Wednesday, November 25, 2009

Managing IP in China

In a previous posting on managing intellectual property in China, I said I would outline some practical steps involved. An integrated approach is required to the multiple elements that make up the "secrets to success".

I will deal with one aspect here.

Litigation Approach

Let us examine the case of a company with strong patents experiencing infringement in China. The litigation-approach would be to instigate infringement proceedings against all the offenders. In practice, it does not make sense to sue everybody even when there is widespread infringement. It would be too costly and there are risks involved. Prudent management would say that you cannot pick fights with everybody.

The fight does not even have to be in China

When people talk about the sheer size of the Chinese domestic market, they sometimes forget another point - China is also described as "the World's factory". Most damage done to western companies through Chinese patent infringement is not done within China. It occurs in international markets. This has a very important implication for IP management strategy.

Business in China is all about relationships. That cannot be managed by remote control. If China is an important market, you have to have a presence on the ground there and and senior management should visit there often. Managing IP in China is not just about blocking infringers and signing up new licensees. You have to also maintain close relationships with existing licensees, ensuring that they continue as committed, compliant partners.

A real example

On one such visit to China, I was involved in an intense meeting with one of our licensees. The president of the company said to me that he is often approached by international buyers. The buyers say that they like his product but do not want to pay a premium for a license fee. The threat is that if the licensee does not supply them unlicensed product, they will go to his competitor who will. "What should I do in that situation?", the president asked me.

The immediate answer is that the licensee must respect the terms of our agreement. Otherwise it all falls apart. But it raises a question. A compliant licensee is at a cost disadvantage to an infringing competitor. This is a structural disincentive to recruiting and retaining licensees. It stands to reason that a perceived disincentive would block any chance of building a business relationship.

Why do people buy Chinese products?

Let's take a step back. Let's ask the question "Why do people buy Chinese products?". The simple answer is that they are cheaper. International buyers seeking cheaper product know that they must accept some compromises in getting the cheaper product. That could be inferior raw materials, reduced quality, lower wages, poor employee welfare or non-payment for intellectual property.

So are the Chinese cheating?

When I hear people talking about China not respecting IP, I must admit I have some sympathy for the Chinese companies. People use emotive and judgemental words such as "cheating". It is not a matter of cheating or morality. It is business. Chinese businessmen are resourceful and entrepreneurial. They are good at playing the game, whatever it is. If the game is to supply unlicensed product, that is what they will do.

Changing the game

Our business is to change the game. I do not dwell on the morality of Chinese manufacturers as much as the morality of the people who buy the product. Patents protect products against being made, imported, used, sold or offered for sale. Before considering legal action within China, it is possible to also deal with the demand for unlicensed product by addressing the international buyers.

Licensee-friendly environment

It can be much more effective to address the international buyers in their own jurisdictions. If it is clear that they will suffer sanctions for importing or selling infringing products, they will turn to legal products, especially if the premium is reasonable. That is what I call "creating a licensee-friendly environment". If the international buyers insist on only buying licensed product, the manufacturers are prepared to pay the license fee. They know they can pass on the cost directly to the buyer. In that case, it is similar to a sales tax. For the licensee, it also brings the advantage that they will be sought out by respected buyers. They can become respectable suppliers to global markets.

Of course nothing is ever simple

Just like the license could be considered similar to a "sales tax", manufacturers are happy to pass on the cost to their customers. Happy, that is, for a while. Just like sales taxes, after a while they will try to avoid paying what is due. I will deal with that in a later post.

Also, what is described above applies to exporting companies. After a while, companies adjust their behaviour and try to partition their business into export and domestic, to partially avoid responsibilities. That will also be a matter for a future article.

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