Strategies and Methods to Protect Intellectural Property in China

December 13, 2010 2 comments

I recently presented on IP protection in China at a business conference. Here are my notes on some strategies and methods I used as a reference at the presentation, which might be useful for those who are seeking commercial mechanism rather than legal actions to protect IP in China.

 Large companies: Being an industry leader and one-stop solution provider:
-Keep innovating to keep a leading position in the industry. It is a costly approach and work well with large companies;
-Bundle core products/services with non-core but related products/services so that you offer a one stop solution or a whole package for your customers. The demand for your core products/services will drive the growth for non-core business, as your customer will find switching cost or operation cost is to high if they use your core services while using someone else other services.
-Also you may charge for the products/services which are hard to be copied while providing for free other products/services which could be easily copied so that you will take all the market shares your IP infringer may get;
-Build the IP protection in the R& D or product development phase;
-Get involved in the process in industry standard or quality standard development and drafting. Chinese companies are most good at this to protect their IP and monopolize the market.

Vertical integration or horizontal integration: backward acquire your supplier to control the core knowhow or forward integrate with your clients to share risks and cost and better control your IP; or alternatively you enter related industry sectors by acquiring or being partially acquired so you provide a broader range of related products and services to lock in your customers and hence protect your IP;
Target the “right” market, .e.g Microsoft China focused on the market segments which are so concerned about their brand, legal position and market image and also those who could be easily tracked, such as Fortune 500’s subsidies, large Chinese private companies and Chinese government-owned enterprises.
Technical ways, such as dingo for software, online service delivery rather than providing it in the form of softcopy;
Internal IP protection through technical methods:
-Track your sales by offer free membership and free complementary services to your clients so they will not switch to others while you can track your sales and market;
-Firewall, monitoring of emails, back up of materials, etc;
-Leverage media especially online monitoring by brand promotion, online forums, blogs etc.
-Give incentives and retain your key staff who mater your core knowhow;
Protect IP from your stakeholders and Build a network of stakeholders who assist you to protect IP

-In lots of cases, your clients or suppliers are IP infringers so put certain terms and conditions in your contract with them to protect your IP or at least warn them the potential penalty of IP infringement;
-Sharing some knowledge while keeping the core knowhow so rather than taking the risk to infringe IP, potential IP infringers will focus on maximising the benefits as a “peripheral” partner. Microsoft adopted this approach;
-Leverage stakeholders such as clients, suppliers, media, end customers etc to monitor the market and potential IP infringement.
-Get more people to work with you on your IP protection by licensing the IPs or more creative way mutual licensing or multi-cross licensing so you work with a network of organizations to protect and benefit from each others’ IP.
Focusing and giving strategy:
-Look at the cycle of your products and services. If it is at the later stage of product cycle, you may consider the option to share the knowledge for free to beat the market share your IP infringers may get, and hence reduce their profit margins and dampen financial viabilities;
-Last but not least, if you have limited resources, focus on IP protection of your core technology knowhow or in the most important market, the one which you are most advanced, which is hard to be copied and which you can get the best profit margin.

Advertisements

Sara’s Presentation on Models for Outsourcing to China

December 9, 2010 Leave a comment

China’s New Measures on Supervision and Handling of Unlawful Contractual Practices

November 8, 2010 Leave a comment

The State Administration of Commerce and Industry (SAIC) recently promulgated the Measures on Supervision and Handling of Unlawful Contractual Practices (the Measures) , which will take effect as of November 13, 2010. The Measures aim to further regulate the entry and performance of commercial contracts, paying particular attention to how standard contractual clauses are applied by the business operators, in an effort to better protect the legitimate interests of the contracting parties.

The Measures define “unlawful contractual practices” as behaviours designed to derive illegal profits from contractual activities and in contravention of applicable laws and regulations. The Measures target three types of actions. The first is contractual fraud, meaning obtaining money or valuables by means of fabricating facts or concealing truth for the purposes of possessing money or valuables of the others. The second is seeking an illegitimate benefit by means of bribery, coercion or collusion with others using a contract. The third is to infringe upon the interests and rights of consumers by using standard contractual clauses to disclaim liability of its own and to aggravate liability on the part of the consumers.

Contractual fraud

The Measures clearly spell out the scope of contractual fraud by enumerating 10 types of prohibitive behaviours, including:

  • to fabricate fraudulent excuses for suspension (termination) of contracts;
  • to circulate or utilize false information to lure others into contracts; and
  • to maliciously include in the contracts, provisions which cannot be performed and as a result rendering the counterparty unable to perform contract obligations.

