Jacob Schindler

In recent weeks, no fewer than four Chinese smartphone companies have re-affirmed their determination to crack the US sales market, despite what seem like significant political headwinds. Huawei’s latest attempt came up short when a carrier deal with AT&T fell through just before the big Consumer Electronics Show (CES) in Las Vegas. In light of recent patent deals executed by major Chinese players, it seems like patents are no longer the main hurdle they face. But continued commercial difficulty could have knock-on effects for patent strategy.

Both Huawei and Xiaomi have recently held talks with US mobile carriers with a view toward getting their handsets into the country’s dominant sales channel before the end of 2018. Huawei, which already sells a small volume of devices online in the US, was evidently on the verge of announcing a partnership with AT&T when the deal fell through at the eleventh hour. The breakdown, which came after two years of negotiations and after marketing for the partnership had already begun, was attributed to murky “security concerns”.

As for Xiaomi, executive Wang Xiang – who handles both the intellectual property and international business portfolios – told Bloomberg that the company aims to sell phones in the US within the next two years. He cited the need for lengthy negotiations with potential partners as one potential reason for slow going. ZTE has already found success partnering with wireless providers, often selling unbranded devices. It has managed to hold onto a market share of around 11% in recent quarters. But the company wants to graduate to higher-end devices, and it says it has a bold plan to beat Apple and Samsung to introducing the first 5G handset in the US by early 2019.

At one time just a few years ago, patents were considered a key reason why Chinese companies, rising meteorically across Asian markets, would face tough sledding in the United States. But you will notice that Chinese executives and analysts are not so much talking up that angle anymore. For one thing, the truly international smartphone players have come a long way in building up their patent portfolios. Even players with large portfolios are still growing fast – Huawei received the 20th most US patent grants in 2017, a year-on-year increase of 23%. And following SEP developments in China, these companies have been very active in obtaining licence rights over the past two years. In addition to Qualcomm, both Xiaomi and Huawei both inked deals with Nokia over the past year, removing major potential obstacles.

Perhaps even more important is the legal environment in the US. Yes, Chinese device makers can expect a certain level of assertion activity by NPEs, but it is doubtful whether it presents a serious commercial threat. Could Huawei expect a barrage of new suits if a carrier deal makes it a major market player? ZTE’s experience suggests probably not. Though ZTE has carved out a nice share of the market and Huawei’s current phone sales are minimal, ZTE and Huawei Device (the telecom’s consumer electronics subsidiary) faced about the same number of assertions in 2016 and 2017 (about 20 per year).

Nevertheless, the security and trade hurdles are not going away in the telecommunications equipment space, and their spillover effects in the mobile market may be more serious than any patent deficit. Just this week, a new bill was introduced in the United States Congress that would not only ban the US government from contracting with Huawei and ZTE, but also with any contractor that uses their networking products. Likewise, China is becoming more and more restrictive in terms of what foreign companies can do in its own tech sector.

What effect will this have on IP strategies? A patent is a fairly long-term asset, and the forces that have pushed Chinese patentees into the top five nationalities for US patents for the first time are still there. But while internally-developed portfolios are likely to continue growing, would-be Chinese market entrants may not feel any great pressure to pull off major third-party acquisition deals.

For licensors, it means that aside from Apple and Samsung, a big swathe of the world’s biggest mobile device sellers simply won’t see the US as a critically important market. That means any effort to enforce patents against them will be most effective somewhere else.