Officials in the Chinese government are well aware of the importance of IP (intellectual property), and they have reacted to this need in a typical top down fashion which marks the management style of the Chinese Communist Party: they have given quotas to Chinese companies of how many patent filings they must make each year. Chinese officials use these as KPIs (key performance indicators) which go into their files, making it easier for them to be promoted to more senior positions with the ranks of the party for successful performance.
The problem with this approach is that it leads to really crappy patent filings, because it is all about meeting target numbers. Yes, China is now a leader in patent filings, but a lot of them are quite frankly, junk.
The Chinese government, knowing that it could not rely only on Chinese indigenous innovation for patents, needed a solution to help Chinese companies get a hold of foreign IP. At the same time, it wanted to inject itself into the business process, so that party members could get monetary and business benefits from this process.
It has done this by setting up state-ownedd intellectual property clearing houses to act as brokers between Chinese companies and western IP owners. These IP clearing houses would fulfill several roles:
- They would act as a single point of contact for Chinese companies in all their IP procurement needs;
- They would act as a single point of contact for western IP brokers seeking to sell their IP to Chinese companies.
In practice though, there are some problems:
- Many of the patents taken to these clearing houses are not the best, and are second- and third-tier patents. They won’t help Chinese companies to become more competitive;
- While some of the individuals have domain expertise about technology and patents, many do not, which means that they don’t provide a clear value-added to the service;
- Most patent brokers want to have a direct relationship with their buyers, since this will give them a good idea of what technologies and patents it will want in the near future. A state-owned IP clearing house gets in the way.
- Most importantly, it turns into a commodity service a service which needs a high degree of customization. This is very typical of the Chinese Communist Party, which is good at mobilizing resources for large projects, but which is largely useless for smaller projects which require a high level of customization and technical expertise for consumers.
In my previous article, I mentioned about how Apple benefited from having an extremely simple product line. This is in contrast to Android phone makers, who up until 2010, built and sold a huge number of models to feed into the growing smartphone market. After 2010, the number of smartphone makers fell out of the race because few could afford the costs of design, development, tooling, marketing and sales in order to compete. One of the leading smartphone industry analysts, Horace Dediu, went so far as to say that if a company missed one quarter of profits, it would likely be unable to compete on a sustained basis. This is why on the Android side, Samsung is the only handset maker which is profitable. As for Apple’s iPhone, the company’s tight control over design and its supply chain means that it can capture a much larger share of the profits.
This huge scale underscores why it’s so difficult for smaller outside players, including Chinese companies, to enter this market and build their brand presence. China and the Chinese are very innovative in their use of mobile software, but this needs much less in terms of capitalization and intellectual property than the major players which include Apple, Samsung, Google and Microsoft.
A Chinese entrant into this market could take a approach like Amazon’s, which has avoided the smartphone market completely, focusing only on selling Kindle tablets. But Amazon has publicly said that it doesn’t want to make money on Kindle hardware sales alone; it only makes money on sales of digital products for Amazon Kindle owners.
So this avenue is closed.
What should western IP sellers to China do?
If Chinese companies will become major IP buyers, but there are major issues with the state-owned IP clearing houses, what is a good strategy for western companies?
Like most things in China, nothing is simple, but there always is a way.
First of all, they should deal with the state-owned IP clearing houses, but they should not rely exclusively on them. The Chinese government, and the party, do have very useful resources which can be helpful. But they should not be counted on to deliver.
This means that, at the same time, they should have an agent in China, who understands their industry well, and is able to connect with designers and product engineers, not just management, marketing and legal departments in a Chinese company. The designers and product engineers are most likely to understand what the product roadmap is going to be, and although they won’t freely share this information, they will share what their needs are.
In choosing an agent, they should not select an IP attorney. IP attorneys really don’t understand the product roadmap. The only exception to this rule is to make sure that you have applied for patent registration and protection in China before you shop your patents, because if you don’t, you are inviting IP piracy. After they are registered, you should then approach the IP clearing houses, then find an agent.
When selecting an agent, be sure to select someone based on your own research, and not someone based on a recommendation from someone at the IP clearing house.
Things to check for include:
- What industries do they work in?
- What buying companies did they sell into?
- Did the IP sold go into any finished products?
- What markets were they sold in?
- If they operate on a retainer plus costs basis, how much do they charge?
- How are they accountable for success or failure?
- How do they know if a client is the right fit?
It also makes sense to understand what your agents’ geographic strengths are. An agent in Beijing may have good government contacts in Beijing, but may have very few contacts in Chengdu or Shenzhen. If this is the case, you may want to consider having different agents in those two cities (assuming that they are important to you), and visiting them from time to time.
It is not just enough to sign up an agent and then leave China, expecting quick sales. It’s very important that you make calls with your agent, be sure to attend dinners and go drinking as well. One aspect of the Chinese understanding of face is that your presence shows that you and your company take this IP sales effort and China seriously. Be sure that your Chinese counterparts get this message by giving them face-time.
This will help you down the road.