Xiaomi’s phenomenal growth threatened by patent dispute

• Partial ban of sales in India is symptomatic of larger issues
• To succeed it must pay royalties or develop own technology

WHILE the good times for Xiaomi Inc continue in China and large parts of South-East Asia, the same cannot be said for the upstart device maker in one of the most populous nations in the world, India.
 
Last week, The Times of India reported that the Beijing-based company and its retail partner Flipkart have been ordered by the Delhi High Court to cease selling Xiaomi smartphones in India, at least until Feb 5, 2015.
 
The issue surrounds a patent infringement suit brought by Swedish telecommunication gear-maker Ericsson against the Chinese manufacturer.
 
The Guardian reported that Xiaomi is “restrained from manufacturing, assembling, importing, selling or advertising” its smartphones in India, citing court documents released to the Economic Times.
 
Also, India’s Customs officers have been ordered to block the import of smartphones or other devices that potentially infringe on Ericsson patents until further notice, the UK-based daily noted.
 
The Beijing-based smartphone and tablet maker has seen a phenomenal rise since its birth in 2010. Research firms IDC and Strategy Analytics both rate Xiaomi as the third largest smartphone maker in the world.

The company officially launched its product and base in Malaysia earlier in May, and have since become a favourite amongst smartphone shoppers, even challenging more established brands like Samsung, Apple, HTC, Sony, and LG. Its aggressive online-only business model and huge fan base has been attributed for its success.

In China, Xiaomi has overtaken Samsung as the most popular smartphone, according to a recent report from analyst firm Canalys. However, the company's profits remain thin, on the back of its aggressive spending and growth, reports Forbes.
 
When contacted by Digital News Asia (DNA), a Xiaomi spokesperson declined to answer any specific questions but instead referred DNA to an official statement made on Dec 12 by Hugo Barra, its international vice president, on the company’s Facebook page.
 
“We have been committed to continue our sales of Redmi Note and Redmi 1S devices in India … However, we have been forced to suspend sales in India until further notice due to an order passed by the Delhi High Court.
 
“As a law abiding company, we are investigating the matter carefully and assessing our legal options. Our sincere apologies to all Indian Mi fans… Stay tuned for more information.”
 
On Dec 17 however, The Times of India reported that Xiaomi won a brief reprieve from this ban as the Delhi High Court is allowing it to sell certain handsets to consumers.
 
In reaction to this, Barra posted on Xiaomi’s Facebook page saying that the Delhi High Court has since allowed the company to resume sales in India subject to certain terms. “The good news is that Redmi 1S is coming back next week and we’ll be having our next sale on Tuesday, Dec 23.”
 
Meanwhile, Reuters noted that the suit could be the start of a string of patent challenges. Citing company insiders, the news agency said Xiaomi’s leadership has privately acknowledged for years its vulnerability to patent entanglements.
 
“The higher risks of IP (intellectual property) litigation in Western markets even played a role in shaping Xiaomi's strategy of expanding in India and South-East Asia,” Reuters quoted the sources as saying.
 
Short- to mid-term impact

While the ban on Xiaomi smartphones has been reduced to a partial one now, analysts DNA spoke to said that these issues were the Chinese handset maker’s growing pains as it strives to become a truly global company.
 
In the longer term however, many expect the company to weather this patent storm and to play ball by agreeing to license patents to technology that it uses, instead of getting into such disputes that could stall its growth momentum.
 
Katyayan Gupta, a Forrester Research analyst based in India, said that in the short term, the halt of Xiaomi handset sales will cool off the ‘Xiaomi mania’ in the country to some extent.
 
However in the longer term and if the ban isn’t lifted soon enough, consumers would not wait for a Xiaomi phone, he cautioned.
 
“They will move on and find equivalent substitutes, of which there are plenty available,” he told DNA via email.
 
Fellow Forrester Research analyst Clement Teo noted that this fiasco may have an impact on Xiaomi’s brand reputation, and that this could potentially drive some customers away.
 
Asked how Xiaomi’s competitors would capitalise on this, Gupta said Xiaomi has a winning formula in India: Come up with a smartphone with great specs and low pricing, and leverage quick time-to-market by selling via an online market.
 
“Competitors need not reinvent the wheel. If they can follow the above formula, they should be able to benefit from this ban,” he argued.
 
Teo added, “Xiaomi's rivals must ‘out-market’ it to drive and grow brand affinity with users, as using low-cost pricing as a tactic will not work in India against Xiaomi.
 
“What will work would be to introduce a smartphone packed with features that rivals the Xiaomi models at an affordable price point, and to put a marketing engine behind it to drive demand,” he said.
 
Gupta however warned that Xiaomi needs to ramp up on inventory so that it can meet customer expectations in India.
 
Unlike Apple, whose customers are fiercely loyal, he said Xiaomi sells devices to the masses and the short supply of devices can create unhappiness in customers.
 
“This will negatively impact its brand in India,” Gupta said. “They will also need to supply their products to other online and offline channels as well.”

A deeper challenge?
 
Meanwhile, Neil Shah (pic) of Counterpoint Research said there could potentially be a larger underlying issue for Xiaomi, beyond the short- to mid-term impact it is facing today.
 
Speaking to DNA via email, the research director said that the temporary lifting of the ban based on certain conditions has got something to do with circumventing the kind of chipsets that is at the centre of the dispute.
 
“I believe the ban has temporarily lifted for some models – possibly for those powered by a Qualcomm chipset – so that their introduction to the market would not violate patent infringements,” he suggested.
 
“Hence the cheaper version of Redmi Note (non-4G) based on a MediaTek chipset won’t be available for sale, but the Qualcomm version would be allowed for sale,” he added.
 
Despite the partial lifting of the ban, Shah believes that the patent dispute in the long run would still affect Xiaomi’s current cost structure in a new market where it is trying to set up and expand.
 
“Xiaomi’s strength has been its leaner cost-structure, and paying millions of dollars in royalties would force it to re-jig its cost-structure and thus dilute its competitive pricing edge,” the analyst said.
 
Shah said that if Xiaomi were to settle with Ericsson and become a licensee, then it could be showing the world the chink in its armour.
 
“This could make Xiaomi become highly vulnerable, which may in turn attract many more patent disputes and companies knocking at its doors demanding royalties.
 
“It would then put the brakes on Xiaomi’s expansion plans and put pressure on its costs [structure] in order for it to remain highly competitive,” he argued.
 
Shah also believes that the company’s foremost weakness is its low investment in research and development, especially on the hardware side.
 
“If it can’t invest for the longer term in these technologies then it will have to license technology from others,” he argued. “It would then also need to figure out a way to continue remaining competitive with its future products.”
 
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