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Issue 238 | August 27, 2004
Strategic Intellectual Property and Emerging Standards for Entering the Chinese Market

To compete within any industry, a company must look for an edge over its competitors. In the high technology sector, companies looking for an edge are pointing towards China. However, jumping into the Chinese market has proven to be fatal to many high technology companies. Their failures are linked to the most important asset of high technology companies: Intellectual Property Rights (IPRs). In the recent past, the international community frowned upon China for its failure to protect IPRs. Loss of IPRs in China occurred for two reasons: the inability to catch the thief and the inability to punish the thief in Chinese courts. But China took affirmative steps to display its willingness to be a global player and protect IPRs in the future, such as updating its intellectual property laws for entry into the World Trade Organization (WTO) and providing assurances of protection in the future. Now, however a third way of losing IPRs in China is rapidly surfacing. China is adopting high technology standards which are different from the current standards. China's responses to the issues arising from these newly set standards question the future of foreign IPRs in China.

The Chinese market as a whole kept the global market afloat in 2003. Indeed, while the rest of the world's markets suffered or continued to stagger, the Chinese market alone accounted for nearly one-sixth of the global economic growth. As a result of rapid growth beginning in the last decade, the Chinese market accounted for a 21% growth in U.S. exports since 1999. With the world's largest population and the fastest growing market, China now has the second highest number of Internet users and has surpassed the United States to become the global leader for receiving foreign direct investment. Where foreign companies once felt reluctant to enter the Chinese realm, the same companies are now left without an option. They must actively look to expand towards China to remain competitive.

Many major foreign high technology companies are finding the entry into China difficult. As can be seen with the establishment, and later indefinite suspension, of the Wireless Authentication and Privacy Infrastructure (WAPI ) security standard for chip vendors, the imposition of new technology standards can highly influence decisions for entry into the market. Even chip giant Intel Corporation (Intel) temporarily withheld from entering China's market, mainly due to a failure to meet the standard set by the Chinese government. The companies suffering from a similar situation as Intel are facing a completely new effect on their IPRs. Though they may own IPRs, they are slowly witnessing China gain indirect control of them by the establishment of new technology standards. They are not suffering a loss of the IPRs but instead, are losing the value of their IPRs in arguably the biggest market in the world.

The China Electronic Standards Institute (CESI) reported that China must develop its own IPRs because of non-tariff trade barrier tactics utilized by foreign developed countries. Furthermore, CESI argues in its report that even though membership within the WTO ensures the nonuse of trade barriers against other members, China has fallen victim to a form of non-tariff trade barrier it refers to as "technology barrier," defined as "the use of laws, directives, regulations and standards to regulate trade between countries." Developed countries, such as the U.S., cannot compete cost-wise with developing countries, such as China. In an effort to control this arena, developed countries set technology barriers into international treaties or laws. Thus, standards for technology with IPRs owned by certain developed countries are set within these treaties and laws. China is left with two options. "One is to develop new technology to replace the patented idea. The other is to pay [a] license fee to use... [the foreign] patent. The first one would result in lost of opportunity [to sell while the market needs the product], while the second choice would lose cost competitiveness."

Through the lesson learned from attempting to trade with the global market, China has decided it will not be a victim in its own home. Thus, the country with the largest market and the fastest growing technology sector realized it had the power to set its own rules yet still maintain its international agreements.

Saving IPRs in China when standards change will be difficult. To have any chance, one must at least make sure the basics are covered. This includes registering IPRs in China and other international markets. Registering requires knowledge of key domestic and international rules and laws. Creating a joint venture with a Chinese company will also help, for China has been found to thoroughly protect IPRs of domestic companies.

More importantly, to protect IPRs from a standards change, one should make sure the IPRs are easy to license. China decided it would be easier to invent its own solution when dealing with problems such as licensing from different groups for the same technology or when the price for licensing is set too high.

To help avoid losing IPRs to a standards change, one might consider getting involved with the new standards being developed in China. Rather than try to lose the value of the IPRs, one can invent or obtain IPRs in sync with the proposed new standard. American companies such as LSI Logic and On2 Technologies are doing just that by helping China develop EVD.

To discuss these topics further, please contact Dennis Fernandez or Osama Hussain of Fernandez and Associates, LLP at (650) 325-4999 or at osama@iploft.com with any questions that you might have regarding this material. Information about the authors can be found at http://www.iploft.com.

The information contained in this email is provided for informational purposes only and does not represent legal advice. Neither the APLF nor the author intends to create an attorney client relationship by providing this information to you through this message.

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