[A2k] Story about XIAOMI's efforts to overcome patent barriers in India, and other countries

Jamie Love james.love at keionline.org
Sat Dec 20 11:17:41 PST 2014

This story illustrates some of the shifts in policy in China, as regards
patents.  Jamie



December 17, 2014
By Major Tian

As it pushes for internationalization, what is Chinese smartphone maker
Xiaomi up against?

China’s hottest smartphone maker Xiaomi is in the hot seat right now. Last
week, the company hit a roadblock in India, where its phone sales were
suspended under a court injunction because of patent infringement
allegations brought up by Swedish telecom giant Ericsson.

The injunction is the first major intellectual property hurdle for Xiaomi,
which started its overseas expansion last year with the help of former
Google executive Hugo Barra. Among the countries Xiaomi has already
entered, many believe that India could be the company’s largest market
outside China. Since Xiaomi launched in India in July, it claimed to have
sold more than half a million handsets by November. Xiaomi’s India head
Manu Jain even told the media in October that the company was considering
manufacturing locally next year.

For Xiaomi, the good news is that days after the injunction, the Indian
court temporarily lifted the ban on some models of Xiaomi’s phones that use
Qualcomm chips. Other models still won’t be in stores at least until early
February, when a court hearing about the patent dispute is scheduled.
Although the injunction is in India, it has ignited a heated debate back in
China about whether Xiaomi’s business model is sustainable in the long run.
So far Xiaomi has enjoyed rapid growth with little in the name of
intellectual property challenges, thanks to American chipmaker Qualcomm. As
the dominant player in the mobile chip market, Qualcomm has been able to
pool patent licenses from its clients in China through cross licensing
agreements; and as a client of Qualcomm, Xiaomi is able to use any patents
from the pool for free without legal consequences.

However, this special arrangement has been under scrutiny since China
launched a year-long anti-trust probe against Qualcomm in late 2013. If
authorities eventually strike down the provision, Xiaomi may be vulnerable
to lawsuits from big patents holders like Huawei and ZTE.

So has Xiaomi opened Pandora’s box? How will the lack of patents impact its
business both in and outside China? We posed these questions to Tony Tong,
Visiting Associate Professor of Strategic Management at Cheung Kong
Graduate School of Business. Tong says that although Xiaomi is aware of the
patent problem and has already started building up its patents portfolio,
the company still faces huge risks, especially when expanding into
developed markets.

Tong, who has done research on how patents influence Chinese companies’
strategies and is also a co-founder of the Chinese Patent Data Project,
shares his insights in this interview.

Q. Xiaomi doesn’t have a lot of patents. Will that be a bottleneck for its
growth down the road?

A. Xiaomi currently has 1,500-odd patent applications in China, most of
which were filed in the past two years. But only about 100 of them have
been granted, because it usually takes several years for the State
Intellectual Property Office (SIPO) to complete the process. Among those
100, there are only a dozen invention patents (the rest are design and
utility model patents). In comparison Apple has over 1,100 granted patents
in China and about half of them are invention patents.

It also has very few patents overseas with patent offices in the US or
Europe. So it was kind of hard to imagine that such Xiaomi [would do so
well without patents) in this industry. So when I heard about the
injunction on Xiaomi in India, I wasn’t very surprised.

Xiaomi could face more problems like this in the future, especially in
developed markets like the US and Europe. One important reason that Xiaomi
can sell at low prices in China, I think, is that it doesn’t spend that
much on licensing fees—it paid some to Qualcomm but not significantly to
others. And in overseas markets, Xiaomi may be in bigger trouble, because
not only can companies like Apple and Ericsson bring lawsuits against it,
[but also] a lot of non-practicing entities, or what we call “patent
trolls”, may target it. Patent trolls can cause a lot of damage because
they time their legal actions carefully, or they ambush, which give the
companies very few options.

Q. Can Xiaomi just buy its way out, since it has supposedly made a lot of

A. The ICT (information and communication technology) industry is what we
call a “complex” industry when it comes to technologies and patent
protection. There are simply so many patents out there and it’s impossible
for one company to own them all. Although companies in this industry
usually own a large number of patents—to design and manufacture a product
requires the use of many patents that are owned by others. So companies
often use their own patents as bargaining chips in cross-licensing deals.
.But cross-licensing is a two-way street—each party has to offer its own
patents and they need to be valuable to the other party.

Xiaomi can pay up licensing fees or buy patents, but [if] they’re to buy,
they’ll have to buy a big number of them, which can be extremely expensive.
For example, Google spent billions on the transfer of Motorola Mobility’s
intellectual property (mainly patents) in 2012; in the same year, Microsoft
bought 925 patents from AOL for $1.1 billion. (Some experts argue that
paying up licensing fees can result in a 5% to 20% cost rise for Xiaomi.)

Q. Do you think there’ll be a patent war between Chinese cellphone makers,
once Qualcomm’s model stops working?

A. I think yes. [Lawsuits on patents] are like a feature of the ICT
industry. Companies like Huawei and ZTE will likely cause some trouble for

Xiaomi is very successful at branding and marketing its products, but
that’s not enough in this industry. To sustain its position
internationally, or even domestically, Xiaomi needs to have real
technological capabilities and a lot patents covering those technologies.

If Xiaomi is in, say, the fast-moving consumer goods industry, then maybe
it can just leverage its marketing power and pull ahead more easily. But it
is not.

Q. Is Xiaomi doing anything about its lack of patents?

A. It definitely realized the problem. And I think that’s why Xiaomi is
expanding into so many other spaces (such as TVs, set-top boxes, wireless
routers and air purifiers), where patent costs are lower, to diversify its
product portfolio.

In fact, Lei Jun, the founder of Xiaomi, also invested in and controls a
company called Zhigu. This company follows a similar business model to
Intellectual Ventures (a well-known, top-five patent owner in the US,
sometimes accused of being a patent troll), which does venture capital
investment and IPR (intellectual property rights) management. Zhigu has now
acquired a large number of patents and has also invested a lot on start-ups
and individual inventors.

But it’s not an easy business at all, since it requires a network of
top-notch technology experts who know what patents or future inventions are
important in specific industries. It’s harder to do so in China because of
the bigger environment [of less IPR protection and high quality

But I do believe that as the situation in China continues to improve, more
and more business models around IPR management will emerge. And we’ll see
more companies like Zhigu that play as patent market intermediaries.

Q. Will intellectual property protection in China continue to improve?

A. I think so. People in the industry say that copyright and trademarks
have enjoyed their “spring” in China in the past couple of years; and the
next two years could be “the spring of patents”.

James Love.  Knowledge Ecology International
KEI DC tel: +1.202.332.2670, US Mobile: +1.202.361.3040, Geneva Mobile:
+41.76.413.6584, twitter.com/jamie_love

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