It is worth noting that anyone knowingly (or should have known) facilitating contractual fraud, such as intentionally furnishing certificates, licenses, stamps, accounts or other facilitating acts, are also punishable under the Measures.

Misuse of standard contractual clauses

According to the Measures, business operators are now prohibited to disclaim liability by adopting standard contractual clauses from:

  • personal injury to consumers;
  • property damage to consumers caused by wilful misconduct or gross negligence of the business operators;
  • warranty prescribed by law on goods and services provided by the business operators to consumers;
  • liability arising out of breach of contract; and
  • other liability prescribed by law.

The Measures further provide that business operators cannot use standard contractual clauses to aggravate consumer’s liability in respect of:

  • penalty for breach that exceeds the lawful limit or reasonable amount;
  • operational risk that should be born by the business operators who drafted the standard contractual clauses; and
  • other liability that should not be assumed by the consumers by law.

Finally the Measures list various consumer rights that cannot be eliminated by way of standard contractual clauses:

  • right to amend or terminate contract pursuant to applicable law;
  • right to claim penalty for breach by the other party;
  • right to compensation;
  • right to seek explanation of standard contractual clauses; and
  • any other rights enjoyed by consumers by law.

Based on the foregoing, some commonly seen unfair clauses or the so-called “overlord clauses” (“霸王条款”) such as “we reserve the right to final interpretation of the provisions under the contract” (“本公司拥有最终解释权”), “the products cannot be returned by customers for whatsoever reason” (“客户不得以任何理由退货”), and “tourist agency shall not be liable for the accidental personal injuries of tourists”, etc, will be caught under the Measures.

Administrative penalties

Any unlawful contractual practices caught under the Measures could render a penalty to the business operator of a fine of up to three times the illegitimate benefit, but capped at RMB 30,000.

Time for business operators to review their standard contract clauses

If business operators have been using their standard contractual clauses to mitigate their contractual liability, it is time for them to revisit and review those standard clauses to ensure they are not caught under the Measures.

Must-Knows about Business Set-up in China

September 16, 2010 Leave a comment

More and more Australian companies are setting up their own presence in China in order to source products/services directly from China or enter the Chinese market. However, given the alien nature of local regulations and business environment in China, it is critical to be proactive and fully prepared before you take the strategic move to set up your own presence in China.

Here are some “must-knows” before you set up the business in China:

1.You have more than one option for a local presence in China. Your China presence may be in the form of a wholly owned foreign enterprise, a contractual joint venture, an equity joint venture, a representative office or a local representation by a third party (local secretary/representation service companies).

2.Carefully define your business scope for the China presence. China National Development and Reform Commission may prohibit, restrict, permit or encourage your business set-up based on your business categorization and scope. Hence it is critical to carefully define your business scope so as to be permitted or encouraged to set up the presence.

3.Select the right location for your China operation. China abandoned its preferential tax rate for investments of foreign companies from January 1st 2008. However, some areas still offer local preferential policies for foreign investors in terms of land leasing/procurement, staff recruitment and management, local tax etc.

4.Confirm the minimum registered capital for your China operation. The Chinese government requires certain minimum registered capital for various types of businesses. However, local Industry and Commerce Administrations may decide on your minimum registered capital based on their judgement of your business scope and operation scale. You need to confirm with local government agencies the minimum registered capital through local contacts before taking any other actions in case they require an amount far above your financial resources available for the China operation.

5.Integrate commercial clauses in the Articles of Association to maximise profit repatriation into Australia. You may have commercial arrangements between your Head Office in Australia and the subsidiary in China in order to guarantee maximum profit repatriation. However, some arrangements must be included as part of the Articles of Association to be valid. The Articles of Association is to be submitted to local government agencies for approval and filing during business license registration. Hence, you must incorporate necessary clauses in the Articles of Association in the first instance.

6.Fully understand employers’ responsibilities and liabilities in China. China issued the new Law of Labour in 2007 which specified issues on employment contract, redundancy, etc. Without preliminary knowledge of this law, you may end up spending a huge amount of time and money terminating the contract with under performing employees, as the structure of the contract was wrong. You also need to be aware of the mandatory employee welfare and benefits so as to include such cost in the budget.

7.Conduct thorough due diligence and credit check on your joint venture partners. Your partners may not be what they claim to be. China has the business culture to show their wealth and status by driving luxurious cars, wearing prestigious watches and owning an impressive factory. Hence your Chinese business partners may look financially viable and well connected but, as a matter of fact, live on bank loans and personal debts.

