Although Chinese-based smartphone makers Xiaomi and OnePlus have garnered attention and market share this year as sales of their low-cost models have thrived, the companies face obstacles to expanding globally, including patent litigation and a lack of brand awareness among Western consumers.
In some ways, these obstacles are very similar to the hurdles that more established Chinese players Huawei and ZTE have had to overcome, and to an extent still are working to surmount. Disputes over intellectual property can halt sales in a country, as Xiaomi learned this week in a spat with Ericsson (NASDAQ: ERIC). And even when there is no threat of litigation, Chinese companies have to work hard to make their brands known.
What's remarkable is that a number of Chinese companies are now in a position to become global players. Lenovo, Xiaomi, Huawei, ZTE and OnePlus make up half of the world's top 10 smartphone vendors by shipments, according to data from Strategy Analytics cited by the Wall Street Journal. Three years ago only Huawei and ZTE were in the top 10.
Xiaomi, which only started selling its smartphones in 2011, sells its phones in batches online, and the devices often sell out in minutes. The company's model relies on inexpensive phones and services like apps and games that it makes revenues on. Indeed, Xiaomi sells its flagship Mi 4 starting from 1,999 yuan ($323) in China--that's about a third of the price of Apple's new iPhone 6. The company's model has proven successful in China, where Xiaomi surpassed Samsung Electronics in the second quarter of this year as the country's top smartphone maker, according to research firm Canalys.
Yet Xiaomi confirmed it halted sales in India, a fledgling expansion market, after a court ordered it to do so this week while it waited to hear a patent complaint made by Ericsson that Xiaomi is violating its wireless patents. Hugo Barra, Xiaomi's global vice president, said in a post on Xiaomi's Indian website that the company was looking at the matter and assessing its legal options. Barra noted that in the last two days Xiaomi had received about 150,000 registrations for the Redmi Note device via the Indian online retailer Flipkart, its main distributor in the country.
"Our sincere apologies to all Indian Mi fans! Please rest assured that we're doing all we can to revert the situation," he wrote. "We have greatly enjoyed our journey with you in India over the last 5 months and we firmly intend to continue it!"
The ban by the Delhi High Court came after Ericsson said that it has tried for more than three years to negotiate licensing for patents with Xiaomi. "It is unfair for Xiaomi to benefit from our substantial R&D investment without paying a reasonable licensee fee for our technology," the company said in a statement, according to Bloomberg. "We look forward to working with Xiaomi to reach a mutually fair and reasonable conclusion, just as we do with all of our licensees."
Xiaomi started in China but has expanded to India, Indonesia, Singapore and other Asian countries. Barra has said the company is looking at Brazil, Mexico and other markets where its low-cost business model can thrive.
Yet there is also reason for Xiaomi to be cautious, according to ZTE USA CEO Lixin Cheng. "Many Chinese vendors have to think twice before they make the investment to expand" he told the Journal. "If you are not innovative, you are running a high risk of violating others' intellectual properties."
OnePlus co-founder Carl Pei noted that because the company is selling its smartphones essentially at cost, it is not making much money, but hopes to build up its user base and then monetize them through software and services, as Xiaomi has done. He noted that OnePlus's sales outside of China are set to surpass sales inside the company this year, adding that the company has a global staff.
Still, Pei acknowledged that even though OnePlus stores its global data on Amazon (NASDAQ: AMZN) servers in the U.S., the company faces skepticism because it is based in China. "I think it boils down to understanding your users and what they worry about and acting in their best interests," he told the Journal. "Whether we like it or not, China still has a very poor image globally. Before, it would be because of the poor product quality and now increasingly it's because of cyberwarfare between different countries."
Meanwhile, Chinese firms face a lack of brand awareness. One of the reasons Lenovo spent $2.91 billion to acquire Motorola Mobility was so that it could sell Motorola-branded phones in Western markets along with reintroducing the brand to China. Lenovo can also take advantage of Motorola's patent portfolio.
According to the Journal, Interbrand's Best 100 Global Brands ranking this year included just one Chinese brand: Huawei, at No. 94. To boost its brand profile in the U.S., ZTE became the official smartphone of the New York Knicks and Golden State Warriors basketball teams, building on similar October 2013 deal with the Houston Rockets. This summer, 16 percent of those in Houston surveyed by the company said they knew ZTE, a sharp uptick from 2013. But the findings offer a look at how far ZTE--and other Chinese smartphone makers--have to go.
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