IPR: What Beijing Wants YOU to Know

A hot-off-the-press World Bank report titled China's Information Revolution: Managing the Economic and Social Transformation says that China already has the world's largest telecommunications market and that its ICT industry has grown two to three times faster than GDP over the past 10 years. Yet, the report notes that legal and regulatory reforms are urgently needed (see PDF pp. 12-13). Key item on their agenda: IPR. More IPR protection; better IPR protection.

An AmCham China survey suggests that Beijing is “both capable of and willing to take action against those who violate intellectual property rights (IPR).” For example, the National Working Group for IPR Protection is targeting 276 measures, with a National IPR Strategy Formulation (plan) scheduled for completion by the end of next month. This national strategy on IPR has involved 28 agencies within the central government over the past 2+ years. (For additional details, see a recent Tech China blog post on China's Action Plan on IPR Protection 2007.)

In a document on IPR cases, the Supreme People's Court said IPR violators should get heavier punishment, and that serious IPR violators could be sentenced to three to seven years in prison along with severe financial punishment. (This is tougher than comparable U.S. laws.) Fortunately for U.S. firms, international IPR laws will take precedence whenever they are applied in domestic trials even if they differ from domestic laws, a vice-president of the Supreme People's Court told a national conference on IPR-related trials. One goal is to transform WTO regulations such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) into domestic laws. And to “further allay foreign concerns” on IPR protection, the Standing Committee of the National People's Congress recently approved China's entry into the WIPO Copyright Treaty and WIPO Performances and Phonograms Treaty.

It should be noted that from 2002 to 2006 the Beijing Number 1 Intermediate People's Court ruled in favor of overseas parties in 60 percent of 670 IPR cases and that within this judicial sector alone 14 IPR-related laws, regulations, rules and administrative measures have already been drafted, formulated or revised this year. Niu Wenyuan, chief scientist on sustainable development with the Chinese Academy of Sciences, said: "IPR is the number 1 strategic reserve in the 21st century and its significance is not inferior to any other strategic reserve, be it food or energy." Indeed, a key message delivered at the China High-Level Forum on Intellectual Property Rights Protection held two weeks ago in Beijing was that IPR will become the “major factor behind Chinese enterprises' survival in both domestic and international markets.”

Shifting this discussion specifically to patents (which is the most relevant IPR-related issue for our sector), according to the current annual report on ICT patents released by MII, one of every three patents granted in China is awarded to an ICT firm, making it the top industry for innovation in China. However, two of every three so-called “invention” patents in the ICT sector belong to foreign companies and foreign institutions, with Huawei, ZTE, Lenovo, Haier and HiSense the leading domestic players (the latter two headquartered in the beautiful sailing and beer capital of China, Qingdao; alas, I'm planning to run for Qingdao Mayor one of these days) and Tsinghua (yes, OUR Tsinghua) leading among China's universities. Bottom line: China takes IPR and IP creation very seriously, especially in our sector ... and especially at Tsinghua.

Further, China is planning the third overhaul of its Patent Law and the draft amendments to the law have been turned over to the State Council for deliberation, according to the State Intellectual Property Office (SIPO); more than half of the current 69 provisions have been changed in the draft. The current Patent Law requires Chinese entities and individuals to file applications for inventions developed in China first. The draft extends this requirement to both Chinese and foreigners and stipulates that failure to meet this first-filing-in-China requirement will lead to rejection of the Chinese application. Within the provisions of China's Anti-Unfair Competition Law, China's courts will also balance the encouragement of innovation and fair competition when handling IPR cases. The most notable problem: According to a recent official survey, only 0.03 percent of Chinese domestic enterprises have core independent IP, with 99 percent having no patent applications and 60 percent without independent trademarks, according to Mr. Tian Lipu, head of the State Intellectual Property Office. Some domestic firms hesitate to invest in research and development not because of the cost but because they fear their hard-earned ideas may be stolen; however, the Supreme People's Court has pledged to protect both foreign and domestic trademarks equally.

