-Analysis-

BEIJING — Recently Xiaomi, China's largest smartphone distributor, made its debut in India. It was immediately sued by Ericsson for violating the Swedish company's patents. Only a few days later, the air purifier made by Xiaomi was also questioned by Balmuda, a Japanese brand, for copying its appearance.

As the Chinese saying goes: it takes more than one cold day before a deep river freezes. There are many reasons why Chinese enterprises are so often entangled in court cases involving copyright issues. Among the most significant causes are China's incomplete legal protection for patents, and the government's role in maneuvering so that intellectual property protection works to benefit homegrown Chinese industries.

That China doesn't make enough effort in protecting intellectual property rights has long been criticized by the international community. The costs are relatively low to infringe intellectual property rights in China, while it is expensive, in both time and money, to safeguard them.

As a rising industrial nation with large gaps in technologies compared to advanced countries, China relies mainly on importing core technologies. Thus Chinese authorities are inclined to see the issue through the objective of fostering immediate opportunities for the country's public and private enterprises, and eventually avoiding the jeopardizing of China's entire economic interests.

Putting aside whether such reasoning is right, it is undeniable that the Chinese government has used anti-monopoly measures to protect its national companies by suppressing the value of foreign patents in China.
　
In the case of Microsoft's acquisition of Nokia, the European Union and the United States antitrust authorities approved the acquisition unconditionally, whereas the Chinese Ministry of Commerce gave approval but with restrictive conditions, including a clause requiring Microsoft not to raise its patent costs.

When China's National Development and Reform Commission undertook an antitrust investigation of IDC, a U.S. wireless firm, IDC wound up eventually having to agree to a number of conditions, including reducing its licensing fee. Also, according to informed sources, in the Qualcomm antitrust case, the final penalties included a significant reduction of royalties.

Trying to gain time

Though pressuring patent holders via administrative measures favors Chinese domestic enterprises in the short term, it definitely isn’t a beneficial move in pushing China toward becoming a "creator nation."

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Xiaomi has the look. Photo: jtgeek

In the era of globalization, patent protection is territorial while multinationals have a strategic view of their patent protection. This is why it's easy to understand Ericsson's decision not to sue Xiaomi directly in China, but instead sat back and waited in India for three years. Ericsson had reasoned that filing proceedings against a Chinese company in China would encounter local and national protectionism. This is also why foreign companies rarely bother to file lawsuits in China, even though many Chinese firms do not pay them royalties.

The original intention of the China's weak protection of intellectual property rights was so that Chinese brands could gain time to conduct their own R&D and improve their global positioning in their sector. But this has simply resulted in Chinese companies being reliant on just such protection. Since they obtain core technologies at relatively low cost, they are not motivated to invest their time, energy and money to augment their innovative ability. This can easily be confirmed by looking at how many patents Xiaomi actually possesses.

But we are now beginning to see that if Chinese firms don't increase their investment in developing independent technologies, nor pay for using those of others, it's certain that litigation, such as Xiami has experienced, will happen once their businesses go overseas.

How this deep patent crisis is tackled will largely help determine whether China can transform itself from "Made in China" to "Created in China," with some of China's most interesting emerging companies at stake.

New industries must on one hand increase investment in innovative capability, and on the other learn to protect themselves with legal tools if necessary, knowing how to handle intellectual property right lawsuits properly.

Even for highly innovative enterprises, relying on patents is inevitable in an emerging industry, as patents often must be purchased from other companies to enhance a product's competitiveness. It is even said that Qualcomm, a company that designs and sells wireless telecommunication technologies, hires more lawyers than engineers.

Chinese companies, in particular those in the emerging technology-intensive industries, lack a basic awareness of intellectual property protection. It's unsustainable that they depend solely on the Chinese government, and will prevent them from expanding abroad.

China's top companies need to attach greater importance to protecting their patented technologies, the ones they developed themselves, and at the same time be able to weigh the legal risks when they make their debut abroad.

Foreign companies such as Qualcomm and Ericsson have struggled to be properly compensated for their patents in China. But be rest assured that they will sharpen their legal weapons in counter-attacking Chinese companies outside of China.

Thus Chinese firms really only have two choices: either give up on overseas markets or pay the royalties. Either way the winner will always be the one holding the patent.

*Tao Jingzhou is an expert in international merger & acquisition and arbitration law.