By Gillian Wong And Juro Osawa
China's rising smartphone star, Xiaomi Inc., has hit a legal
wall in India, in a development that underscores the obstacles
Chinese phone makers face as they try to replicate their domestic
success abroad.
The High Court of Delhi issued a temporary injunction this week
on the sale and import of Xiaomi handsets in India while it waited
to hear a patent complaint against Xiaomi by Swedish telecom
equipment maker Ericsson. Ericsson alleges that the Chinese firm is
using its technology but refusing to pay royalties.
The ban throws a wrench into Xiaomi's business plans in India,
where the Chinese company has already taken a 1.5% market share in
the third quarter after it started sales there in July, according
to market research firm Counterpoint Research. Xiaomi said it
hasn't yet received the court order and declined to comment on
Ericsson's allegations and the potential financial impact of the
ban.
"India is a very important market for Xiaomi and we will respond
promptly as needed," Xiaomi's head of India operations, Manu Jain,
said in a statement Thursday.
The injunction shows why global domination won't be so easy for
Chinese smartphone makers, which have become some of the top
vendors in the world on the back of strong domestic sales, and are
now looking to topple brands like Samsung and Apple abroad. Led by
Xiaomi, half of the world's top 10 smartphone vendors by shipments
are Chinese, versus only two--Huawei Technologies Co. and ZTE
Corp.--three years ago, data from Strategy Analytics shows. But to
succeed outside of China, the companies must tackle a host of
hurdles they didn't face at home: looming patent expenses, user
concerns over cyberspying and poor brand recognition.
"Many Chinese vendors have to think twice before they make the
investment to expand" overseas, said Lixin Cheng, head of ZTE's
U.S. operations. "If you are not innovative, you are running a high
risk of violating others' intellectual properties."
Xiaomi's success is rooted in selling phones with features
rivaling high-end Samsung and Apple models but at around a third of
the price, saving costs by marketing through social media and
selling handsets online. This year, Xiaomi expanded in Southeast
Asia and India and expects to sell 60 million units globally, up
from 18.7 million in 2013.
Patent disputes are quite common in the high-tech industry. A
single smartphone encompasses about 200,000 patents, intellectual
property experts say. To get rights to use those technologies in
each country, handset makers typically have to sign cross-licensing
agreements, buy patents or pay royalties. Markets with robust
intellectual-property protections, such as the U.S., U.K. and
Germany, are more challenging for newcomers like Xiaomi than
emerging markets where IP protections are weak, executives say.
"Our situation when it comes to patents is the same as everyone
else," said Hugo Barra, Xiaomi's global vice president, at the WSJD
Live Global Technology Conference in October. He noted that his
company files for a significant number of patents in China and
strikes licensing deals abroad. Litigation risk "is not a
determining factor" in deciding the best markets for Xiaomi's
international expansion, he said.
Kwang Jun Kim, chief intellectual property officer at Samsung
Display Co., who previously worked on litigation for affiliate
Samsung Electronics Co., said as Chinese companies expand abroad
they will have to address legal challenges in the global
market.
"The U.S. is by far the most intense legal battlefield for
global technology firms," Mr. Kim said.
Access to patents was a key factor behind Lenovo's recent $2.91
billion acquisition of Motorola Mobility. By selling
Motorola-branded smartphones in the U.S., Lenovo can take advantage
of the U.S. firm's intellectual property as well as its brand
recognition, executives said.
ZTE paid about $17.4 billion to U.S. companies to license and
purchase their technologies and products over the past four years,
Mr. Cheng said. ZTE last year posted revenue of 75.2 billion yuan
($12.2 billion).
Chinese firms will also need to distance themselves from
concerns about digital surveillance by their government, often
accused by the West of cyberespionage. Beijing has said it opposes
cyberattacks.
This fall, Taiwan's regulator began studying data collection by
smartphone makers after allegations that Xiaomi collected user
information without notifying consumers. The regulator concluded
that all 12 smartphone makers it studied were equally culpable.
Authorities in Singapore and India have also been looking into
whether data on Xiaomi phones are safe.
In August, F-Secure, a Finnish computer security firm, said it
tested a Xiaomi phone and found it was sending unencrypted data
back to servers in Beijing. In response, Xiaomi has said the data
traffic was part of its cloud messaging service and issued a
software update to encrypt the data. It also began in recent months
to move servers out of China for data on its international
users.
"China still has a very poor image globally," said co-founder
Carl Pei of OnePlus, a Chinese handset startup. It used to be about
product quality woes, "now, increasingly, it's because of
cyberwarfare between different countries."
OnePlus, which ships handsets to the U.S. and Canada, says it
stores its global data on Amazon.com's U.S. servers.
Many Chinese smartphone makers also continue to grapple with
being virtually unknown outside China. Interbrand's Best 100 Global
Brands ranking this year included just one Chinese brand: Huawei,
at No. 94. Industry executives say brand awareness is crucial even
for low-cost players, as cheap handsets proliferate.
When ZTE conducted a consumer survey early last year in Houston,
it found almost no one there knew its name. It became the Houston
Rockets basketball team's sponsor in October 2013 and designed its
marketing around the team, including making Rockets-edition
smartphones. This summer, 16% of those in Houston surveyed said
they knew ZTE, a sharp increase from 2013, but still not a
household name. ZTE added sponsorships with two other basketball
teams--the New York Knicks and Golden State Warriors--this October.
It is now the fourth-largest smartphone vendor in the U.S. after
Apple Inc., Samsung and LG Electronics Inc. Its U.S. smartphone
market share rose to 6.3% in the third quarter from just 0.9% three
years ago, according to Strategy Analytics.
Jai Krishna in New Delhi, Dhanya Thoppil in Bangalore and Eva
Dou in Taipei contributed to this article.
Write to Gillian Wongat gillian.wong@wsj.com and Juro Osawa at
juro.osawa@wsj.com
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