But there's life beyond IPR. On the flip side, from the procurement angle, China plans to give priority to innovative products produced by Chinese-owned or -controlled enterprises in government procurement. Chinese-owned or -controlled firms can register their products with the National Innovative Products List which is scheduled to be issued later this year. That the government should buy more domestic products to “enhance innovation capability of Chinese enterprises” was a talking point during the Fifth Session of the 10th National People's Congress. Zhu Jian, deputy principal of Zhejiang University, suggested large government equipment purchases should go to domestic enterprises to further their development endeavors.

Lest I forget, there's one more thing Beijing wants you to know and it pertains to a new focus on IPR awareness. In an “only in China” moment, Beijing TV aired a live show, a reality game show contest, on IPR. The Beijing municipal government also sent text messages to 3 million mobile phone users on April 26th to remind them of the importance of IPR, along with advertisements on buses. But it gets better. SIPO also organized a nation-wide singing contest. The first (and I hope the last) such contest by SIPO, they received 76 new songs from 24 provinces and 24 qualified into the final. Yes, only in China.

When it comes to IPR, China will do it their way. They want us to know that they take IPR very seriously, but that we're playing in their sandbox. They'll bend to accommodate international laws, but they'll also do whatever it takes to promote their own companies and institutions. The tone in their English-language press is firm, but also a bit accommodating, whereas the tone in their Chinese-language press is much tougher as I described in last week's column. And remember this: If you lose at “Let's play IPR in China,” you can always go for the megabucks cash prize during the second SIPO-sponsored singing contest.

Next: Software - The Apex of China's National Technology Policy

Based in China, David Scott Lewis is SVP with Startech Global Corporation, the outsourcing hub for Tsinghua University (China's MIT). In addition to his bizdev/GAM responsibilities, he authors their Tech China blog.

Originally posted on 7 May 2007 on the Sand Hill Group "Letter from China" blog.

It's “IPR Week” in China (or, "Why I Watch '24'")

For better or worse, this will likely be the first of many columns addressing IPR issues in China. In fact, the key reason for not doing software development in China has to do with IPR. It's not about English-language skills (even though they're much worse than most imagine; don't believe the hype from China's government or the drivel from American “tourist” executives fooled during visits to elite Chinese universities), it's not about technical capabilities (in hard skills sans apps integration, China can easily match India; only in soft skills like project management does India do better).

For our sector, there is an adequate supply of English-capable (I didn't say “fluent”) engineers. And, let's be honest, at the grad level, China's technical universities absolutely kick India's butt. (Once again, back to my “China vs. India” thread.) What about cost issues? I laughed when I read about Indian firms complaining about high costs in China. The joke is on them (re: TCS, among others), which I'll explain in a forthcoming column, “Why the Indian Globals Will Fail in China” (working title). Cost isn't an issue. It may not be as cheap in Beijing, Shanghai or Shenzhen as some American firms would like, but it's still cheap compared to numerous global alternatives, and let's not forget that BJ, SH and SZ are not the only options in China. So it's not about English or technical skills, or costs. It's really about IPR.

IPR: A Real Concern in China; “IPR Week”: A Total Sham

Fortunately, IPR protection is a recurring them in China's tech policy press: It's recognized as the greatest bottleneck to innovation in China. To some (re: many Americans), China makes a good living by copying others. But within China's tech policy community, there is an understanding that China can't continue to copy and must invent its own technology. China also knows that if it wants to attract FDI in high tech sectors, they need to address IPR issues, although foreign concerns are not the driving force behind advancements in IPR protection. So what's the driving force? Answer: Protection of domestic innovation, i.e., innovations by Chinese companies within China's borders.

“IPR Week,” on the other hand, is much more for show to Westerners. For example, there was a disproportional amount of coverage on “IPR Week” in China's English-language press (e.g., China Daily) versus in China's leading national and trade dailies. China's tech policy daily did mention “IPR Week” on its front page, but it was the shortest article on its front page; it was supplemented by a nearly identical article (written by a different author) buried on the last page of that particular edition. But CCTV showed a crowd of thousands interested in learning about IPR. Gotcha!! In fact, the camera showed maybe just a dozen or so ... at most. Hardly a pressing issue on the Chinese psyche.

