Made in China 2025 and Intellectual Property Protection

Elegant Gathering in the Apricot Garden (Xie Huan Ca. 1437)

China IP Protection Practices Snapshot and Predictions

Product companies and research organizations have long complained about theft of intellectual property (IP) and lax enforcement of intellectual property rights in China. Forced technology transfers have been another major grievance of foreign companies setting up local operations in China.

Despite the potential risks of IP leaks and bureaucratic limitations, the lure of the enormous Chinese consumers market is impossible to resist and for some companies it may very well represent an essential component of their long-term growth strategy.

Case in point: General Motors China strategy.  Preparing for a slump in the sales if internal combustion vehicles in the US, GM is planning to reduce production and shut down factories in the US, and gradually shift its focus to China’s electric vehicle (EV) market.

While the global auto market is slowing down due to higher steel and aluminum prices and stiffer emissions regulations, China’s electric car sales, backed by its pro-green car policy, have been surging. in the first three quarters of 2018, GM, through its joint ventures in china, sold 2.7 million vehicles and recorded equity income of $1.7 billion.

Helping to call attention to the potential of the China auto market are fear-mongering headlines such as “There’s an Electric Vehicle Race. And China is Wining.” Spoiler alert: there’s nothing in the article to back up this assertion other than exalting the size of the Chinese EV market.

And the same market perspective is true for other product companies. A growing middle class with increasingly demanding tastes and buying power is an opportunity too big to ignore. But capitalizing on this opportunity also requires local presence and collaboration with local companies, suppliers and subcontractors. And with these, concerns about IP leakage are top of mind for many.

China’s Growing IP

One might hypothesize that at some point China will have much IP of its own to protect and will see it necessary to provide effective protection and legal remedies for Chinese IP, which will then be extended, at least to a degree, to infringements by Chinese individuals and corporations.

Indeed, China has been appropriating, absorbing and adapting global technologies and knowledge for decades. But over the last few years, the country has made major strides in innovation and IP development, and has excelled in certain types of innovation such a e-commerce and on-demand services. The World Intellectual Property Organization (WIPO) highlights China’s growing role on the international IP stage in its 2016 World IP Indicators report. In 2015, China accounted for:

  • 30% of all patents granted worldwide
  • 38% of all patent applications filed worldwide
  • 65% of all design applications filed worldwide
  • 45% of all trademark applications filed worldwide.

Despite this impressive progress, China has yet to take a leading position in more challenging forms of innovation, such as scientific discovery and advanced engineering technologies and processes. China’s intellectual property exports account for only about 1.8 percent of R&D spending by the rest of the world.

Made in China 2025: China’s Innovation Imperative

“Made in China 2025″ is a Chinese government initiative to propel the Chinese industry forward. Drawing direct inspiration from Germany’s “Industry 4.0” plan but more far reaching, the Chinese effort is focusing on improving manufacturing efficiency and product quality, provide protection against emerging low-cost competitors and more effectively collaborate and compete with advanced industrialized economies.

The plan sets aggressive innovation and IP goals for China to achieve by 2020:

  • Double the number of patents from 6.3 to 12 per every 10,000 people.
  • Double the amount of international patent applications from 30,000 to 60,000.
  • Increase IP royalties earned abroad from $4.4 billion to $10 billion.
  • Increase the world’s positive view of IP protection to 80%.

China now spends 2.1 percent of its GDP on research and development. This is a huge jump from just 0.7 percent in the 1990s, nearing the 2.35 percent average spend among members of the OECD, but not quite matching the US levels of 2.79 percent of GDP and still far behind R&D powerhouses Israel and Korea that spend 4.25 percent.

Changes at the Top

Although, as expected, the state plays the dominant role in creating and governing the overall framework, providing financial instruments, and establishing manufacturing innovation centers (15 by 2020 and 40 by 2025), the Made in China 2025 plan also calls for greater reliance on market institutions and the effective use of the country’s IP in business strategy.

A key component of the initiative is strengthening intellectual property rights protection through civil, criminal and judicial enforcement, especially for small and medium-sized enterprises, and allowing firms to participate in international technology standards activities.

The country’s patent law is being amended. As reported by state-run news agency Xinhua, under a new proposed draft presented at a recent meeting of China’s legislature, victims of intellectual property theft in China could soon be allowed to sue for punitive damages. The new draft proposes to increase the compensation amount by up to five times.

Chinese courts heard a total of 213,480 IP cases in 2017—40 percent more than in 2016 and double the number heard in 2013. In 2019 the Supreme Court will begin handling appeals on intellectual property rights cases, which were previously handled by provincial-level high courts.

Chinese leaders also announced they were looking at restructuring laws governing foreign investment in China. The proposed changes give foreign firms the same privileges as Chinese companies and would prevent the forced transfer of foreign technology and knowhow.

Patent Inflation

The government sweeping push to boost China’s IP, that includes not only patent applications, but also scientific publications and citations, will undoubtedly lead to an influx of poor quality and meritless patents in a bureaucratic quagmire, and with those, an epidemic of patent trolls.

Exploring Options

The Made in China 2025 call to increase the country’s “self-sufficiency” and “self-reliance”, and the complete independence from foreign technology may be optimistic, but with the rise of unilateralism and trade protectionism, it is yet another factor in multi-national corporations already considering a shift in strategy amid escalating US-China bilateral trade tensions.

Global corporations, both Chinese and non-Chinese, will have to explore options for creating separate corporate structures for their China-focused and US-focused operations, including establishing separate legal entities that provide distinct products and services. And, in some instances, it would be logical to replace less-powerful foreign brands with fresh ones.

Image: Elegant Gathering in the Apricot Garden (Xie Huan, Ca. 1437)