INTERNET: Xiaomi, Momo Bad Ethics Tarnish China Tech

Ericsson sues Xiaomi for infringement

A national anti-corruption campaign at major state-run firms has filled the headlines these last few months, but a spate of smaller scandals last week cast a spotlight on another lower-profile problem that is far too common in China’s private corporate sector. That problem is deficient business ethics, which created embarrassments twice for smartphone sensation Xiaomi, and also for social networking app developer Momo (Nasdaq: MOMO) and security software specialist NQ Mobile (NYSE: NQ).
Each case was slightly different, but the common thread was that all required a foreign angle to bring the ethically dubious business dealings to light. Without such international exposure, issues like intellectual property theft and violation of business contracts probably would never be uncovered in the public spotlight.

A big part of the problem is lack of experience and the wielding of local influence in China’s court system, where such disputes should be typically mediated. But the companies and their executives at the center of these scandals also have a role to play, and need to make a better effort to refrain from actions that are sometimes unethical and set a bad example, even if they aren’t always illegal.

Xiaomi’s first scandal last week involved patent infringement claims against the company by global telecoms equipment leader Ericsson (Stockholm: ERICb), which sued Xiaomi in an Indian court. (previous post) As a result of those actions, a Delhi judge ordered Xiaomi to stop importing and selling its trendy smartphones in India, the company’s second largest market. Ericsson later explained that it had tried unsuccessfully to get Xiaomi to pay royalties for the last 3 years, forcing it to finally take the legal action. Notably, Ericsson took that action in India, a market Xiaomi just entered in July as part of its new global expansion, rather than in Xiaomi’s home China market.

Just days after the India scandal broke, Xiaomi became the subject of similar allegations when it was accused of copying designs for its newly launched line of air purifiers by Japanese firm Balmuda. (previous post) Xiaomi never directly addressed the Ericsson claims in the first case, and in the Balmuda case simply said that its own air purifiers contained other features different from the Japanese company’s models.

The same week as Xiaomi was battling the copycat allegations, social networking app maker Momo faced its own scandal on the eve of its New York IPO. That case saw Momo’s CEO Tang Yan accused of violating a previous employment contract and stealing resources from his former employer, online game giant NetEase (Nasdaq: NTES). (previous post)

In that instance, NetEase issued a statement saying Tang had violated a no-compete clause in his contract when he set up Momo after leaving NetEase in 2009. NetEase further said that its resources had been used by Tang to develop Momo’s key social networking app. Like the Xiaomi case in India, NetEase’s allegations took advantage of an overseas venue to gain attention, coming as Momo prepared to raise more than $200 million in a New York IPO.

Finally there was NQ Mobile, whose Chairman and co-CEO Henry Lin abruptly resigned after he became “unable to perform his duties in this capacity due to personal reasons unrelated to the company”, according to a company statement. (previous post) No additional reason was given, but Chinese media said the abrupt departure may have been sparked by Lin’s ties to a business associate who was being investigated for possible corruption.

Xiaomi, Momo and NQ Mobile certainly aren’t the only private companies whose executives have engaged in this kind of ethically suspect behavior, even if laws weren’t necessarily broken in some instances. China’s private sector is filled with similar stories of copyright violations and workers leaving their employers, only to set up their own companies making rival copycat products months later.

Such shenanigans owe mostly to the youth of China’s market economy, which means that business ethics and legal procedures for settling disputes are still relatively immature. Beijing has taken steps to improve its courts as arbiters in such business disputes, and that campaign is starting to show signs of results. But as the Xiaomi, Momo and NQ cases show, companies and their executives also have a responsibility to behave more ethically in their business dealings and play by rules that will ensure the healthy and orderly development of China’s business environment.

Bottom line: Chinese companies need to clean up their bad ethics, or risk harming their image abroad and ultimately stifling industry development.

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