Qualcomm, Apple dispute extends to supply chain

Dive Brief:

  • Qualcomm on Wednesday sued four Apple manufacturers — Foxconn Technology, Compal Electronics, Pegatron and Winstron — for failing to pay royalty payments on Apple products using its technology, The Wall Street Journal reports
  • The lawsuits are the latest episode in an intellectual property battle between the two cellular technology giants, where Apple is protesting Qualcomm's "excessive" licensing fees while Qualcomm claims the iPhone maker is using strong-arm tactics to secure lower costs.
  • Court documents filed by Qualcomm allege the four manufacturers ceased payments at Apple's prodding. The manufacturers continue to pay royalties for associated non-Apple products, but Apple has asked they not pay Qualcomm until the case is litigated, offering to pay indemnities that arise from such a choice.

Dive Insight:

The intellectual property dispute between Apple and Qualcomm is getting bloody, turning into a war of attrition as the iPhone maker takes advantage of its war chest and relations to make its supply chain an accomplice.

Per the court documents, Apple suppliers are withholding contractual payments to Qualcomm because Apple has promised to indemnify any damages incurred. It's a win-win for the partners and a big loss for Qualcomm. Suppliers can save months of royalty payments until the case is litigated, and Apple foots the whole bill. If Apple succeeds, as it seems convinced it can, suppliers and Apple will benefit from lower payments in the long run.

It's a gamble, and Apple's playing hardball. Meanwhile, Qualcomm will suffer, enduring months without a previously consistent revenue stream, which could affect cash flows in the short run. "Apple is attempting to inflict severe, immediate, and permanent harm on Qualcomm to force Qualcomm to agree to Apple’s unreasonable demand for a below-market direct license," according to their complaint.

Previous stories and the above statement reveal an additional peculiarity to the case: Apple is not attempting to exit the license altogether, but the dispute began as a contracting failure where neither side aligned. Apple seems to want a direct license, rather than reimbursing Qualcomm suppliers, perhaps in an effort to further control its supply chain.

The disagreement, however, revolves around the definition of "market price." Qualcomm has effectively cornered the cellular technology after decades of innovation. "Every modern cell phone practices multiple Qualcomm patents," the company writes, noting its thousands of patents in the space. "Due to the fundamental nature of Qualcomm’s inventions, virtually every handset supplier in the world—or the manufacturers from which those
suppliers source their products—has entered into a royalty-bearing license to Qualcomm patents." 

Royalty payments surrounding patents are common practice, and in fact an integral part of manufacturing expenses. Yet Apple claims the license deals may be overpriced. Qualcomm naturally disagrees. Only litigation may resolve the issue, but in the meantime, Qualcomm is facing the full force of Apple's supply chain prowess.

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Filed Under: Operations Procurement