However, there was one fascinating article on IPR protection that was the lead article in another edition of China's tech policy daily this past week (i.e., during “IPR Week”). It was a report on a conference session held in Beijing that featured five companies from south China. Their topic: How Western firms abuse IP laws to keep Chinese companies off their domestic turf!! Bottom line: According to the Chinese, foreign companies and countries bully Chinese companies by taking advantage of their domestic court systems, challenging Chinese firms with Section 337 actions. Well, this is certainly one way of looking at the world.

One problem with IPR protection in China is a lack of knowledge about IPR fundamentals. Often Chinese firms don't know what is legal, what is illegal. For example (as this is good one), many Chinese companies really don't know that they can't use existing technologies still under patent protection to create a newer technology without paying royalties to the patent holders of the existing/core technologies. This absolutely stuns the Chinese.

However, the biggest impediment to IPR protection has nothing at all to do with the WTO, WIPO, or the legal systems in China or the United States. Fact is, the greatest challenge to IPR protection in China is culture. The anecdotal consensus among mainlanders is that it will take a couple/three generations (yes, generations) for Chinese to fully appreciate IPR. The key problem is that Chinese people don't perceive that they're doing anything wrong when they use/borrow/steal someone else's IP! I give a lot of credit to the Chinese government for taking a gazillion steps in the right direction. But, sorry Beijing, you can't easily legislate cultural habits (although turn the clock back 40 years and maybe they think it's still doable).

Who Says That Watching “24” is a Waste of Time?

Want to enter the China market? Good for you. Think you can do it without using Chinese service providers? You're in for a big surprise. Sure, you can service MNCs in China without too much interference from some entity of the Chinese government. But if you have grander visions of broader market penetration, you might already know that there are unwritten rules to playing in the China market. (In some ways, India can be much worse. Think retail in India. But this column is about playing in China's sandbox.)

Some American firms believe that they can best control their IP developed in China by running a captive operation. Probably true, although not likely the best way to start. Either the captive operation would be too small to matter or there would be too much risk in launching a significant development operation. ODCs – offshore development centers – are a better way to go. Our firm does this: One of our offerings is to help American ISVs set up R&D or software development ops in China, starting with an ODC, often staffed with Tsinghua grads, coupled with a BOT (Build-Operate-Transfer) option that enables the ISV to flip a switch and turn the ODC into a CDC – captive development center. Enough of a commercial, though.

Regardless which route an ISV chooses, it's best to take Andy Grove to heart: Be vigilant, be paranoid. This is where the Jack Bauer analogy comes to mind. Security, security, security. Physical and data. Don't take any unnecessary chances. Chinese companies tend to rely on Rent-a-Cop guards and easily crackable access cards (I know, trust me) for the bulk of their security measures. Sorry, but this isn't enough.

Physical and data security is best ensured through a combination of CCTV video surveillance, biometric access control and verification systems, intrusion detection, perimeter protection, keyloggers, no removable media, restricted Internet access, document destruction, randomized polygraph testing, counter-eavesdropping and zero-day exploit shields. Sounds like something out of Ft. Meade? Perhaps. But most of these measures are a lot easier to implement than they may sound.

For the latest government developments on IPR protection, see my recent Tech China blog post titled, “China’s Action Plan on IPR Protection (or, Why I Have “12312" on My Speed Dial)”. A copy of “China’s Action Plan on IPR Protection 2007” is included in the post. The post mentions the new Blue Book as well.

NEXT: IPR: What Beijing Wants YOU to Know

Based in China, David Scott Lewis is SVP with Startech Global Corporation, the outsourcing hub for Tsinghua University (China's MIT). In addition to his bizdev/GAM responsibilities, he authors their Tech China blog.

Originally posted on 30 April 2007 on the Sand Hill Group "Letter from China" blog.
Image courtesy of MIT.