455475216
Photograph by Brent Lewin — Bloomberg via Getty Images

Can China’s smartphone makers thrive in countries which take IP rights seriously? Ask Xiaomi

Dec 12, 2014

News that India’s High Court of Delhi issued an injunction against Chinese smartphone upstart Xiaomi was a reminder of how much Chinese smartphone makers still have to grow. It was not, however, an indication that the Chinese can’t grow into international brands.

The Swedish telecom giant Ericsson filed suit in India complaining that Xiaomi did not pay royalties on its wireless technology patents. The court agreed and instructed Xiaomi to stop selling and importing in the country until February, when the court hears the case.

“Ericsson’s commitment to the global support of technology and innovation is undisputed. It is unfair for Xiaomi to benefit from our substantial R&D investment without paying a reasonable licensee fee for our technology,” Ericsson said in a statement.

Xiaomi had been on a roll in India. In October Xiaomi said it sold 40,000 phones in just four seconds in an online flash sale. Hugo Barra, vice president of Xiaomi global, said in a posting on Google Plus today the company had 150,000 registrations for its Redmi Note on the e-commerce site Flipkart just as the injunction came down.

That momentum is halted for now, but not quashed. Patent disputes in the smartphone industry are as common as hot specs on a new phone. The litigious history of Apple and Samsung, which included injunctions before the two sides agreed to a ceasefire, is but one example. According to Ericsson, Xiaomi had been unresponsive during three years of attempts by the Swedish company to get compensation for its standard essential patents (those essential in connecting a phone to a wireless standard) for GSM, EDGE, and UMTS/WCDMA standards. A Xiaomi spokeswoman did not respond to a request for comment.

“Xiaomi needs to act fast to reverse the injunction to protect its brand image in the country,” Canalys analyst Rushabh Doshi said in an email. According to Canalys, Xiaomi shipped close to 340,000 units to India in the third quarter.

A quick settlement is likely. Xiaomi doesn’t want to face Ericsson in court—a state-run Chinese newspaper reported last week Xiaomi only holds 12 authorized patents in China—and the smartphone newcomer wants to continue its early momentum in India.

Xiaomi can end an injunction quickly enough if it chooses. It can offer Ericsson a percentage of every device it sells in India. That will crimp operating margins, already slim on Xiaomi’s smartphones that sell for as low as $96 in the country, but allow Xiaomi to keep selling. By the time Xiaomi expands to Brazil and Mexico next year, as it has previously said it intends to, its patent portfolio and R&D could be expanded to give it more bargaining power in future patent lawsuits.

Xiaomi’s case in India isn’t isolated. Ericsson (eric) has filed suits against Indian-firms including Micromax and a separate Chinese smartphone maker Gionee, which has run a successful business in India for years. Gionee’s president William Lu told me about the case in a November interview at Gionee headquarters in Shenzhen. I asked him if Chinese smartphone vendors had expanded to India because like China, it has a reputation for lax patent enforcement when compared to Western Europe or the U.S. Lu stopped me. “Being in India, you cannot avoid the IP issue,” he said, and offered the Ericsson dispute as proof.

Xiaomi must have realized the same thing this week.

The Chinese smartphone makers’ lack of patents has been known for years. Ericsson’s suit in India is the first taste of the IP hurdle Xiaomi faces outside the favorable confines of China, where the court system established low royalty rates in a case involving the U.S. company InterDigital and under Qualcomm’s terms, the smartphone makers don’t file disputes against one another if they use Qualcomm chips (which almost all do).

If Xiaomi quickly settles with Ericsson in India, the episode might be seen as just a hurdle in Xiaomi’s global expansion.

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: http://www.djindexes.com/mdsidx/html/tandc/indexestandcs.html. S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions