Despite problems, Xiaomi expanding Indian Operation Aggressively

The recent trouble over security issues aside, the company is stepping up its plans for India, including diversifying into new products and boosting R&D

Xiaomi of China emerged as the third largest maker ofsmartphones after Samsung and Apple in the quarter ended September 30, according to International Data Corporation. It reported 211 per cent growth in sales for the quarter in 2014, even as Samsung reported a drop of 8.2 per cent and Apple an increase of only 16 per cent. The final battle for supremacy will be fought in India, the world's second-largest market after China, which Xiaomi entered in July through a tie-up with online retailer Flipkart. By the end of October, it had sold over half a million smartphones in flash sales that got over in a few seconds. That might still be small - smartphone and feature phone sales were 72 million in the July-September 2014 quarter, according to IDC - but none of Xiaomi's rivals is taking it lightly.

What could stop Xiaomi's march forward is something else. In October, the Indian Air Forces asked its personnel and their families not to buy Xiaomi smartphones because of security concerns. Within a few days, Xiaomi announced that it would set up a data centre in India in 2015 to store local user data. But its troubles seem to continue. In the second week of December, the Delhi High Court restrained Xiaomi from selling handsets that run on technology patented by Ericsson of Sweden in the country. Within days, in an open letter to Indian consumers, Hugo Barra, Xiaomi's global vice-president, said: "We have been forced to suspend sales until further notice due to an order passed by the Delhi High Court. As a law-abiding company, we are investigating the matter carefully and assessing our legal options."

Xiaomi explained its position to the Delhi High Court last week. It said it has a direct contract with chip-maker Qualcomm for some of the technologies that it uses in its devices, and there could have been cross-licensing arrangements that patent holders have among each other. Following this, the Delhi High Court, in an interim order, allowed Xiaomi to sell those smartphones in India built on Qualcomm chipsets. However, the company will have to deposit Rs 100 for every handset sold towards royalty as part of a temporary measure. The Delhi High Court will hear the case again on February 5. "Xiaomi will have to settle with Ericsson on this matter and find an amicable solution. This also means Xiaomi will have to slightly tweak its cost structure and arrangement with suppliers to neutralise the extra intellectual property costs," says Neil Shah, research director (devices & ecosystems), CounterPoint Research.

India is the second most important market for the Chinese company, says Xiaomi India Country Manager Manu Jain. For Xiaomi, 2015 is set to be the year of expansion in India. "We'll bring almost all the smartphone models that we sell in China. Not just smartphones, we will expand our portfolio here as much as possible. Till now, we have just scratched the tip of the iceberg here," adds Jain. Besides expanding its smartphone portfolio in India, Jain says Xiaomi will bring its high-end smart televisions in India and look at new product segments like air purifiers. "We are also working on reducing the lead time," he adds. At present, the company brings devices in India about two months after it launches them in China.
Going local

To reduce the India launch time, Xiaomi has been setting up its research and development centre in Bengaluru, spread across 20,000 square feet. From just about two people at present, the facility will be ramped up to full capacity in a years' time. The R&D unit will work on developing India-specific content, features and themes. "We could see Xiaomi invest more in localised content, language support or local manufacturing to position itself as a very 'Indianised' brand," says Shah.

After the success of its smartphones, it is reasonable to assume that the price tags of its other products will also be low. Aggressive pricing requires costs to be put on a tight leash. That's why Xiaomi has a very lean structure in India. There's just one person who takes care of Xiaomi's market development here. All told, there are 12 people on the company's payrolls, along with six interns. It has a call centre, managed by third party, in Indore where about 35 people work. There are four or five people at each of its five service centres - again on contract. The numbers, obviously, will grow in 2015, but the structure won't change.

It also plans to increase focus on after-sale services. Xiaomi has just five service centres across India at present. "In a market like India, service is the key. We will open about 100 exclusive service centres across India by the end of 2015. These service centres will also be experience zones for Xiaomi in India," Jain says. There's more. Xiaomi will have its own e-commerce portal to sell its products in India in 2015. "Our partnership with Flipkart will continue as well," adds Jain.

ERICSSON'S PATENT RUN-INS

Xiaomi may have been the latest company to be hit by a patent infringement case, but it appears Ericsson’s run-ins with technology companies in India is an old problem. Ericsson Telefonaktibolaget, which owns about 33,000 standard-essential patents for mobile communications, moved the Delhi High Court claiming that Xiaomi had not been paying the patent holder to get a licence for using its technology. The Chinese smartphone giant has quickly reacted stating that the technology used for its devices is provided by Qualcomm with which it has a direct contract to share technology. The case is pending, and unlikely to be resolved soon. However, this is not the first time that Ericsson has cracked the whip on companies selling mobile phones in India. Last year, it was home-grown Micromax that was dragged to court for not paying royalties to the Swedish patent holder. Micromax,  India's second-largest handset maker, had to reluctantly agree to pay for licences under a FRAND (Fair, Reasonable and Non-Discriminatory) agreement. Earlier this year, Ericsson took Intex Technologies, another home-grown handset maker, to court for patent infringement. This list does not end here. Ericsson has also dragged Chinese company Gionee to a court in India for similar reasons. The world’s largest smartphone maker, Samsung Electronics, is also facing legal heat from Ericsson in a US court for alleged violations of its mobile patents. Besides Ericsson, Chinese companies Huawei and ZTE have strong patent portfolios. As of end-June, Huawei had filed 65,000 patents. Its mobile devices division had filed 12,000 invention-related patents, besides 1,000 design patents, worldwide as of August. ZTE has more than 13,000 patents as well.

On one hand, Xiaomi is looking at growing organically. On the other, the Chinese company is eyeing Indian start-ups for inorganic growth. As Barra said last month, Xiaomi will invest in start-ups in India and is scouting for opportunities in Bengaluru and Delhi as it looks to add new features and services to its products. "These engagements and investments will help us build the ecosystem of innovation. We will invest in start-ups in the areas of mobile content, not just for the Indian market but also for the global market," says Jain.

Xiaomi's operations in India are slightly different from other companies. Flipkart, as its exclusive partner, buys devices from Xiaomi in China and sells them in India. Xiaomi Technologies India, a subsidiary of the Chinese company, offers support to Flipkart but does not engage in sales activities. "If we need to have an Indian entity in the future, we'll register one. For now, we'll continue with the existing model," Jain says. He believes that Xiaomi will fuel the growth of smartphones in India - a market that is still dominated by feature phones with 72 per cent of the pie. "In three years, 90 per cent of India's handset market will be smartphones. And, we'll drive the growth," adds Jain, with confidence.

original articular posted on business standard