CELLPHONES: Xiaomi Hits Roadblock In India

Bottom line: Xiaomi is likely to quickly settle a patent dispute against it by Ericsson in India, which could slightly raise its costs but won’t affect its longer term development in the market.

India judge crimps Xiaomi’s global expansion

The global expansion plans of fast-rising Xiaomi may have hit a major roadblock, with word that a court has ordered the company to stop importing and selling its popular low-cost smartphones in India. Xiaomi had been targeting India as one of the main drivers in its campaign to become a major global smartphone brand, and has made a number of major moves in the market this year. But now it will have to deal with this new litigation, which is coming from global telecoms equipment giant Ericsson (Stockholm: ERICb) over patent infringement claims.

India is certainly one of the most promising markets for China’s newly minted smartphone makers, since the 2 countries have many similarities. Average incomes for residents in both markets are relatively low, making them ideal for the lower prices of Chinese smartphones that can cost less than $100 apiece. At the same time, both countries have more than 1 billion potential mobile consumers, as well as newly launched high-speed 4G networks that are ideally suited to smartphone use.

But this latest news shows that India may end up as a legal quagmire for Chinese smartphone makers, which are seen as outsiders and thus treated with relative neutrality and perhaps even some bias by the Indian court system. Chinese smartphone maker ZTE (HKEx: 763; Shenzhen: 000063) has also been embroiled in its own series of patent-related court actions with US-based wireless technology firm Vringo (Nasdaq: VRNG) in India, at times resulting in orders to stop selling its smartphones there.

By comparison, Chinese smartphone makers would rarely face such actions in their domestic market, where they are generally favored by a home court system with less experience in patent disputes. But Xiaomi is quickly learning that it will need to play by international rules as it moves further from home, and that it’s likely to draw more lawsuits like this from major international patent holders as it enters foreign markets.

According to the latest reports, the Delhi high court issued an order this week barring Xiaomi from importing and selling its phones in India, following the patent infringement claim filed by Ericsson. (English article; Chinese article) The reports cite Xiaomi’s recently named India head Jai Mani saying the company hasn’t been officially notified of the order, and that its legal team is evaluating the situation based on the media reports.

Xiaomi launched its globalization drive earlier this year with an entry to Singapore, and since then has moved into several other markets. It started selling its popular lower-cost models in India in July, and since then it has sold more than 500,000. That surge has made India its largest market outside China, and helped Xiaomi become the world’s third largest smartphone maker in this year’s third quarter, behind only far more established players Samsung (Seoul: 005930) and Apple (Nasdaq: AAPL).

This kind of litigation isn’t all that unusual, and ZTE and rival Huawei have faced similar action in Europe. Still, such legal wrangling can be a major distraction and can also drive up prices if smartphone makers are ultimately forced to pay royalties to companies like Ericsson and Vringo. That also ultimately undermines the Chinese manufacturers’ competitiveness, since low prices are their main advantage over global rivals.

All that said, I do expect that Xiaomi will move quickly to try and resolve this Indian dispute, since the market is too important for its global expansion and Ericsson would be quite a formidable opponent in court. At the end of the day Xiaomi is quite a cash-rich company and can probably afford to pay Ericsson some money. What’s more, the company is also one of the few Chinese names that’s good at brand building, and thus is less reliant than some of its domestic rivals on low prices to remain competitive.

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