Xiaomi cuts deal with local Chinese chip-maker to beef up intellectual property: report

Xiaomi’s overseas expansion is in full swing, but for every country it expands to, it spends more money on licensing fees for the mobile chipsets used in its devices. This burden becomes a more costly and risky factor as the company launches in new markets.

Today, Datang Telecom’s wholly-owned subsidiary Leadcore Technologies signed a “technology transfer contract” with Beijing Songguo Electronics, a company that multiple Chinese media report is controlled by Xiaomi, according to Techweb and Sina Tech. The deal, worth a reported RMB 103 million (US$16.8 million), gives Xiaomi access to Leadcore’s core technology patents, boosting its intellectual property holdings. Xiaomi’s IP portfolio in its home country, which includes patents, is dwarfed by rival phone makers like Apple and Samsung.

Last week, QQ Tech published an article stating Xiaomi and Leadcore were creating a joint venture for the same purpose, but Xiaomi flat out denied the report. A company spokesperson told Tech in Asia:

The tie-up with Leadcore is not true. Patent infringement lawsuits are not a key concern for us when we expand to more countries. We consider a variety of factors including the population, disposable income, maturity of social media, and ecommerce. We do own patents in the US and Europe.

But after clearer details of the arrangement surfaced today, Xiaomi declined to comment.

Leadcore makes chips used to connect phones to their mobile networks; more specifically to China Mobile and other TD-LTE and TD-CDMA networks. Does Xiaomi intend to put Leadcore chips into its phones? Possibly, although it probably won’t replace the Qualcomm and MediaTek chips currently used in its devices. However, as more and more countries deploy TD-LTE networks, Leadcore could be a powerful ally.

Preparing for TD-LTE

Commercial TD-LTE networks, as opposed to the FDD-LTE standard that most countries use to connect smartphone owners to 4G-LTE networks, now operate in 27 countries with many more planned, according to the Global Mobile Suppliers Association. These networks require different chips – the kind that Leadcore makes – than those used on FDD-LTE networks.

Chip makers like Qualcomm, Mediatek, and Leadcore earn income both from the units they sell and the royalties they collect afterward for their use. The cost of these royalties recently became a point of contention between Chinese authorities and Qualcomm, the world’s biggest chip maker. The Chinese government has been pushing to boost the local mobile chip industry and break the current “monopoly” held by Qualcomm. A tie-up between Xiaomi and Leadcore could certainly help to that end.

Besides using Leadcore’s patents to cut costs in the form of licensing fees to other chip makers, the patents also give Xiaomi some legal ammunition. When tech companies get sued for patent infringement (which happens all the time in the mobile industry), handing over patents is a common way to settle the suit without going to court. If Apple sues Xiaomi, for instance, it can allow Apple to use Leadcore’s patents rather than hand over a check for 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. Xiaomi has faced little headwind in this regard so far, but as it expands to more countries, it makes itself increasingly vulnerable to patent lawsuits and higher licensing fees.

See: Why Chinese smartphone makers aren’t eager to sell their phones in the West

(Source: Sina Tech)