The Korea Fair Trade Commission (KFTC) has punished U.S. semiconductor company Broadcom for allegedly forcing Samsung Electronics to sign a long-term contract to purchase parts for smartphones.
The Korean market watchdog announced on Sept. 21 that it has decided to slap a fine of 19.1 billion won (US$14.3 million) on four companies, including Broadcom’s U.S. headquarters and Korean branch, along with a corrective order, for forcing Samsung Electronics to sign a unilaterally unfavorable long-term agreement (LTA) on the supply of parts through unfair means, including the suspension of parts shipments.
Broadcom is a supplier of radio frequency front ends (RFFE), Wi-Fi modules, and global navigation satellite systems (GNSSs), which are core components for smart devices such as smartphones and tablet PCs. As of fiscal year 2020, the company racked up approximately US$23.9 billion in net sales.
Broadcom is accused of forcing Korean smart device manufacturers such as Samsung Electronics to sign three-year long-term exclusive contracts with terms unfavorable to them in order to exclude competitors, according to the KFTC. It took place from March 27, 2020, to July 2, 2021. Broadcom pressured Samsung to purchase more than US$760 million worth of parts for smart devices annually. In effect, the company limited Samsung’s contractual options and prevented its competitors from selling their products to Samsung.
The KFTC launched an investigation into the case in 2020 following a complaint from U.S. semiconductor company Qualcomm, a competitor of Broadcom.
“At the time, Samsung Electronics and Apple were competing fiercely in the premium smartphone market,” said a KFTC official. “Samsung Electronics was counting on Broadcom for most of the cutting-edge and high-performance parts that are used in expensive premium smartphones.”
“In December 2019, as competition began to emerge in the market of some parts in 2018, Broadcom developed a strategy to sign an LTA with Samsung Electronics using its exclusive parts supply situation, after careful consideration, in order to prevent Samsung Electronics from leaving for other suppliers and secure long-term sales for Broadcom,” the official added. “Samsung Electronics had no intention of entering into the LTA with Broadcom at the time as it was pursuing its policy of diversifying its parts supply lines, and consistently rejected Broadcom’s requests, citing opportunity costs and big financial losses.”
The KFTC believes that Broadcom used a series of unfair means to pressure Samsung Electronics to sign the LTA including stopping the approval of parts purchase orders and halting shipments and technical support since February 2020. In addition, when Samsung adopted some parts from a competitor of Broadcom as part of its strategy to diversify its parts supply lines, Broadcom called the competitor a “hated competitor” and filed a strong complaint with Samsung.
Samsung Electronics had no choice but to accept Broadcom’s demands, as it would be unable to produce products if the supply of parts was suddenly cut off. As a result, not only did Samsung overbuy parts to meet its quota, but it was unable to utilize Broadcom’s competitors’ parts for a long period of time, piling up malicious inventory. The damage was estimated to be hundreds of billions of won.
“Broadcom compared its measures on Samsung Electronics such as the suspension of purchase order approval and shipments to bombing and even the use of a nuclear bomb,” a KFTC official said. “Broadcom was aware that Samsung Electronics would be put in a serious situation, believing its acts to be against corporate ethics and a threat to Samsung Electronics.”
“Samsung Electronics was at a severe disadvantage in negotiations due to Broadcom’s actions such as suspending shipments, and was in a desperate situation where it could not help but accept Broadcom’s unilateral demands,” the official said. “Some emails among Broadcom employees depicted Samsung Electronics’ situation by saying that Samsung Electronics was concerned about disrupting its production lines and had no cards to use against Broadcom, and Samsung Electronics was in dire need of Broadcom’s parts so Broadcom had to take advantage of this situation.”
In order to honor the LTA in this case, Samsung switched to Broadcom parts from those of Broadcom’s competitors that it had adopted in the first place and was forced to purchase US$800 million in components by using all available means, including loading Broadcom parts even into entry-level models and purchasing parts for the next year in advance.
As a result, Samsung Electronics initially decided to use parts from a competitor of Broadcom in the Galaxy S21 released in 2021, but eventually scrapped the plan. It was difficult for Samsung Electronics to continue its strategy of diversifying its parts supply lines, as the Korean tech giant could not help but adopt Broadcom’s parts and its options were limited. Broadcom’s parts were more expensive than those of competitors, resulting in a financial disadvantage due to a price hike of its products.
By limiting Samsung Electronics’ choice of parts through the LTA, Broadcom’s competitors were deprived of opportunities to compete fairly based on the prices and performances of their products. In the long run, other parts makers lost momentum for investment, stifling innovation and finally damaging consumers.
“This action is significant in that it establishes fair trading order and creates a competitive environment in the semiconductor market, which is a key underlying industry for technological innovation, by preventing leading semiconductor companies such as Broadcom from using their dominant positions to give disadvantages to their competitors and limiting competition in the relevant market,” the official stressed.
“The semiconductor market is closely linked and interacts with frontline industries such as smart devices, automobiles, robots, and artificial intelligence (AI), and backline industries such as semiconductor materials, parts, and equipment,” he said. “In this regard, the restoration of a fair trading order in this market may have a ripple effect on related markets, making [this act] even more meaningful.”
In order to avoid the KFTC’s sanctions, Broadcom had previously prepared a consent resolution draft centered on the establishment of a 20 billion won semiconductor startup company development fund. A consent resolution quickly closes a case without determining whether law has been violated, even if the case is under investigation, if corrective measures proposed by a business operator are recognized as appropriate.
Remedial measures in the consent resolution draft consisted of prohibiting the forced signing of parts supply contracts using unfair means, the restriction of parts selection options against the will of a counterparty, and establishing a system for compliance with the Fair Trade Act. They aim to restore competitive order. As a mutually beneficial solution to improve trading order and enhance the welfare of small and medium-size enterprises (SMEs), they included fostering specialized personnel in the semiconductor and IT industry, supporting SMEs with 20 billion won, and expanding quality assurance and technical support for Samsung Electronics.
Broadcom initially denied the allegations. “Broadcom was in the position of manufacturing parts for Samsung Electronics,” the company claimed at a plenary session on June 7. “Our LTA with Samsung Electronics was a contract between leading companies for mutual benefit.”
Samsung strongly opposed Broadcom’s consent resolution, arguing that it was insufficient to remedy its damages. In June, the KFTC rejected the consent resolution and resumed its deliberations on sanctions.
“We understand that the maximum penalty cannot exceed 20 billion won,” the official said. “Since compensation for damages is not something that the KFTC can directly provide, Samsung Electronics will receive compensation for damage on its own, I think.” (8)
Samsung Electronics claims to have suffered damage of US$326.3 million due to the long-term contract forced by Broadcom. Based on the KFTC’s sanctions, Samsung Electronics will soon file a lawsuit against Broadcom for damages, industry insiders forecast.
The KFTC is not concerned about trade friction between Korea and the United States as a result of the decision. “The complainant is Qualcomm,” the official said. “There was no possibility for trade friction because the complaint was filed by a U.S. company.”