ZTE Protests Vringo’s High-Cost Patents
A new complaint in Europe by smartphone maker ZTE (HKEx: 763; Shenzhen: 000063) is shining a spotlight on Chinese gadget makers’ dependence on foreign technology, which often ends up making them hostages to big western patent holders. I personally find ZTE’s new complaint against Vringo just slightly amusing, since ZTE and crosstown rival Huawei are consistently among the world’s largest global patent recipients these last few years — a fact both companies love to trumpet. Apparently many of those patents aren’t worth too much, which leaves companies like ZTE still quite reliant on foreign technology.
All that said, it’s also important to point out that patent holders do have a certain responsibility to charge reasonable prices for licensing their technologies that are central to particular industries. But the market should also play an important role: If a patent holder gets greedy and tries to charge too much, then that company will inevitably drive away customers and hurt its own business.
According to a company statement, ZTE says it has formally filed a complaint with the European Commission asking it to investigate Vringo’s licensing practices. (company announcement) ZTE argues that as a holder of key telecoms patents, Vringo is obliged to license its technology at fair prices to ensure competition in the European market.
ZTE says it has been in technology licensing discussions with Vringo since 2012, but has been unable to reach a deal. This complaint is part of an ongoing tug-of-war between ZTE and Vringo on the issue. Last year, Vringo convinced an Indian court that ZTE products were violating its patents, resulting in a temporary injunction banning the sale of certain ZTE products in the country. (company announcement)
Vringo has taken similar action against ZTE in Brazil, and has also targeted global giants Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOG) with other infringement lawsuits. I suspect that ZTE is finally going on the offensive against Vringo in Europe because it really needs to solve this issue to clear the way for its bid to become a global smartphone giant.
Such intellectual property issues could become an obstacle for many of China’s other smartphone aspirants as they attempt to move outside their domestic market, where patent law is still in its infancy and infringement is relatively common. Other smartphone makers to move abroad recently include Oppo and Xiaomi, both of which could face aggressive action from western patent holders in more mature markets like Singapore, the US and Western Europe.
This current case looks slightly similar to an anti-trust investigation now taking place in China against Qualcomm (Nasdaq: QCOM), the world largest cellphone chip maker. (previous post) Many Chinese smartphone makers also argue that Qualcomm charges unreasonably high prices for its chips, which are generally considered the best in the industry and command a large share of the mid- to high-end smartphone market.
Qualcomm, aware of the importance of the China market, has made moves to placate the Chinese anti-monopoly regulator. The investigation is still ongoing, but recent signals from at least one smartphone executive indicated that Qualcomm might be moderating its policies to offer more reasonable prices to Chinese manufacturers.
While China can take this kind of action at home to protect its domestic smartphone makers, it has far less influence on what happens outside its borders in disputes like this one between ZTE and Vringo. I doubt the European Commission will be too sympathetic to ZTE, since we haven’t seen too many other companies make similar complaints against Vringo. Instead, perhaps we’ll finally see a compromise between the 2 companies on the issue, which would allow ZTE to put the matter in the past and move ahead with its global smartphone drive.
Bottom line: ZTE’s ongoing dispute with Vringo highlights the dependence of Chinese gadget makers on global technology, which could hinder their global expansion plans.
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