As Qualcomm Faces China's Wrath, Tech Foundation Steps Up Critique Of Beijing

Chinese skies began to darken over Qualcomm three years ago. Homegrown companies that had licensed technology from the global leader in smartphone microchip design weren’t paying up. Soon after, China’s new antitrust authority drew a bead on Qualcomm, charging it with violations of the country’s anti-monopoly law, and Chinese officials hinted that the company erred in not sharing more technology with Chinese partners.

Pressure from China to hand over valuable intellectual property isn’t at all new, but the response of the American technology companies in Washington--including Qualcomm--has broken fresh ground. A young organization with close ties to the industry, the Information Technology and Innovation Foundation, unleashed a blistering, well-researched critique of China’s newly muscular big to make American know-how its own.

At its head is Rob Atkinson, a technology and economic development specialist who doesn’t take the usual diplomatic approach of seeking common ground by arguing it’s in China’s interest to respect patents, copyrights and trademarks. He contends China is engaged in rampant theft of intellectual property and will not stop until it dominates its domestic market--and maybe not even then.

At the same time, Atkinson understands the business realities. China is a massive market at the same time that its firms, with the government firmly on their side, aspire to be competitors. The American CEO who picks a fight with Beijing won’t earn much in China, and might lose more than money. Only Washington, Atkinson says, can win that battle.

“The U.S. government can’t expect U.S. companies to ask for help,” he said. “It’s not going to happen.”

Except that to some extent, American companies--including Qualcomm--are doing just that, by ensuring that Atkinson, can speak his mind and the foundation can document Chinese policies. In an area where American executives obfuscate, hem and haw or otherwise prevaricate in order to dodge the wrath of China, Atkinson does not.

China practices--it’s Atkinson’s mantra--constitute “innovation mercantilism,” the forced transfer of American technology, despite promises not to do so, he says.

The country is building up a domestic industry for the design and manufacture of integrated circuits and considers the over $150 billion in semiconductors it imported from abroad in 2014 to be “a problem,” even though the supply is not threatened and China runs a large trade surplus in information technology products. Chinese policy is to “hoover up knowledge” that China didn’t produce and create industries competing with those who did, he said.

The problem is hardly limited to Qualcomm. A survey by the American Chamber of Commerce in China found in 2012 that 33 percent of companies had trouble with the demands to give up their technology to Chinese partners.

Above all, egregious behavior by China only goes unpunished, Atkinson says, because it has 1.4 billion people and an economy that multinationals from around the world simply cannot avoid.

“If you’re a second-rate country, you’d face a global capital strike,” Atkinson said. “But not China.”

From Washington to Beijing, Atkinson’s forceful critique has gotten notice. The foundation’s members like him personally and respect his knowledge, said Phil English, a former Republican member of Congress who co-chairs the foundation board.

“This foundation goes out of its way to reflect the views of its board,” English said. “It’s lean and focused and does not pull any punches.” (English declined to comment about Qualcomm’s role at the foundation.)

The foundation Atkinson runs represents a solution to the muffled debate on China in Washington, though it is active on other issues as well. It has a structure that lets the foundation tap the resources of the industry, which can stay arm’s length from Atkinson’s critique. In the last three years, he’s become increasingly forceful. But so has China.

Season China hands in Washington understand a truth about debates on U.S. trade policy toward China: even the largest companies fear irritating Chinese officials with public criticism.

In a country where the reach of the government is long, Chinese officials can kneecap a foreign company if it doesn’t play by Chinese rules. Sometimes, as in the case of Qualcomm, it was an antitrust investigation. Or a contract might go to a competitor. In other cases, the pressure is subtle: meetings are cancelled or telephone calls are not returned. The environment keeps foreign executives on tenterhooks.

Derek Scissors, a resident scholar at the American Enterprise Institute, recalled an incident in which a company faced pressure from Chinese officials. Figuring it was the sort of thing lawmakers should hear about confidentially, Scissors, also consultant to American firms in China, offered to broker a quiet meeting -- to no avail.

“They are getting attacked by the Chinese at this very moment,” said Scissors. “ And they won’t even have a closed-door meeting with a member of Congress.”

The Information Technology Industry Council, a lobby group that includes IBM, Google, Apple, Qualcomm and 60 other companies created the foundation in 2006 for the express purpose of what corporate America likes to call “thought leadership.”

Atkinson, a seasoned tech policy thinker whose judgement they trusted, would advance the industry’s worldview without representing companies, according to people involved in setting it up.

The foundation’s board includes lobbyists from a smaller group of companies than the lobby group, but also from universities, law firms and one environmental group, a structure that creates deniability. “Rob can turn to anybody and say, ‘Hey, they don’t own me,’” said one person who works closely with the foundation.

According to Atkinson, the structure works.

“I have never had a conversation with one of our supporters where they asked me to do something on China,” he said. “I have had conversation where they asked me to not be so blunt.”

Mention his name to lobbyists in the tech industry and they’re likely to comment, with an approving smile, that Atkinson is “off the leash,” or something to that effect.

A native of Calgary, Atkinson holds a PhD in city and regional planning from the University of North Carolina, a course of study that led him into economic development policy in Rhode Island, and other metropolitan areas. After advising members of Congress on tech issues, he joined the Progressive Policy Institute, a Democratic-leaning think tank.

