Rights of way

The bulk of Chinese companies are experiencing growing pains in developing intellectual property (IP) in international markets, a common challenge facing developing economies.

"But learning the lessons of history, Chinese companies can avoid many of the pitfalls that normally confound rapidly developing economies", says David C. Michael, senior partner and managing director of Boston Consulting Group and Greater China head of the company.

Based on Boston's global study, with a specific focus on the Chinese market, he highlights four critical levers that local companies can use to overcome IP deficits: partnering, acquiring intellectual property, building a focused IP portfolio and involvement in setting industry standards.

Partnering

Due to the long lead time required to build a powerful patent portfolio, a quicker way to forestall market exclusion is to collaborate with IP-rich corporations, he says.

"This approach holds down costs associated with gaining access to technology, although it also presents significant drawbacks in other areas," says Michael.

The United States National Science Foundation reports that between 1985 to 2000, Japanese corporations created more than 820 joint ventures with US companies in industries where IP is crucial, including information technology, biotechnology, new materials, aerospace and defense, the automotive industry and chemicals.

These partnerships provided an IP shield that enabled Japanese firms to successfully compete in markets and technology domains from which they might otherwise have been excluded.

Over the past decade, domestic companies also have been joining forces with foreign companies in IP-oriented joint ventures.

To these relationships the Chinese side typically brings a low-cost labor pool, manufacturing capabilities and the promise of access to the domestic market.

"Their joint-venture partners typically bring technology, intellectual property, investment capital, global distribution channels and management expertise," says the senior partner of Boston, who adds that acquiring an IP position is the fastest way to build a portfolio.

Acquiring IP

He again cites Japan as an example. During their rise to IP sophistication, Japanese companies completed at least 450 acquisitions of US companies that held valuable IPs, including more than 90 in the semiconductor industry alone.

In a recent study of Chinese mergers and acquisitions overseas, Boston found that IP played a significant role in a number of these deals, most notably Lenovo Group's acquisition of IBM's PC business and the takeover of Thomson's television division by the Chinese electronics company TCL International Holdings.

But "not all IP-oriented acquisitions need to be large," says Michael. "In fact, acquisitions of small technology-focused companies with strong IP positions are becoming more common."

Small "IP shops" eager to amass attractive patent portfolios are forming and merchant banks specializing in IP assets are beginning to emerge, helping an increasing number of corporate players commercialize their patents.

Many universities and research-oriented companies are also involved in such sales, hoping to maximize returns on their investments in innovation.

In addition, because a truly liquid market for IP does not yet exist, and the same IP holds different value for different buyers, Chinese companies may also acquire desirable portfolios at attractive prices", the veteran consultant says.

He notes that two types of acquisitions are possible. First, companies should acquire IP to protect their existing or soon-to-be-introduced products. Second, they might want to consider acquiring patents on which competitors are most likely to infringe.

The latter assets could prove to be a valuable trading commodity when competitors attempt to exclude emerging companies from key markets or to constrain their profits through royalty payments.

Building a focused IP portfolio

Many firms today invest in research and development and file patent applications on the basis of "what investors think" might be patentable, but the real key is to "focus on securing patents that strategists know" will bring both access and differentiation, says Michael.

He explains that because securing global protection for IP is expensive, setting priorities is essential. For emerging companies in China, the critical goal should be gaining affordable access to export markets by avoiding crippling royalty payments.

Ownership of directly relevant intellectual property is important, but sophisticated IP owners also seek patents in areas of their competitors' vulnerability. "They can use such patents as a leverage during negotiations," Michael says.

The standard-setting game



Through standard-setting processes, competitors reach agreement about common interoperability protocols. The field is rife with politics and intrigue, as industry competitors try to balance the need for cooperation with their drive for advantage.

In these complex multilateral negotiations, companies' power and influence depend on three primary factors: the best technology, the strongest IP and the largest market share.

"Fortunately, China boasts a major advantage over most other nations: a large domestic market," says Michael, adding that many companies want to sell goods and services in China and in some instances - for example, to gain market access - they might compromise and adopt standards that are more favorable to Chinese companies.

Until domestic companies can bolster their positions in technology and intellectual property, the size of their domestic market may be their best bargaining chip, the Boston senior partner adds.