CELLPHONES: Qihoo’s New Coolpad JV, Xiaomi Back In India

Bottom line: Qihoo’s new joint venture looks like a smart tie-up to promote its software and online services, while Xiaomi’s resumption of India sales looks like a hollow win in its patent battle with Ericsson.

Qihoo, Coolpad in JV

A trio of smartphone stories are in the news today, including updates on major news involving security software specialist Qihoo 360 (NYSE: QIHU) and the ultra-cool Xiaomi. The first headline has Qihoo moving into the overheated smartphone space through a major new joint venture with domestic giant Coolpad (HKEx: 2369). In the second headline, Xiaomi has been allowed to resume selling some of its smartphones in India, after a judge last week ordered it to stop sales amid an ongoing patent dispute with Swedish mobile technology giant Ericsson (Stockholm ERICb).

The other noteworthy headline has smartphone aspirant Huawei proclaiming it aims to topple Xiaomi and Coolpad, as well as global leaders Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930), to become China’s largest smartphone seller in the next 3 years. I’ll wish Huawei good luck in that endeavor, though I would also predict the chances of it succeeding are nearly zero.

Let’s start this smartphone round-up with the Qihoo story, which was first reported early this week but is now official with a detailed announcement on its new tie-up with Coolpad. (previous post) According to the announcement, the 2 sides will form a joint venture, with Qihoo investing $410 million for a 45 percent stake. (company announcement; Chinese article) Qihoo will load much of its free software onto Coolpad’s popular smartphones, which will become a key part of Qihoo’s bid to build an ecosystem around its various software and Internet products and services.

There’s no additional financial detail, but I do expect that Coolpad is probably putting most of its smartphone manufacturing operations into the joint venture and giving Qihoo the 45 percent stake in exchange for much needed cash. Coolpad and most of China’s other smartphone makers have been locked in a bloody battle for market share over the last year, and reports emerged in September that the company had laid off 10 percent of its workforce as it scrambled to cut costs. (previous post)

Qihoo is quite cash rich and can easily afford this joint venture, and I wouldn’t be surprised to see it ultimately buy Coolpad outright if the partnership is successful. The new joint venture looks like a smart long-term strategic move for Qihoo, which is under pressure to start showing some profit improvement to justify a huge run-up in its share price last year. But short term-focused investors weren’t too impressed, with Qihoo shares tumbling 7 percent to a 16-month low after the announcement.

Next there’s Xiaomi, which has been allowed to resume selling some of its smartphones in India, partially reversing a court order last week telling it to stop importing and selling its products. (Chinese article) The reversal has come from a panel of 2 Indian judges who modified the earlier ruling that came from a single judge. But conditions attached to the decision mean the previous decision may still prohibit Xiaomi from selling products with disputed technology developed by Ericsson, which filed the original complaint.

Announcement of this particular development looks like Xiaomi’s attempt to put a positive spin on the dispute, which has dealt setbacks to both the company’s image as a cool innovator and also to its global expansion plans. Xiaomi entered India in July, and the market has quickly grown to become its second largest. The bottom line here is that Xiaomi will still need to settle its dispute with Ericsson, and will probably have to ultimately pay royalties that will further erode its already razor-thin margins.

Finally, let’s close out this smartphone round-up with a brief mention of Huawei, which is struggling for attention even as Xiaomi and now Coolpad and Qihoo take most of the headlines. A Huawei executive forecast his company will become China’s top smartphone maker in 3 years, speaking in an interview on the sidelines of a Beijing event to launch a new model from its higher-end Honor brand. (English article) There’s not much more for me to say about this gutsy but nearly impossible prediction except for: Good luck!

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