Patent protection vital to Chinese mobile brands

Illustration: Chen Xia/GT

Licensing fees worth price for market access

In an injunction issued last week by a court in Delhi, India, Chinese smartphone manufacturer Xiaomi Technology Co and its exclusive retail partner Flipkart have been ordered to stop selling the latter's handsets in the country. According to reports, the injunction came after a plea from Ericsson that Xiaomi had been illegally using its telecommunication's technologies without paying royalties.

Reacting to the order, Xiaomi declared simply that it will evaluate its legal options. Prior to the court-ordered sales halt, Xiaomi's devices had been selling well in India, with reports putting sales at 800,000 units since July, when the Chinese company first entered the country. Despite being a relatively late entrant, Xiaomi's share of India's booming mobile market had been expected to climb from 1.5 percent to 3 percent from the third to the fourth quarter, according to Counterpoint Research.

The company's near-term prospects in India have been cast into doubt though thanks to infringement claims levelled against the Chinese up-and-comer. Xiaomi will surely be eager to resume sales as soon as possible given the rich potential of the Indian market, which has become a focal point for many of the world's leading smartphone brands. Indeed, it should move quickly to resolve its issues with Ericsson while also taking steps to protect itself from similar infringement charges in the future.

Reports say that India has nearly 900 million mobile phone users, however only 110 million people in the country have a smartphone. And with popular high-end products like Apple Inc's iPhone and Samsung Electronics Co's Galaxy devices still priced beyond the reach of many local consumers, budget-level offerings from Xiaomi and other Chinese manufacturers are positioned to sell well in the country.

A lack of patent protection in India can cost Chinese brands dearly though, as Xiaomi is no doubt learning for itself. Xiaomi is not the only Chinese company that has been ordered to halt its sales in India due to infringement allegations. Shenzhen-based G'Five encountered a similar roadblock several years ago. In 2010, G'Five sold some 35 million smartphones in India, giving it a 21 percent share of the local market. However, a patent infringement lawsuit launched by Ericsson and Nokia at the end of that year resulted in a massive drop in sales as well as steep legal defence fees.

Other Chinese companies could soon suffer a similar fate based on their lack patent development. Even in their own lucrative home market, brands like Coolpad, Oppo, Vivo and Meizu have only 334, 103, 7 and 4 patents respectively in China, according to reports citing figures from the State Intellectual Property Office of the PRC. Meanwhile, reports also say global powerhouse Ericsson has some 35,000 technology patents - not to mention an annual research and development budget of some $5 billion.

The high cost of patent licensing is likely one of the major reasons why some Chinese brands have been reluctant to protect themselves. Reports say that patent licensing could account for 20 to 25 percent of revenue for a mobile phone manufacturer. Chinese brands must realize though that they cannot expect to compete in overseas markets unless they comply with all relevant patent and licensing rules. The cost of compliance may be high, but so too are the potential gains to be had from overseas expansion. Here, Lenovo Group offers an illustrative example. The Chinese consumer technology giant has had to shell out hundreds of millions of dollars in patent licensing fees to sell its products in the US, a major world market where it claimed in May to have beaten Apple in personal computer sales.

For Xiaomi and its Chinese peers, the only way to grow globally is to obtain the rights to more patented technologies. This may require some short-term pains, but the long-term benefits of operating in key emerging markets like India are worth the expense.