Finding the Best IP Strategy for China

Five key factors for businesses to take into account

Intellectual assets (IA) are a major asset to any corporation, with most of the value of a business being found within its IA. According to Ocean Tomo’s research in 2017, intellectual asset value can be as much as 84% of S&P 500 market value. So it is essential for business decision makers to understand the value of intellectual assets and to incorporate an effective and proactive IP strategy as part of any successful and profitable business strategy.

China is a complex and inherently unique market. There are significant challenges arising in the wider political, economic and regulatory trading environment and all of these challenges have the potential to impact the ability of a business to extract value from its intellectual assets. A lack of understanding around intellectual assets, and a lack of understanding of the marketplace in China, might result in a business potentially missing out on opportunities and failing to fully identify any associated risks.

The purpose of this article is to highlight five key issues in China that businesses looking to operate in the country should consider. By taking into account China’s national strategies relating to:

  • innovation and sustainable technology,
  • the establishment/acquisition of IP rights,
  • the legal environment with a focus on enforcement,
  • the business environment, and
  • the international environment

A foreign company will be able to ensure that their IP strategy within the market is aligned with its business strategies. This article will address all of these issues separately.

National Strategies Concerning Innovation and IP in China

Government policies within China are currently undergoing a noticeable and significant change. The national focus now is not so heavily oriented towards just economic growth by any means necessary, but is shifting towards innovation and ensuring a more environmentally sustainable future for China. Through recent policies and speeches introduced and made by president Xi Jinping, there has been a clear pattern emerging with references to climate change and innovation occurring far more frequently. With these areas being integrated into the current 5-year plan, it is clear that this will impact how business operations are conducted in the country.

The government has displayed its commitment to the global community in regards to climate change by entering into 3 international treaties and by making their own commitments to cut carbon emissions. For foreign companies looking to operate within China, this spells opportunity, but also risk.

As the government ultimately aims to ensure that these new policies and focus areas succeed, it is likely that more government intervention, through state funding of certain businesses, will become evident and this will give impetus to the new innovation driven ‘greener’ agenda. However, this may also change the market entry environment. It might soon be the case that, if a company fails to comply with eco-friendly initiatives, they may be refused entry into the market or, similarly, they may be refused permission to take their products outside of China. This highlights how essential thorough due diligence will be for foreign companies and investors. 

If foreign companies can enter China with a business model that advances innovation and sustainability, and if they can collaborate with domestic companies that are actively advancing these national policies themselves, there could potentially be great benefits for them going into the future.

Access to rights – Patent, Trademark and Cooperation

Even before these changes in national policy, the number of patent filings in China has been increasing significantly year-on-year. The facts show that this is a direct reaction to the amount of domestic investment in R&D and increased innovation in environmentally friendly technology. With a forecast that China will exceed US R&D expenditure by 2020, the number of patent filings are set to increase even further.

Between 2007 and 2017 the number of PCT filings has increased 10-fold, with China now occupying around 40% of the global patent portfolio. These figures alone identify China as a country of high innovation and increasing market size, which ultimately translates in to a strong business opportunity for foreign companies.

Again, with this opportunity, there is also risk. Foreign companies looking to operate and invest in the Chinese market must adapt to the unique regulatory environment by taking steps towards appropriate patent management.

Furthermore, China has now become the busiest trademark jurisdiction in the world with the number of trademark applications being processed per year at a record high. However, this can be largely attributed to a high number of bad faith applications. A recent survey of 100 brands highlighted that an estimated 71% of brands were submitted for registration by a third party (rather than the original owner of the brand). In order for foreign companies to establish and build a brand in China they must file applications for trademarks. However, due to the vast scale of trademark filing currently going on, these companies must design and implement a comprehensive trademark filing strategy as early as possible.

The global patent market is extremely competitive and with Chinese companies becoming increasingly stronger, foreign companies are likely to be attacked in the more patent intensive areas, so preparation is vitally important.

Legal Environment – Rights Protection and Enforcement

It is a common misconception that China does not respect the intellectual property rights of foreign entities. However, since 1979 there has been considerable development in this area. From virtually no property rights, to the establishment of an internationally competitive IP legal system, China continues to make advancements in the way it identifies and respects property rights. Although the legal system in China is set up in a way that meets the needs of domestic entities, that does not necessarily mean that foreign rights holders will be treated unfairly by the system.

Foreign companies should be aware that the legal environment in China is predominantly changing for the better. Through its national policies, the Chinese government is clearly aware that a well-functioning IP legal system is beneficial to everyone in the market as well as driving economic growth. Improvements to the legal system have come with the introduction of IP Courts and stringent enforcement, with recent discussion about even imposing punitive damages against infringers. This demonstrates that China is taking very positive and proactive steps towards strengthening and protecting the intellectual property rights of both domestic and foreign enterprise.

As China continues to make trade agreements around the world, it is likely that the terms and conditions of these will drive further recognition of, and expectation of enforcement of, each other’s intellectual property.

Business Environment

With innovation at an all-time high, Chinese companies are increasingly moving towards newer, more efficient, technological business models. A classic example of a new, successful, business model in China can be seen through Luckin Coffee. Their model has been so disruptive to the traditional coffee business model that it has forced Starbucks, a major player, to reconsider how they are operating in China. Through enhanced use of technology and modern day interactions Luckin successfully gained considerable market share in a very short time period. Similarly, the use of WeChat and Alipay, and an increasing number of E-Commerce websites, have completely changed the everyday lives of consumers.  In particular, they are changing how Chinese consumers interact with brands and how they communicate and receive marketing materials. Innovation in these areas is already outpacing the rest of the world and is now at a level where even someone visiting the country from Western society has to adapt from what they traditionally know, to the new ways of communicating, paying and interacting with others. If people who are just visiting the country have to do this, the importance of foreign companies having to recognise this different way of life and to adapt is extremely high.

In order for foreign businesses to operate in China, they must recognise the customers that they are targeting, recognise how their everyday lives have been changed by technology and aim to adapt their own models around these new innovative business models.

International Environment – China US Trade War

The nature of China’s trading relationships with some other countries is a sensitive issue, widely reported in the world’s media. What can initially appear to be minor issues, can escalate rapidly and de-escalate equally as quick. The situation is sometimes fluid and there is potential for issues around activity in one sector, spilling over into other, seemingly unconnected, sectors. This highlights the need for companies conduct thorough due diligence and understand where, when and how changes in the international environment could affect their business. Local knowledge and understanding will be key, as well as a broader understanding of international relations. While short term developments may appear dramatic, for all the reasons discussed above, the long term pressure is toward normalized trading relationships and agreements.