China is home to some of the world’s biggest smartphone makers, but if you’re living in Europe or the US, you might never know it. With a few exceptions, companies like Xiaomi, Huawei, ZTE, and Lenovo haven’t made much of an effort to sell their phones in western countries. Instead, China’s smartphone brands target the developing world for overseas growth, seeing greater opportunity in places where many households have never even owned a PC, much less a smartphone.
These companies have danced around western nations for some time, but not for fear that they wouldn’t be loved by consumers. The biggest factors that keep Chinese smartphone makers out of the West – and even developed countries in Asia like South Korea and Japan – are carrier subsidies, patents, and cultural stigma.
Carrier subsidies
Most Chinese smartphone makers rely on a low price tag to draw in customers, but in Western countries where carrier subsidies are prevalent, that advantage is heavily diminished. That makes more expensive premium phones preferable even to less well-off users. In China and other developing countries, subsidies are either not available or just aren’t as popular as buying a phone outright.
Here’s an example: the price difference between a Xiaomi Mi4 and an iPhone 6 in China is US$537, assuming both are purchased unlocked. But in the US, even if the Mi4 price was subsidized to zero with a two-year contract, the iPhone 6 only costs US$200. The price margin in the US is much slimmer, wiping out much of Xiaomi’s competitive edge.
This probably won’t change anytime soon in the US, but the numbers show European telcos are starting to move away from carrier subsidies.
Patents
When Lenovo recently finished its acquisition of Motorola, it became the third-biggest smartphone manufacturer in the world by shipments as of last quarter. But CEO Yang Yuanqing admitted the most important aspect of the US$2.91 billion deal wasn’t being able to sell Motorola devices, but to get its hands on Motorola’s large trove of patents.
Those patents serve two major purposes. The first is they cut licensing fees that Lenovo would have had to pay to other mobile phone manufacturers for much of the technology used in its phones. These patent fees vary by country, and are typically much higher in western nations.
Secondly, when tech companies get sued for patent infringement (which happens all the time in mobile), handing over patents is a common way to settle the suit without going to court. Should Samsung sue Lenovo, for example, Lenovo can opt to let Samsung use some of its patents rather than hand over a check for hundreds of millions of dollars or waste resources on a court battle. This is called a cross-licensing agreement, and it usually happens between two parties to avoid litigation and settle these types of disputes.
Up-and-coming smartphone makers in China have faced little headwind in this regard so far, but as they expand to more countries, they make themselves increasingly vulnerable to patent lawsuits. When a series of design-related lawsuits flared up between Apple and Samsung, the two companies had ongoing court cases in South Korea, Japan, Denmark, France, Italy, Germany, Australia, the UK, and the US.
Lenovo has now made it over this hurdle, as have ZTE and Huawei. But young companies like Xiaomi are lacking in comparison. According to China’s state intellectual property bureau, Apple’s patents outnumber Xiaomi’s 48-fold. Xiaomi applied for 1,141 patents last year, compared to Huawei’s 71,903 applications. Without an adequate patent library, a smartphone maker can expect to sink about 20 percent of its revenue into patent-related costs.
Stigma
Made in China. It’s a trope that exists both among consumers and regulators. Western consumers are often put off by the label, associating Chinese-made goods with cheap materials and poor build quality. That’s a stigma that’s starting to wear off as some Chinese brands prove their mettle.
But regulators are still keen to throw up red flags any time a Chinese product crosses their desks. Huawei, due to its close ties with the Chinese government, has run into legal barriers that deterred its expansion into several countries. In the US, Huawei and ZTE were blocked from securing contracts to provide telecom equipment in the face of regulators’ ire. Even though those pronouncements didn’t extend to smartphones, Huawei’s image has been tainted.
Politics also comes into play. A squabble between governments can easily suck private companies into the crossfire. The US punished Huawei at a time when tit-for-tat cyber espionage allegations were all the rage. Xiaomi now faces its own wave of regulatory antagonism, with ongoing investigations in India, Singapore, and Taiwan. Entering western countries could be even more of a hassle with those scars on its resume.
Moving to new countries will require more than a marketing campaign and shipping phones. Smartphone makers also need to purchase server space off Chinese soil to be trusted with users’ personal data. Reacting to a wave of negative press brought about by revelations that Xiaomi was funneling user info back to China, the company quickly commenced a migration of user info.
See: For Chinese tech companies venturing overseas, China is a toxic brand
Lenovo, Huawei, and ZTE are probably the closest to entering developed countries. Huawei, it should be noted, is already one of the biggest smartphone brands in several European countries. These firms have a wealth of patents and high-end smartphone models in the same price range as Apple and Samsung. Lenovo, once owned by IBM, is already a trusted PC brand on most continents.
Xiaomi will have to work a little harder, but it has a hell of a lot of momentum behind it.
Chinese smartphone brands are working to break the status quo in the long run, but for right now they’re more concerned with snatching up the low hanging fruit offered by developing nations, especially in South and Southeast Asia.
This post Why Chinese smartphone makers aren’t eager to sell their phones in the West appeared first on Tech in Asia.
Why Chinese smartphone makers aren’t eager to sell their phones in the West
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