• Rouse Consultancy

THE FUTURE OF INTELLECTUAL PROPERTY IMPORTS IN CHINA

Updated: Aug 2, 2019

China will continue to be a significant importer of brands and technology, which rely heavily on their IP for their competitive advantage. But the nature of opportunities will change. Business must track the trends to seize the chances.


#brands #tech #businessenvironment


At the China International Import Expo earlier this month, Chinese President Xi Jinping announced that China will import $30 trillion in goods and $10 trillion in services over the next 15 years. His speech also included a commitment to increase intellectual property protection and enhance punishment for those who violate IP rights, including significantly raising the costs for infringers. The Expo was intended to show, in no uncertain terms, that China is a global promoter of international trade. It also reflects China’s growing emphasis on consumerism as a tool to deliver its goal of becoming a “moderately prosperous society” by 2020. This is an ambitious target, which requires China to double its 2010 rate of GDP per capita.


Putting aside whether you believe China is in a position to promote free trade, what do Xi’s high-level remarks mean for the future of intellectual property in China?


Highly Functioning Intellectual Property System

It would be more surprising if the intellectual property lines were not included within Xi’s

speech, given how much negative press surrounds the Chinese IP legal system, especially within the trade war context. Although it is appropriate to address the concerns, it is important to remember the system is not as bad as the reputation which precedes it.

The legal system is built on a civil law model, with the German Justice Ministry playing an instrumental role in providing advice and support for the setup of China’s IP legal process over the past 20 years. The quality, cost and timeliness of the patents and trademarks granted to foreign firms under Chinese law compare well with the rest of the world.

Enforcement of patent rights is much cheaper and faster than in most developed countries. China has built a network of specialist IP courts across the country, which are handing down some very sophisticated judgments. China is now developing legislation to introduce an Intellectual Property Tribunal in the Supreme People’s Court to serve as an appellate for IP judgments handed out by the IP and intermediate courts. The courts are also adopting technology to further speed up the process, introducing virtual hearings where plaintiffs can join via video link.


Of course, challenges still exist. The size of penalties and damages awarded is still low.

This in part is linked to systemic difficulties in proving losses in Chinese courts.

Enforceability of judgments can be patchy depending on location. Bad-faith trademark

filings persist, as do counterfeiting issues. If steps were taken towards resolving these

issues, they would be widely welcomed by the international community. The IP judgement appeals process and previous statements by the Chinese Government on compensation demonstrate a willingness to act.


Domestic Entities Increasingly Understand and Adopt Intellectual Property

Awareness of intellectual property and its value is rapidly rising in China; as former Prime Minister Wen Jiabao said on many occasions, “competition in the future is competition in IP.” Even primary school children are learning about its importance. Businesses have embraced IP rights, and take their ability to access enforcement seriously.


As China matures as a market, businesses and academics want to prevent their ideas from being stolen, as much as anyone in the West. The level of patent filings in China has rapidly increased. In 2016, 43 percent of all global invention patents were filed in China.


Since 2004, there has been more patent litigation in China than in any other country,

including the United States. Around 99 percent of cases are Chinese companies suing

Chinese companies. Chinese entities are also beginning to make their presence better

known in overseas filings, although there is still a long way to go.


Implications for Intellectual Property in an Expanding Import Environment

Large numbers have been announced for future import targets, but commentators have

said that these don't amount to a significant increase beyond the current trajectory. The

outlook for IP-related imports will depend on the types of rights available to IP owners.


Growing Consumer Markets

For brands looking to profit from their trademarks, the equation is relatively

straightforward. Increased imports, of course, lead to increased sales of goods, greater

brand recognition and increased IP value. The extent to which companies can sell to China is dependent on import regulations, and the Chinese Government has repeatedly committed to further opening its markets. During the China International Import Expo, education, culture and healthcare were specifically highlighted as priority sectors. Business groups now await announcements of firm proposals.


Beyond the Government drivers, consumer demand is also creating opportunities for

international brands. In general, there is a move towards premium products, with many

shoppers switching from price considerations to quality and brand. This is perhaps no

surprise, given China’s rapidly expanding middle class. Foreign business is clearly well

placed to capitalize in sectors such as skincare, makeup, luxury, fast-moving consumer

goods, and foods and beverages.


But it should not be forgotten that as Chinese brands become more sophisticated and

carve out their own space in domestic and global markets, the competition grows. A

decade ago, there were only three Chinese companies in the top 100 global corporations based on revenue. Now there are 21, with many more showing strong growth trends.


Chinese Innovation Changing the Dynamics

On technology, the picture is more complex. Currently, China licenses a much greater level of foreign technology than Chinese entities licensing the other way. So China could be considered to be a "net importer" of patents. But as the Middle Kingdom becomes an

innovation nation, there will be less of a need to import IP from overseas. There is no doubt that China will reach this stage, thanks to their significant investment in technology

development.

Between 1992 and 2017, R&D spend surged by an average of 20.3 percent each year,

culminating in a spend of $257 billion in 2017. In turn, China’s ranking on the Global

Innovation Index, produced in part by the World Intellectual Property Office, rose from 29 in 2014 to 17 in this year’s index. In addition, their focus on the disruptive technologies of the future is making them a key global technology player.


China is already playing its part in many of the leading advancements in areas such as

energy, ICT, mobile payments and e-commerce. From 2013 to 2016, the number of

transactions made through nonbanking mobile apps increased from 3.4 billion to over 97

billion — an outstanding figure, given that those payments are made through service

platforms such as WeChat and Alipay, outside of the formal banking structure.

Although this is not a proxy for innovation, China owns 56 percent of the global blockchain patents, demonstrating at least the volume of resources which are being channelled into the technology. The U.S. owns only 22 percent. In addition, China is responsible for 48 percent of artificial intelligence funding, with the U.S. accounting for 38 percent.


As the trade war pushes China even further towards self-reliance, and tariffs increase the cost of foreign goods, this trend will only continue. Rather than importing foreign technology, more foreign rights holders will look for opportunities to co-develop new IP in a more sophisticated Chinese market.


Opportunities to Engage

Nothing is ever straightforward when it comes to the Chinese market. However, despite the changing landscape, there will continue to be opportunities for foreign rights holders in China. It is important to track and monitor trends to seize the best chances in such a fast moving market, where engagement can benefit significantly from deep local knowledge.