At Mobile World Congress in Barcelona, along with Xiaomi’s recent announcement of the Mi 5c, the company announced a milestone with the inclusion of its own “in-house” SoC, the Surge S1. By designing their own SoC via the Beijing Pinecone Electronics subsidiary, the company realizes a few potential benefits. The internally developed SoC provides a level of hardware/software product differentiation which may not be achieved via third-party suppliers. Additionally, the development of its own SoC may help improve Xiaomi’s IP position and unlock increased sales potential for its smartphones.
In 2015, Qualcomm made an agreement with China’s National Development and Reform Commission (NDRC) to use 65% of a smartphone’s net selling price as a royalty base for smartphones sold in China. Shortly after the agreement with the NDRC, Xiaomi signed an agreement with Qualcomm that is estimated to use the same method to calculate the royalty base. With the introduction of Surge S1, Xiaomi will likely ask Qualcomm to give them a license for its Surge S1 chips in place of the current agreement that use a smartphone’s net selling price as royalty base. By getting a license for its SoCs, Xiaomi can pay lower royalties for its smartphones that will include Surge S1 SoCs since the price of a SoC - used as royalty base – is a fraction of the price of a smartphone. This argument is not exclusive to Xiaomi’s existing agreement with Qualcomm but could also apply to future potential licensors such as Ericsson and Nokia if the company starts to release more smartphones that include Surge S1 SoCs.
The introduction of Surge S1 SoC will not resolve all of Xiaomi’s current patent licensing challenges but it will be an important piece of the puzzle for its long-term licensing strategy. For the past few years, Xiaomi has been actively enhancing its intellectual property capabilities through filing thousands of patent applications and purchasing patents from major players in the industry which include Microsoft and Intel. The combination of its patent portfolio growth and the introduction of the Surge S1 SoC provide Xiaomi with more tools in its patent licensing toolbox.
Xiaomi is signaling it has the will to invest in IP along with the internal product design required to achieve even a partially vertically integrated supply chain. Signing agreements with the remaining major licensing companies – such as Nokia and Ericsson – is critical to Xiaomi’s future success since it will give the company much needed freedom to expand its smartphone markets outside China. The combination of gradually improving its patent capabilities and enhancing its supply chain has put Xiaomi in a better position to sign more favorable licensing agreements with the remaining major licensing companies which could open doors to more sales opportunities across the globe.