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Start-ups

How innovative China’s growing pains point to an urgent need for IP know-how

Chinese tech newcomers are under-equipped legally and culturally to compete against global rivals even as their innovation is coveted more than ever

PUBLISHED : Wednesday, 20 December, 2017, 7:17am
UPDATED : Saturday, 23 December, 2017, 6:35am

When the decision finally came earlier this year, it was the end of a seven-year legal battle and the end of the appeal line for Chinese electronics maker Gotop.

The Shanghai Higher People’s Court ruled against Gotop’s appeal against US chip maker Qualcomm’s use of the Chinese brand name, Gao Tong.

Both companies had sold products under the name but Gotop was caught off guard in 2010 when China’s Trademark Office approved the US firm’s request to revoke Gotop’s Gao Tong trademarks.

The Shanghai-based electronics maker had been in business for almost two decades but it had not used the trademarked name in several years, allowing the trademark protection to lapse.

The case highlighted how even a successful Chinese company can lose out to an international competitor more adept at navigating intellectual property disputes.

IP specialists say Chinese companies will need to catch up as overseas companies move more aggressively to protect their intellectual property rights in domestic and international markets.

Jenny Lee, a GGV Capital venture capitalist investing in US and Chinese start-ups, said Chinese companies were not prepared enough when it came to international litigation.

“In the West, companies are used to being more aggressive, suing each other to remain competitive. That is not the environment in China. But the Chinese CEOs need to learn fast to be able to compete worldwide,” Lee said.

Technology is growing to touch all aspects of people’s lives. The Internet of Things (IoT) market alone is expected to grow to US$7 trillion by 2020, according to IT research firm International Data Corp. Chinese firms that are active in this increasingly competitive sector will face more challenges while lacking the extensive legal expertise that is needed for success.

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“A huge market and a large number of players is a potent mixture to trigger a full-scale patent war bigger than the one we’ve seen in the smartphone space,” said Kenie Ho, head of the IoT group law firm Finnegan Henderson Farabow Garrett & Dunner.

“There is already a huge global patent stockpile on IoT-related technology. That is a lot of kindling and a lot of firewood building up.”

Innovators globally filed 3.1 million patent applications in 2016, up 8.3 per cent from a year earlier and marking the seventh consecutive year of growth, according to the World Intellectual Property Indicators produced annually by the World Intellectual Property Office (WIPO), a United Nations agency that seeks to promote the protection of intellectual property worldwide. China’s increase accounted for 98 per cent of total growth.

As a patent war heats up, Chinese entrepreneurs are likely to get caught in the crosshairs. In US President Donald Trump’s first national security speech on Monday, he vowed to protect US intellectual property rights against China’s ambition to “unfairly tap into the US’s innovation pool by stealing its proprietary technology and early-stage ideas”.

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While the total number of patents granted in China last year was a world high, according to WIPO, Chinese companies continued to lag their counterparts in the US. Last year, the US Patent and Trademark Office granted 10,113 Chinese patents, 10 times more than were registered a decade ago, according to Derwent Innovation, a global IP data provider owned by Clarivate Analytics. But that was just 4.6 per cent of the 220,000 patents registered by US companies, or one-fifth of the 47,385 Japanese patents.

“Such a lag could leave Chinese companies more vulnerable,” said Hongfei Zhang, managing partner at KIG Capital Advisors, a New York-based investment firm managing US$200 million, focusing on tech, media and telecom.

“We look closely at where the start-ups have patents granted before we consider investing in them. We will urge the companies to apply for patents in all the markets they do business in.”

More savvy start-ups are heeding the warnings.

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Royole Corp, a thin-display technology developer founded in 2012 by Zihong Liu, a 34-year-old graduate of Tsinghua and Stanford universities, said on its website that the company filed “innumerous patents with respect to materials, process and design” both in the US and in China.

KIG is among a group that provided US$800 million in equity for Royole.

Most China-based start-ups, however, do not consider patents a top priority.

“Folks that are in an early stage tend to focus on the tech and how to get products to the market quickly,” said Christian Mammen, an IP lawyer at law firm Hogan Lovells.

“Taking time to protect IP may get overlooked. That’s a risk that will come back to bite you.”

And in China, global expansion is no longer a strategy that can be overlooked as the first generation of start-ups matures.

China is now home to one in every three of the world’s 262 start-ups valued at over US$1 billion, known as unicorns. They account for 43 per cent of the global value of these companies, according to an August report by McKinsey Global Institute.

The trend is unlikely to let up any time soon.

“China has all the elements to encourage innovation,” Zhang said. “There is ample capital, talent and government support.”

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Investor confidence in supporting innovation grew as Chinese President Xi Jinping laid out his plan a few months ago to make China a leading global power in innovation by 2050.

Investments by venture capital firms in China have surged to historic highs, reaching US$31 billion last year, despite a global slowdown, according to KPMG.

With the support of capital, entrepreneurs have more time to fail and try again, marking a significant shift towards a culture more tolerant of risk.

Chinese firm DJI, which owns some 70 per cent of the US drone market, spent 10 years perfecting its technology, said GGV Capital managing partner Hans Tungat earlier this month at the 2017 Fortune Global Forum in Guangzhou.

Looser regulations in China also have enabled a new generation of data-centric companies to take root.

“That freedom combined with the sheer large amount of data available will propel more innovation in health care and biotech,” said Jonathan Woetzel, an Asia-based director with the McKinsey Global Institute, at an Asia Society event in New York last week.

How China’s ‘copycat’ tech companies are now the ones to beat

“Chinese entrepreneurs are the most hungry bunch right now. There is nothing that’s impossible.”

China had been known for copying Western designs. Now its entrepreneurs are creating cutting-edge technological innovations that challenge Silicon Valley’s leadership in e-commerce, mobile payments and computer-recognition applications.

“We no longer see business models copied by China any more. Its companies are maturing to become fantastic idea generators,” said Jonathan Curtis, portfolio manager for the US$1.8 billion technology fund at Franklin Templeton in San Mateo.

“Western companies are now watching what’s happening in China and realise that ideas can flow in both directions.”

Franklin’s technology fund has been adding to its stake in Alibaba Group Holdings Limited, making the Chinese tech giant the fund’s biggest investment at US$72 million as of the end of September.

Alibaba owns the South China Morning Post.

Franklin is betting on Alibaba and Tencent Holdings, in which the fund also invests, becoming global leaders as the companies dominate data-rich markets.

This development is in stark contrast with the moves of earlier Chinese tech companies.

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Huawei Technologies, for example, ran into trouble in the US over patent disputes. The company’s US growth stalled for years because of litigation. Since then, however, the company has regained ground and become China’s leading US patent holder with 4,082 patents granted as of 2016, according to Derwent data.

With Chinese products evolving from made-in-China to designed-in-China, the advancement sets the stage for more intense litigation.

“Modern day start-ups are operating in a more sophisticated environment against more established competition,” Finnegan’s Ho said. “The fights will be more fierce. Everyone is looking to disrupt.”

“If you don’t protect yourself, your competitor or someone that your technology is designed to crush will sue you and try to crush you.”

Additional reporting by Robert Delaney