InterDigital Inc (IDCC)

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Intellectual property faces perils in China, study warns
2004-10-9

Companies need a game plan to protect intellectual property before investing in China, or risk being stripped of their ideas and opportunities, says a report released today by Boston Consulting Group.

"China is home to a tangle of IP issues, with large sums of money and future strategic positions at stake," says the report, Facing the China Challenge, by BCG consultants David Michael, based in Beijing and Kevin Rivette, in San Francisco.

It addresses a major fear of Canadian companies as they consider expanding into the huge but difficult China market. The country‘s intellectual property protection, while improving, is still undeveloped, leaving newcomers exposed to having their knowledge stolen.

"The question is, how do you plug your IP into China‘s market without having someone seize it and become your competitor, not only in China but in traditional markets as well?" the BCG report observes.

In building the case for a China IP strategy, the consulting firm underlines the need for Western firms to participate in Chinese standards development, as the country evolves from being a "taker" of existing standards to being a "shaper" of emerging standards.

It cites several examples, including China‘s advance of a mobile communications standard, called TD-SCDMA, and the recent effort to impose its own security standard on all wireless local-area-network chips sold in China.

China backed down on its demand regarding wireless LAN standards, under U.S. corporate and government pressure. But its general assertiveness will alter the competitive playing field, Jim Hemerling, BCG‘s managing director in China, warns in a press release.

Mr. Hemerling, a Canadian formerly based in Toronto, says companies that forgo a decision on their involvement in Chinese standards-setting will find "it‘s game over in one of the world‘s largest and fastest-growing markets."

The report urges action to "ward off the threat of Chinese competitors illegitimately harnessing your IP to their low-cost production machines or to prevent your company from being boxed out of key standards by faster Western competitors."

The report says too many companies address their IP issues only after making their investment in China. That means they surrender a major part of their leverage with Chinese partners and governments even before they enter the market.

"Keep IP assets ‘on the table‘ as an explicit bargaining chip in any kind of partnership discussion," the authors advise.

BCG, which operates in 37 countries, says the development of IP policy is so important that it must be taken up by senior executives, and not delegated to the legal affairs department.

The management of intellectual property issues must be closely linked to the company‘s overall business strategy, it says. For example, using customs or anti-dumping sanctions to protect markets in North America or Europe could spur "soft reprisals" in China, including slowing down factory permits and investment approvals.

The report lists a variety of barriers that have to be overcome for China to provide effective IP protection. For example, patent registration is still arduous, and protection laws do not apply equally to domestic and foreign parties.

While laws are being created and the courts can enforce them, many judges need more training. Foreign companies cannot initiate action on IP violations; they must persuade the courts to pursue a case.

The paper points out that cultural traditions work against effective enforcement. "Many Chinese have traditionally viewed IP as a common good, to be tried by all for free," it says.

"Licensing is sometimes seen as a ‘sale with instalment payments‘ leading to outright ownership and thus the right to resell. Domestic competitors frequently copy each other with impunity and foreign companies from wealthier nations are expected to exchange knowledge for market access."

http://www.tdscdma-forum.org/en/news/see.asp?id=708

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