Should concerns over the protection of Intellectual Property (IP) rights hold you back from doing business in China? What are the main worries? How can Western companies, particularly SME and start-ups, overcome the IP hurdles and succeed in China? What can be done to mitigate IP risks in China?
Intellectual Property theft is a serious concern in many countries, including China, which has been accused of IP theft for years. But things have been changing over the last 20 years – laws amended, enforcement toughened, regulations improved, measures taken to combat IP infringement – to encourage innovation through better IP regimes. But should Western companies still be worried? Is it time to think about IP in China differently?
Crayfish® share their thoughts and offer a helping hand.
What are the main IP protection concerns Western companies have about entering the Chinese market?
A widely shared view is that Western companies’ main IP protection concerns when entering the Chinese market are related to technology transfer and IP extraction with a preconception that Chinese companies and the Chinese government will gain access to valuable technology and intellectual property through joint ventures, licensing agreements, or other means, and use this knowledge to compete unfairly against Western companies in the global market.
Enforcement of IP rights is a noted challenge whatever country you are in and as such, Western companies need to be prepared to actively enforce their rights when they identify infringement. This brings another challenge. The complexity of compliance with local laws.
Obtaining local licenses and permits, tax registrations, and complying with other regulations can be time-consuming and costly, further complicating the IP protection issue. A blog post by NH Global Partners highlights the challenges of navigating China’s complicated laws and local compliances when entering the market.
Precautions are advised, and budgeting for IP rights enforcement is a key consideration for European SMEs operating in China.
Joe Simone, partner at Hong Kong-based SIPS Asia – now part of Sinofaith IP Group a leading intellectual property service company headquartered in Shanghai – advises that registering patents in China is particularly important for SME or start-up companies with their own IP, that are seeking financing for growth and expansion. Joe explains: “Small companies, especially in the tech sector need to move fast. Most investors will want to know that you have protection in China. Even if you are not yet in or selling to China, your IP strategy should be able to convince investors that your IP is protected.”
Should IP protection concerns deter Western companies from entering the Chinese market?
Despite IP concerns, China remains a strategically important market for Western companies.
It is ultimately a business case to enter a new market – a strategic decision.
There are several compelling reasons why IP concerns, and risks, shouldn’t deter Western companies to enter or to stay in China.
- Doing business in China can help companies gain insights into Chinese business practices and consumer behaviour, which can be valuable in the long run, not to mention the size and potential that the Chinese market offers. Closer collaboration leads to the development of better IP protection practices and standards, and some companies have found that establishing a physical presence in China, such as a wholly owned subsidiary, can help them better protect their IP while navigating the local market.
- China’s IP protection has been improving. China has established specialized IP courts, increased penalties for IP violations, and implemented technology to detect and prevent infringement. And they need to – in 2021 they topped the list on the World Intellectual Property Organization (WIPO) out of the top 10 countries with patent applications, having only first appeared on the list in 1989. The World Intellectual Property Indicator 2022 shows that China received 1.59 million patent applications in 2021, more than double the number received by the US. The surge in patent filings in China may also be attributed to the country’s emphasis on innovation and technological development in recent years. Companies like Huawei Technologies, which recorded 7,630 invention patents in 2021, have been at the forefront of China’s push for innovation in areas such as AI and chips. Interestingly, non-resident applications made up 10% of the total applications in China and over 98% in HK SAR.
- IP risks in China can be mitigated through careful planning and execution, and with the help of IP specialists or lawyers. Protecting IP in China to a large extent is like most developed countries -research, strategy, due diligence, selecting and vetting business partners, robust contracts, licensing agreements, ongoing monitoring, risk management, and working with appropriate local experts, are some of the key elements. Using Chinese courts or arbitration to enforce IP rights is also a popular recommendation.
What should and could be done to mitigate IP risks in China?
Sharing his views at last year’s Crayfish China Semiconductor Roundtable, Tudor Brown, former President and co-founder of Arm, said:
“I think the main defence against IP issues is to build a personal relationship and make it fundamental to your business transaction. There are ways in which you can avoid reverse engineering by not allowing reverse engineering technically and contractually. Whether these hold is a separate issue and at the end of the day you have to know what’s going on with your customer, so when you find a customer is starting to do things that are a bit outside of the contract you’ve got to clamp down on that. So, try to build your contracts as a fundamental document for how you expect the relationship to be going forward but at the same time carefully monitor that through personal relationships.”
Joe echoed Tudor’s view. When it comes to IP protection, China is not much different than most developed countries, but what is different with China is that you can’t just say, “I’ll handle it myself”, or “I’ll use my UK lawyer”. You need decent advisors on the ground that can explain what’s going on, on an ongoing basis.
According to Sinofaith IP Group, the most common types of business foreign companies conduct in China include importing for local sale, licensing of IP for local production and distribution, and sourcing products from Chinese factories for export to other markets. In most cases, the focus of these efforts is online marketplaces and physical markets within China.
But for other companies, the main concern is exports of infringing goods from China to other markets, and perhaps the most critical mistake of foreign companies is to delay the filing of trademarks and patents with the China IP Administration. Those with IP registrations in China can prevent and stop parties from producing and exporting infringing goods to other countries where they will unfairly compete with genuine products.
Is it time to think about IP in China differently?
A new collaboration model designed and established by Cambridge-based Crayfish® and Sinofaith IP Group is an example of how China IP protection could be democratised for technology firms and academic institutions through a long-term partnership. It doesn’t stop at protecting IP from infringement.
Under the strategic partnership, the two companies will jointly develop a new IP collaboration model to protect, manage and monetise IP in China at zero or minimal costs to the IP owners. The cost-efficient facility could be beneficial to start-ups and scale-ups looking to raise funds for potential global expansion.
“At the end of the day, IP sits at the core of the business strategy and plan, and China should be an essential part of your global business ambition. To that end, you need a trusted China-savvy partner beside you as early as possible, and alongside you on that journey,” says Ting Zhang, co-founder and CEO of Crayfish.io.
She continues “Crayfish® has helped companies and institutions to succeed in China for over two decades, so whether you are new to doing business with China or are looking to expand, we are here to help”.
Find out more at Crayfish.io