No one interviewed for this article suggested Atkinson was doing anything but speak his own mind. But four people close to the foundation cited Qualcomm as the company most interested in keeping Atkinson off the leash, rather than on it.

Qualcomm’s senior vice president for government affairs, Nate Tibbits, serves on the organization’s board. Greg Farmer, a Qualcomm vice president, is one of the foundation’s “affiliated experts.” No other company holds two similar positions at the foundation.

Qualcomm officials, including Tibbits, didn’t respond to repeated requests for comment on this article.

Qualcomm has also bankrolled an ever-larger share of the foundation’s activities, according to two people familiar with its finances. ITIF spent $3.7 million on “non-partisan research and education” activities in 2014, according to disclosures filed with the Internal Revenue Service.

At the same time, the company’s founder, Irwin Jacobs, contributed $2.4 million to Democratic campaigns and causes in the 2012 election cycle. In August, Jacobs hosted a fundraiser for Hillary Clinton’s presidential campaign at his home in La Jolla, California. He’s also been active in the Clinton Global Initiative, the former president’s organization.

Around the time Jacobs was pouring money into President Barack Obama’s campaign coffers, Qualcomm was riding high, owing to its prowess in the global market for integrated circuits that power all manner of mobile devices.

San Diego-based Qualcomm’s business model of licensing technology to others for production, an unusual strategy born of financial desperation in the 1980s, has paid handsome dividends. Last year, Qualcomm earned $6.6 billion in royalties, nearly doubt revenue for actual products.

“The company controls the most widely used patent portfolio in the industry and continues to develop leading technologies that others actually build or implement,” Check Capital Management, a California asset manager, wrote in a June 2013 report.

But China was a challenge to that model.

When it joined the World Trade Organization in 2001, China promised not to force companies to hand over intellectual property in exchange for investment opportunities, a pledge it flouted utterly. “Put simply,” the Information Technology and Innovation Foundation wrote in a 2012 report, “technology transfer requirements as a condition of doing business in China remain a key pillar of China’s innovation mercantilist strategy.”

According to Atkinson, reports from American businesses in China put paid to the perpetual debate about the “two forces in China” -- the enlightened reformers and the stodgy conservatives. The latter had come out on top by 2012. “That was when the Chinese started to care a lot less about what we think,” he said.

By then, local companies that had licensed Qualcomm technology underreporting the number of phones they were selling, depriving the company of royalties. The worst news came in November 2013, when Qualcomm disclosed a Chinese antitrust investigation that would last into 2015.

Chinese officials didn’t seem care that the antitrust inquiry looked nakedly political. China’s minister for cyberspace affairs, Lu Wei, publicly lectured the then-CEO of Qualcomm, Paul Jacobs -- the son of its founder -- that “friendships” were the key to success in China. “We should make money together,” Lu told Jacobs in September 2014.

Parallel to Qualcomm’s travails, Atkinson became more outspoken on China. A 2012 study on the semiconductor industry was an opening salvo. Atkinson appeared at private-sector events that are part of the Strategic and Economic Dialog, an annual meeting of senior government officials from the United States and China. He testified before a congressional commission created in 2000 to monitor China’s rise. And ITIF put China at the top of its “Ten Worst” list of “innovation mercantilists.

“He’s a real player on this issue,” said one person who has dealt extensively with China issues. “He knows how to drive a wedge into a policy opening.”

In late 2014, Qualcomm announced plans for a new joint venture to design chips for servers in Guizhou, the mountainous province northwest of Hong Kong. The antitrust probe ended in February with a nearly $1 billion fine. Four months later, Qualcomm announced a new joint venture with China’s largest maker of computer chips, Shanghai-based SMIC, and a Belgian research center to develop next-generation technology for smartphones and servers. Soon after, it unveiled a $150 million investment fund for new Chinese chip companies.

Rick Clemmer, chief executive officer of Dutch chipmaker NXP, which gets nearly half its sales from China, acknowledged the new reality for foreign companies recently. “Over the next few years, it’s not going to be the same as it is today, where we just ship semiconductors into China,” Clemmer said. “You’re going to have to do joint ventures and licenses.”

Stephen Ezell, the foundation’s director of global innovation policy, and Atkinson, didn’t mention Qualcomm by name in a September report on China’s failure to live up to promises it made when joining the World Trade Organization in 2001. But the report highlighted repeated demands that American companies bring technology into China through joint ventures, and the $100 billion that the government will invest in every step of semiconductor production, from design to manufacture to packaging.

“The strategy also unabashedly calls for China to reduce imports of U.S. semiconductors by half in 10 years and to eliminate them entirely within 20 years,” Ezell and Atkinson wrote.

The two argued in the report that Congress needs to fight back, in ways that wouldn’t have much precedent in Sino-American relations. They want to relegate diplomatic and security issues with China to the back burner, and put a tougher U.S. Trade Representative in charge of fighting China’s industrial policies. They propose new rules barring Chinese investment in the United States -- a fast-growing trend -- until the forced handovers of U.S. technology stop.

Atkinson acknowledges he has grown increasingly strident over the past three years because China is rising, and time is running out to prevent the kind of treatment Qualcomm faced.

“The U.S. government has a lot more leeway to be tougher on the Chinese but they do not take advantage of it because they’re afraid it will spiral out of control,” Atkinson said. “But that leverage is not going to last much longer.”