In summer last year, lawyers representing Chinese telecom equipment maker ZTE Corp (中興) began writing to half a dozen local handset makers it believed used its patents. Its message was simple: It is time to pay up.
ZTE’s efforts to collect patent royalties — months ahead of Qualcomm Inc’s Chinese antitrust settlement this week — shows how that deal has already changed the way China’s booming smartphone industry does business, people with knowledge of the matter said.
As anticipated by ZTE, a key term in the settlement dissolved Qualcomm’s cross-licensing agreements in China that had given smaller Qualcomm customers free access to the patent portfolios of more established Qualcomm customers.
The settlement has allowed wireless patent holders like ZTE and Huawei Technologies (華為) to seek royalties, while introducing a new risk of litigation to China’s younger handset industry at a time when domestic patent law is gaining traction.
“For the first time, the settlement is forcing domestic manufacturers to recognize the value of IP [intellectual property] and consider how to use it strategically, which companies do in the West,” Mobile China Alliance secretary-general Wang Yanhui said. “That’s the real significance of the [Qualcomm] settlement.”
The competitive dynamics are particularly complex in China, the world’s biggest smartphone manufacturer and consumer, as large Chinese telecoms equipment makers that hold many essential patents for wireless technology also compete in the phone market against younger, nimbler manufacturers.
The settlement could prove tricky for companies like Xiaomi Inc (小米), a 4-year-old Beijing-based smartphone maker whose weak patent position has proved a major vulnerability. In December last year, a court in India temporarily halted its shipments there after Swedish telecom firm Ericsson complained Xiaomi had not been paying its royalties.
Although Xiaomi has been reported by Chinese media outlets to be one of the handset makers now targeted by ZTE’s lawyers, both companies declined to discuss the issue.
However, in response to media inquiries, Xiaomi president Bin Lin (林斌) said he expects Xiaomi to attract more patent threats and litigation from rivals, as does any young firm that enjoys explosive growth.
“This is true of any company, not just Chinese companies,” Bin said, adding that Xiaomi filed 2,000 patents last year and hopes to apply for double that number this year. “We’ve been focusing on building up our own IP. It’s going to take some time.”
ZTE declined to discuss its patent negotiations with other firms, but said in a statement, echoed separately by Huawei, that the Qualcomm settlement “is positive for the development and protection of intellectual property rights in China, and will help promote fair competition for technology innovators.”
Between 2007 and 2013, ZTE and Huawei filed for nearly 34,000 patents each, Thomson Reuters data show. The two Shenzhen-based companies have applied for more international patents than the rest of the top-10 Chinese companies combined, and their filing activity dwarfs that of leading Chinese Internet firms Tencent Holdings Ltd (騰訊) and Alibaba Group Holding Ltd (阿里巴巴).
Seeing the potential for big gains through enforcing its patent rights, ZTE executives recently directed a major US shareholder to consult industry analysts about the positive financial impact of chasing royalties, an individual with knowledge of the matter said.
“They’re taking this extremely seriously,” said the person, who requested anonymity to speak about a private issue.
Other observers said legal jostling is set to intensify, but there would not likely be an immediate eruption of high-profile court battles.
“It would be extremely costly and messy for ZTE to take Xiaomi to court, especially as a Beijing company with ties to power,” Wang said.
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