Why Qihoo’s Coolpad investment is a good idea, but won’t set China’s mobile market on fire

While it may have been overshadowed in the global press by Baidu’s high-profile investment in Uber, make no mistake: Qihoo’s US$400 million partnership with Coolpad earlier this week is a big deal.

See: China’s Qihoo gets serious about mobile, throws $400M into joint venture with smartphone maker Coolpad

Qihoo CEO Zhou Hongyi has been interested in getting into the mobile market for years. Qihoo experimented with mobile partnerships repeatedly in 2012, releasing three separate phones with manufacturing partners including Haier and Huawei, but none did particularly well. This week’s investment is a much stronger push, though: Qihoo has put US$400 million into a new joint-venture with Coolpad that it will use to build an entire mobile ecosystem, not just a branded handset. Zhou Hongyi said that the new JV aims to give users “smooth integration of [mobile] hardware, software and applications.”

The companies are a good match…

On paper, the partnership makes a lot of sense. With 12 percent of China’s mobile market (in terms of handset shipments), Coolpad is likely the strongest available domestic partner Qihoo could have chosen. Neither Lenovo nor Xiaomi, the two strongest domestic options, would likely have been interested in a partnership, and the lackluster reception to Qihoo’s Huawei-made handset in 2012 probably ruled out that company too. Coolpad may not be the best theoretical partner for Qihoo, but it’s likely the best available partner. And a 12 percent market share is nothing to sneeze at in China’s massive mobile scene.

For its part, Coolpad stands to gain from linking up with Qihoo, too. Although the company makes and ships a lot of phones domestically, it does not have the brand recognition or reputation that Qihoo does. Its attempts to ape Xiaomi with its Dazen brand have not yet met with success, and partnering with a stronger brand that knows software as well as Coolpad itself knows hardware could be the move Coolpad needs to make its products actually cool.

Given that, I think that unlike Qihoo’s previous forays into mobile, its partnership with Coolpad will prove to be more than the sum of its parts, and may ultimately lead to a more desirable mobile brand than either Qihoo or Coolpad could have created on their own. This is a smart move from both companies.

…but they won’t set China’s mobile market ablaze

With that said, I don’t expect whatever the two come up with to be able to rival the market’s biggest players anytime soon. This joint venture may be a success, but it will not be the next Xiaomi. Based on their previous efforts, neither Coolpad nor Qihoo has the design chops to produce products with the raw appeal of Apple or Xiaomi. And neither of them has shown the flare for creative marketing that helped propel both of the aforementioned companies to the top of the mobile heap.

Change is always possible, of course, but I wouldn’t count on either company being able to produce it. Coolpad has long had a reputation as more of a low-end follower than an innovative design leader. And while Qihoo can probably lay claim to more innovation, the constant rumblings about a high-pressure and hostile working culture at the company lead me to believe it doesn’t play well enough with others to innovate in a joint-venture setting like this.

For example, in a 2012 interview a Qihoo insider told Tech in Asia: “[Qihoo CEO] Zhou [Hongyi] has failed to create a company structure/culture that encourages cross-functional cooperation, the small teams fight alone. Only lone wolf type of teams do well.” That was a while ago, of course, but there are signs that problems still remain. Qihoo has seen several high-level departures this year, including the loss of a board member just recently, reportedly due to disagreements with the blustery Zhou Hongyi.