A Xiaomi employee helps a customer at the company's flagship store in Beijing.[Photo provided to China Daily]

Chinese handset maker Xiaomi Corp is being investigated in Singapore for breach of privacy, the first major hit for its infant overseas business.

Analysts said that security risks will obstruct the 4-year-old company's ambitious expansion plans outside the Chinese mainland, especially when it taps into developed markets for bigger profit margins.

The Personal Data Protection Commission in Singapore is investigating Xiaomi on a complaint that the company had disclosed phone users' personal data without consent, the Straits Times reported.

Similar privacy concerns were also reported in Taiwan last week after a technology website said the company's operating system is sending user information back to its headquarters in Beijing.

Smartphones made by Xiaomi are pre-installed with a significantly modified Android operating system.

Xiaomi said it has upgraded its system to make sure users know if the gadget is collecting data from their address books.

"The smartphone will stop sending information back to us once the cloud service is shut down," the company said in an e-mail to China Daily.

Although security issues are not likely to hurt Xiaomi's revenue in the short term, such incidents have the potential to hinder its overseas expansion over the longer term, said Lydia Bi, an analyst at research firm Canalys based in Shanghai.

"As Xiaomi expands into more markets where privacy laws are stricter and privacy is a bigger factor in customers' buying decisions than on its home turf, the privacy issue is likely to be more prominent, and it will need a better solution," she said.

Emerging markets in Africa, the Middle East, Southeast Asia and Latin America are the first steps in Xiaomi's drive to build a global brand, according to Lei Jun, chief executive officer and founder of the company.

Xiaomi has already launched smartphone sales in India, a country that has weaker privacy laws than developed nations.

"It remains difficult for Xiaomi to make key breakthroughs in developed markets," said Tian Zheng, vice-president of the business solutions group at industry consultancy Analysys International. "It will stick to developing markets to consolidate its overseas presence."

Xiaomi is growing into a top smartphone vendor on the Chinese mainland. It is locked in a bitter battle with Lenovo Group Ltd and Huawei Technologies Co Ltd for the leading spot in smartphone shipments. The company's quarterly shipments in the Chinese market are nearing 10 million.

Handset sales outside the mainland only accounted for about 3 percent of Xiaomi's shipments in the second quarter, according to Canalys.

Some companies have chosen to build local data centers to ease security concerns because user data will be stored inside the market rather than somewhere else.

On Friday, Apple Inc announced a partnership with China Telecom Co Ltd to store user data on the mainland. Previously, information involving mainland users was uploaded to servers based in Hong Kong.

"Building overseas data centers is a positive sign of the willingness to resolve privacy matters, but it can't solve the problem completely as the cloud is ubiquitous and data centers are interconnected," said Bi.

No Chinese vendor — including Huawei and Lenovo — has completely solved the privacy issue. But other Chinese vendors are using standard Android systems, making operating system breaches "less of a specific concern" for them, according to Bi.

"Xiaomi needs to have security built into its own operating system in a bid to solve the problem," Bi said.

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