8.Develop a comprehensive local employee management system. It is a hard job to recruit the right staff in a foreign country. It is even harder to effectively manage the local staff in a foreign country. A sound and robust employee management system will encourage the engagement and commitment of local staff and avoid potential risks. You may include reporting and communication policies, staff training, performance assessment, remuneration, career management and employee management manual in the system.

Business set-up in China is a big project by itself, which requires financial and time commitments, business management knowledge and China expertise. Identifying a competent agent to manage the complex process will be a cost and time effective way to avoid potential pitfalls.

Must Knows about Outsourcing Manufacturing to China

September 16, 2010 Leave a comment

Are you considering outsourcing your manufacturing to China?

Before deciding, you need to:

  • assess the outsourcing opportunity
  • select manufacturing partners
  • protect your intellectual property
  • guarantee quality supply and,
  • secure a long-term commitment from your manufacturing partners?

You also need to consider the following:

Take a strategic approach

Outsourcing your manufacturing should be a strategic decision to enhance your international competency and create scales of economy so that you can harness your financial and human capital to concentrate on your core business and its competitive advantage.

Before making the decision to outsource you need to:

  • Determine the costs of outsourcing vs. in-house production / product purchasing
  • Assess your corporate goals when it comes to ownership, strategic fit, core competency, expansion plans, long term vision and business strategy
  • Look closely at your operations in particular performance controls, logistics, IP protection, what to outsource
  • Review your organisation and how outsourcing will affect your control, management efficiency, staff issues.
  • Choose the right cooperation model

Here are some options:

  • Buyer-OEM manufacturer: you simply outsource manufacturing to the manufacturer.
  • Strategic alliance: through commercial arrangement, you and your manufacturing partner share the production risks and profits.
  • Joint-venture: set up a contractual or equity joint venture with your manufacturing partner in China. Hence you partially own the manufacturer to better manage the manufacturing overseas.
  • Build a robust outsourcing contract
  • Contracts are crucial and need to be scrutinised.
  • Terms of payment: most popular terms include L/C, bank guarantee, D/A, D/P, down payment plus L/C or D/A or D/P. Letter of credit is a comparatively safer and fair term to start with.
  • Specify the requirements for quality and inspection authority: Chinese government agency conducts pre-shipment inspection by random sampling. However, many companies prefer to outsource to SGS or other third parties to conduct pre-shipment inspection on their behalf.
  • Legal arrangements for disputes: include in the contract the clause that International Chamber of Commerce rather than local industry bodies or government agencies in China will be the arbitrator in case of any disputes.

Protect your intellectual property!

  • Don’t rely on legal actions on IP to work for you in China! Be proactive and protective:
  • Keep core products/technology manufactured in-house.
  • Position your self as leading innovator and brand. Keep ahead of your competitors in technology.
  • Split manufacturing tasks to 2 or 3 un-related manufactures in China. Have a back up for each current manufacturing partner.
  • IP registration in a country rather than China does not mean you are automatically registered with China. Register your patent, copyright, design and trademark in China.
  • Invest in un-tangible assets: brand, business process, people and corporate culture.

Don’t compromise product quality

It’s common sense but lots of companies don’t apply for it: Put your QA system into place. The manufacturer manufactures for you and is supposed to do it to your standard. Ask yourself: does their QA meet your requirement? You need to have your own quality assurance system in place to monitor the manufacturing and conduct pre-shipment inspection. Fortunately, it may not be as expensive as you assume. Get a local QA service provider monitor your manufacturing partner on your behalf today.

Above all, be committed!

It’s common sense and here are some tips:

  • Conduct due diligence on manufacturing partners
  • Update information on the partners, competitors and the industry
  • Visit China and review situation often
  • Maintain your manufacturing partners’ commitment through frequent communication, profits/benefits sharing and steadily growing orders
  • Look for complementary resources and create synergies
  • Seek win-win solutions
  • Take advantage of the partner’s complementary resources
  • Maintain your own competitive advantage
  • Seek to evolve the relationship
  • Drive long-term strategy and growth

Acquire A Business in China?

September 16, 2010 Leave a comment

China is not just the World Factory, most booming market for resources and consumer goods and the fastest growing economy in the world with an average GDP of over 10% in the past decade, it is also an attractive destination for foreign investment since China opened its door to foreign businesses in 1978.

With China’s access to WTO in 2000, less restriction on foreign investment, new infrastructure, supply of abundant quality and cheap labour, there are good opportunities to invest in a quality business or acquire businesses in China.

