Jacob Schindler

Yesterday, this blog covered a major deal between Xiaomi and Microsoft that saw the Chinese company acquire 1,500 patents along with a cross-licence. While the financial details are unknown, the fact that Xiaomi is now likely among the top 200 or so holders of US patents has to be seen as a coup for the smartphone startup. It also comes just three months after some big changes to its relatively young IP function.

Two weeks ago, at the Licensing Executives Society International’s Annual Conference held in Beijing, Paul Lin delivered a keynote address on “Growing a leading global business through innovation and business”. Lin spoke in his capacity as “vice president of intellectual property, Xiaomi Corporation”. It was the first public hint (in English, at least) of something intermediaries working with the company have observed for several months: that Zhigu Holdings, a patent aggregator of which Lin has served as president and chief operating officer, has in fact been absorbed into Xiaomi’s corporate structure.

Zhigu was founded in 2012, and says its main business is IP rights investment and monetisation, with the goal of helping Chinese companies succeed internationally. In 2014 it launched Ruihuan IPR Funds, China's first IP investment fund.

It appears that the change took place earlier this year, when Xiaomi became Zhigu’s controlling shareholder through a share purchase agreement with software company Kingsoft. An announcement on 26 February stated that Kingsoft would transfer its entire stake in Zhigu (representing 23% of Zhigu’s total equity) to Xiaomi.  Back when Zhigu Holdings issued new shares in March 2013, we learned that Xiaomi owned about 40% of Zhigu, Shunwei (a venture capital firm founded by Xiaomi CEO Lei Jun) owned 20% and Kingsoft about 20%. The upshot is that with Kingsoft out of the picture, Xiaomi now likely controls about 60% of Zhigu shares directly.

Since that change, IAM understands that the Zhigu team – led by Lin, a former Intellectual Ventures executive – has functioned as Xiaomi’s in-house IP strategy unit. The group’s remit is international and includes long-term planning, licence negotiations and other transactional briefs.

Also in February, Xiaomi hired Bin Sun to direct its IP litigation team. Bin formerly led the IP team at BOE, a display supplier that is among SIPO’s top applicants.

Bin and Lin, together with Wang Haibing, who heads up patent filing for the company, report to Wang Xiang, Xiaomi’s senior vice president of strategic cooperation. The former Qualcomm China head was brought in last July, and revamping the company’s IP strategy is an important part of his mandate. This blog has previously noted that Wang, who has a business background, fills a role similar to that of a CIPO – still something of a rarity in China. He has no doubt brought in some top-notch IP talent to work under him.

It remains unclear whether Zhigu still exists as an independent entity, with executives like Lin wearing two hats, or whether it has been fully integrated into Xiaomi. As recently as April, the firm’s website appeared as normal; it now appears to have been taken down. We also don’t know just how momentous a shift the ownership change represents – given that entities linked with Lei have owned most of Zhigu from the beginning, it likely has always acted as an IP strategy resource for his largest company. Perhaps that role has merely been formalised with this move.

But a bigger question still is what all this means for Ruichuan IPR Funds, which was launched by Zhigu in 2014 and has been described as something akin to a sovereign patent fund (SPF). Outside investors include electronics company TCL, Beijing’s Haidian District government and the Zhongguancun science and technology park. Despite the government money involved, whether a fund operated and largely capitalised by a private company can be considered an SPF is up for debate.

The close ties between Kingsoft and Xiaomi (Xiaomi founder Lei Jun is also Kingsoft’s chairman and largest shareholder) meant that the companies had to file a disclosure, which has revealed previously unknown details about Zhigu’s financial position. Xiaomi paid Kingsoft $7.5 million for its 23% stake, meaning the software company made a pre-tax gain of $4.1 million on its initial investment. The price implies that Zhigu is valued at around $32 million – that’s a significant premium to the company’s book value, which was around $14.4 million at the time of the deal. The figure paid suggests that Xiaomi is confident that integrating the Zhigu team with its own will deliver a significant boost to its IP efforts.

The documents also show that Zhigu made losses of $1.4 million and $1.7 million in 2013 and 2014 respectively. It would be very interesting to know how that figure changed in 2015, a year in which the company made numerous third-party patent acquisitions, picking up assets from Taiwanese operating companies Lite-On Technology and Inventec, among others. According to data from ktMINE, Zhigu has published 79 WIPO patent applications, and has around 70 US patents in total. In light of Xiaomi’s major acquisition this week, the Zhigu team now has a lot more assets to play with.