CELLPHONES: ZTE Pounces On Huawei With Patent Allegations
Bottom line: ZTE’s patent infringement allegations against Huawei are mostly noise that won’t result in any major legal action, and instead reflect the stiff competition that is plaguing China overheated smartphone market.
After several months without any major developments, China’s overheated smartphone market is showing new signs of stress with word that domestic heavyweight ZTE (HKEx: 763; Shenzhen: 000063) is accusing its larger rival Huawei of intellectual property theft. The complaint reflects the intense competition that has plagued China’s smartphone market for the last 2 years, and is likely to claim its first victim or two within the next 12 months.
This particular action also shows that Huawei and ZTE are becoming quite adept at playing the western game of filing lawsuits to protect their intellectual property and attack rivals. Both companies have been sued by their western peers in the past, and their domestic rival Xiaomi suffered a setback last year when it had to stop selling some of its models in India after Ericsson (Stockholm: ERICb) filed a patent complaint.
According to the latest reports, ZTE has complained that 2 of Huawei’s models, the X2 from its Honor line of phones and its newly released P8, both illegally copy certain features of models from its own higher-end Nubia line of phones. (Chinese article) Most of the complaints center on the picture-taking technology used in Nubia phones.
ZTE said in a statement it would use legal methods to deal with the issue, though it wasn’t clear if it has filed a lawsuit. Huawei responded by denying the allegations, saying it developed the technology that ZTE accuses it of stealing. In an interesting twist to the story, both sides have been quite vocal on the issue over their microblogs, in what looks like an attempt to wage their war in the realm of public opinion.
As I’ve said above, both Huawei and ZTE are becoming increasingly adept at accusing others of patent infringement, borrowing a popular tactic of their western peers like Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930). Last year both companies threatened the younger and more nimble Xiaomi with patent lawsuits (previous post), and Huawei has threatened ZTE at least twice in the past for alleged infringements related to their core telecoms equipment businesses.
While this latest dispute may provide some headlines over the next few days, I expect little if anything will happen if and when any lawsuits are filed. That’s because China’s courts are notoriously slow and inexperienced in intellectual property law, and the Huawei phones at the center of this new dispute will probably be obsolete by the time any court decision comes. More experienced western courts have addressed the issue of short life cycles for products like cellphones by allowing judges to quickly issue temporary orders to halt sales of products if they feel a complaint may be justified.
Instead of focusing on the intellectual property angle, this particular case looks like a better opportunity to focus on the fact that China’s crowded smartphone market remains overheated and probably has at least 2 or 3 too many players. A quick view of the latest statistics shows that neither Huawei nor ZTE was among the top 15 smartphone models in China using Google’s Android operating system over the last 3 months, with Xiaomi and Samsung leading that group.
But Huawei did have 3 models in the top 30, versus none for ZTE, according to Umeng Analytics. That’s not a huge surprise, since ZTE seemed to be scaling back its efforts in China over the last year, dropping out of the top 5 smartphone makers as it focused on its more upscale, niche-oriented products like Nubia. I doubt ZTE is prepared to completely abandon its home market and is mostly making noise with these latest complaints. But some of its smaller rivals have far less resources to survive the current smartphone wars, and could easily make such an exit by the end of this year.
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