Acquiring or investing in an existing business is a way to quickly establish your own presence in China and leverage its facilities, resources and networks to access the Chinese market or conduct low-cost manufacturing in China and then export to the global market. With the global financial crisis, China presents a great opportunity for Australian companies to acquire export-oriented manufacturers especially in East China and South China. However, it is usually a complicated and exhausting process.
Here are some Must- knows you need to be aware of before take your first move to acquire or invest in a business in China:

  • Take a strategic approach to acquire or invest in a business in China. Review your internal resources, corporate strategy and business strategy, and identify needs and gaps so as to better assess the option to acquire or invest in a business in China. You may start by reflecting such questions: what is the ultimate goal to do so? How does this acquisition/investment serve my long term business strategy? Is there any alternative? What resources can I allocate to this acquisition and investment? What attributes do I need from the acquisition target.
  • When search for acquisition or investment target, bear in mind you are looking for the best fit rather than the cheapest or biggest. How does the target fit in your overall business strategy and China strategy? Do you have a criteria list of must-have and ideal attributes of acquisition/investment target?
  • Do your research and search carefully among a large pool of acquisition/investment targets. When foreign companies enter China, they are often amazed by the “low price” they are paying to acquire a business without much comparison with other potential targets.
  • Conduct comprehensive due diligence on your acquisition/investment target. The due diligence is much more than just financial auditing. You need to fully understand the target from tip to toe: industry reputation, business scope restricted in their business licence and industry licence, ownership of their venue and facilities, financial aspects, manufacturing capabilities, current ownership and corporate structure, marketing and sales capabilities, corporate culture, team, relationship with local government, supplier and client references, patents and trademarks, legal issues, default history, market scandals and brand crisis, etc. You may leverage a consulting firm to assist.
  • Have a competent Chinese negotiator in your acquisition team who can understand all the cultural nuances and negotiation tricks of your Chinese target. Bear in mind: not any Chinese can do this job as not any Australian can negotiate a good deal in Australia. Find competent and experienced ones.
  • Understand compliance and governance issues and smartly structure the deal and the organization. China restricts foreign investment in some industry sectors in term of maximum percentage of shareholding, especially financial sector, media and some critical resources sectors. Also these is restriction on the number of directors and normal practice on the appointment of Chairman and Managing Director.
  • Do not under-estimate the complexity of the bureaucratic procedures and timeframe. As a foreign investor, you may have full proof of your qualification and financial capabilities and then go through Chinese government agencies to get all documents chopped. It will be more cost effective and efficient to appoint an experienced agent who knows where to knock at the door and get things done in China.
  • Develop a profit repatriation mechanism and an exit strategy. You invest in China not to lock your money in China and be there forever. Think about the end from the very beginning. As Chinese saying says “ without thinking on a long term basis, you will always have immediate trouble”.

China Snapshot

September 16, 2010 Leave a comment

There are 1.3 billion people in China. While a population of this size might sound like an exciting opportunity for your product or service, it is important to understand the demographics of China to identify your actual potential customers.

  • China is situated in eastern Asia, bounded by the Pacific in the east and Russia and Mongolia to the north.
  • The third largest country in the world, next to Canada and Russia, it has an area of 9.6 million square kilometres, or one-fifteenth of the world’s land mass.
  • A one-party state, it is dominated by the Chinese Communist Party (CCP).
  • Its capital is Beijing.
  • Head of State is President Hu Jintao.
  • Premier, Wen Jiabao, heads the State Council, the most important administrative body of the Central Government.
  • The CCP’s Politburo also plays a key decision-making role in relation to reforms affecting the commercial environment.
  • Has the world’s highest population of 1.3 billion. The eastern part of China is densely populated, while the western part is sparsely peopled.
  • Is the world’s third biggest economy.
  • Has one of the world’s oldest continuous histories and civilisations.
  • It has a rich and diversified culture and is also known for its great historical and engineering achievements – The Great Wall of China, The Grand Canal and the Karez irrigation system. It is the birthplace of papermaking and printing, gunpowder and the compass.
  • Its people have a strong sense of pride based on their country’s history and ancient culture.
  • More than 90 percent of China is comprised of the Han Chinese. The rest are minority groups.
  • Around 60 percent of its population live in rural areas.
  • Mandarin, also known as putonghua or the common language, is the official language and is spoken by all but a minority. It is the language taught in schools and supported by the government. Mandarin is one of the official working languages at the United Nations. Other dialects of the 55 minority nationalities are heard throughout China.
  • China’s currency is the reminbi (RMB) which means the people’s money. The unit currency of the RMB is called the yuan.
%d bloggers like this: