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 per cent 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 rivalling 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 US$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 US$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 (US$12.2 billion).

By: DocMemory
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