Jacob Schindler

The average US consumer might not be familiar with the ZTE brand, but the latest figures from global intelligence firm IDC show that it has moved into fourth place in the American smartphone market, behind Apple, Samsung and LG. The Chinese company grabbed an 8% share of sales in the second quarter, up from just 4.4% at the start of 2014. ZTE has not exactly consolidated its gains yet, but its impressive growth offers a tentative success story for other would-be market entrants from China.

ZTE first set its sights on the smartphone sector after Washington DC officials moved to shut it out of the market for networking equipment, its core business. Instead, the company has focused on selling mobile phones: first as carrier-brand models, and now under its own name. The recent sales figures show that ZTE has edged ahead of Huawei, which has pursued the same strategy, as well as Lenovo and the Taiwanese brands active in the US. In contrast, ZTE controls just 3% of the Chinese smartphone market according to Canalys, which puts it eighth in the pecking order. Ruthless pricing makes it stand out from US competitors, offering respectable specs at a low margin.

No doubt the company’s vast pool of intellectual assets has allowed it to expand internationally with confidence; companies like Xiaomi sell many more devices in China but are still too wary of patent litigation to test the waters in the United States or Europe yet. ZTE reportedly has a pile of over 12,000 handset-related patent rights and 13% of the 4G patent space. It was the third largest PCT applicant last year. But while its hoard of patents has helped it establish freedom to operate, it has also benefited from the canny acquisition of research and development talent.

About a year ago, the Wall Street Journal reported that ZTE had set up a dedicated team to lure R&D talent away from the likes of Blackberry and Motorola. In a recent press release heralding 50 patent applications related to its new flagship smartphone, the Axon, the company trumpeted the role of Blackberry engineers, saying that several R&D teams recruited from the Canadian company had strengthened its patent accumulation efforts. This suggests that ZTE is  not necessarily as quantity-oriented as it might seem at first sight. Management probably recognises that the know-how of its lateral hires and the handful of high-quality IP assets they produce may be just as important to protecting market share as its worldwide stockpile of patent as. After all, in the end quality patents are what underpin successful and sustainable product lines.

Of course, ZTE is facing serious litigation battles in the United States, which it is safe to guess are being closely watched by its Chinese peers. IAM recently reported on court documents which revealed details of ZTE’s strategy in its global dispute with Vringo. These included plans to wage a PR battle seeking to cast the non-practicing entity as a “notorious patent troll”. This is one reason why the company waded into the US patent reform debate, signing up to the United for Patent Reform coalition alongside Google and Cisco. ZTE has also made frequent use of the inter partes review system, leading all Chinese entities with 17 challenges.

Will Xiaomi follow in the path of its more established compatriot? It has teased the prospect of a US launch on an 18-24 month horizon. Looking at ZTE’s patent strategy in the round it seems like a tall order for the much younger, much more modestly endowed competitor to match. ZTE’s rise to the number four position in the US has been a slow burn rather than the big splash, which up to now has been Xiaomi’s specialty. A low-key, unbranded entry seems very unlikely for the latter. It shouldn’t be any surprise at this point to see Xiaomi concluding big licensing deals, buying up portfolios or boasting of increased filing numbers. If all that is accompanied by a major headhunting effort, though, that could suggest that the company is one step closer to being on par with its more established competitors.