Patent battles risk disrupting Xiaomi's international expansion

A patent dispute has forced Xiaomi to stop its smartphone sales in India

A banner advertising phones from Chinese handset maker Xiaomi

A banner advertising phones from Chinese handset maker Xiaomi

There's blood in the water and it comes from Xiaomi, a Chinese smartphone maker that risks becoming a target for patent holders that want the company to pay up.

Various patent battles have hit smartphone vendors across the world, and now Xiaomi is no exception. On Thursday, the Chinese company announced it had halted its product sales in India, due to a patent dispute with Swedish network equipment vendor Ericsson.

The legal troubles throw a wrench in Xiaomi's international expansion, and could open the company to even more lawsuits from other patent holders, analysts warn.

In Ericsson's case, the company said it had spent more than three years complaining to Xiaomi about the alleged patent infringement, which relates to the telecommunications technology used in the company's phones.

"Ericsson, as a last resort, had to take legal action," the company said in an email, which claimed that Xiaomi had declined to pay a fair licensing fee for the technology.

In response, Xiaomi said it was working with Ericsson to resolve the matter, without elaborating. But doing so will probably come at some financial cost.

Xiaomi has enjoyed an almost meteoric rise, becoming China's top smartphone maker this year. However, the company was only founded in 2010, and doesn't possess an extensive patent portfolio that so many older technology firms like Ericsson wield.

Although Xiaomi declined to comment on its patent activities, analysts expected that the company would eventually run into intellectual property matters at some point in its international expansion.

"It's possible lawsuits will be filed in other countries, and not just from Ericsson, but other vendors that want to use patents as a weapon against Xiaomi," said Wang Jingwen, an analyst with research firm Canalys.

Xiaomi, which still sells most of its phones in China, made India a focus of its international efforts. The company still has a small market share in the country, but its phones have been selling like hot cakes there.

It could simply end up paying Ericsson and other companies for access to their patents, but that could mean paying a hefty price.

"If Xiaomi is willing to pay for the licensing fees to Ericsson, the issue can be resolved," said Xiaohan Tay, an analyst with research firm IDC. "But the higher cost for smartphones may be passed on to consumers, and Xiaomi may not be able to offer phones at such a low cost to consumers anymore."

A major reason why Xiaomi has been so successful is because its products are so inexpensive. The company's latest flagship phone, the Mi 4, has high-end specs including a Snapdragon 801 processor, a 13-megapixel camera, and a 5-inch 1080 p screen, all in a polished metal casting for 1999 yuan (US$326), or less than half the price of an iPhone.

Some of the company's other phones are even cheaper and have helped the company quickly grow its market share in China. To keep its operation costs down, Xiaomi has ditched traditional advertising and brick-and-mortar stores, for an approach that focuses on selling and marketing its phones through the Internet.

Raising product prices, however, would dilute the brand, given that Xiaomi is known for offering low-cost phones, Tay said. "Also, India is a key market for Xiaomi and this dispute may enable the local vendors in India to gain some ground," she added.

It doesn't help that Xiaomi has also been accused of lifting ideas from competitors, including Apple, which might expose the company to more patent litigation.

On Tuesday, the Chinese company unveiled a new air purifier product, but soon after a Japanese firm alleged that Xiaomi had copied its own designs. The Japanese firm, called Balmuda, is considering taking legal action.

Xiaomi, however, still has certain factors playing in its favor. The company has been able to raise large amounts of funding from investors, and it still has plenty of room to grow in its home market of China, said CK Lu, an analyst with research firm Gartner.

"Even though they have some issues, the Chinese market is big enough to support a company like Xiaomi, and they can expand to other product lines," he said. To defend itself from lawsuits, Xiaomi could end up acquiring a technology company with a strong patent portfolio, he added.

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