers that technology companies like Qualcomm are selling at “unreasonably” high prices. Let’s make a point: Qualcomm has invented and patented innovative modem techniques (CDMA and the like) for wireless communication, and these techniques have been selected by the telecommunication regulators in the USA (and other regions) to be at the hearth of the new standards. Qualcomm has a de facto monopoly, this is due to the international patent policy: every chip maker developing a modem has to pay a license and royalties to QCOM, and this gives a competitive advantage to Qualcomm when the company also develop modem IC. Qualcomm has been smart enough to also dominate the Application Processor market. The chip maker has just do a better job that TI, Nvidia, Marvell, Freescale… you name it. The equation is rather simple:

Innovation (Patent) + Investment (IC design) + Roadmap = Strong Leader position

As far as I am concerned, I don’t see any malfeasance in this strategy. We have seen in the past a high tech PC chip maker basing the company development, not only on a quasi-monopoly (leaving just enough room for a single competitor to survive, so the monopoly was not 100%), but also on anti-competitive practices (like paying back customers to make sure these will stay). Such a behavior has been sanctioned by the American law, and this was good decision. But the picture is completely different with Qualcomm. If you agree with the international patent policy, you must admit that a company cleaver enough to create innovation and turn it into a new technology and the related (IC) products should be in a position to harvest and get benefit from this innovation…

Let’s make it clear: I have no negative a-priori against China. But I may have a certain reluctance when I see politician (from any country) trying to squeeze innovation. At the end of the day, SMIC will get benefit from this partnership, detrimental to TSMC, Samsung or GloFo, and detrimental also to innovation.

Eric Esteve

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