Introduction

The Chinese government is establishing high technology standards that differ from international standards. In effect, foreign high technology intellectual property rights are losing value. In order to prevent this loss, owners must first understand why China is continually changing its standards and with this knowledge design solutions to avoid the loss. This note addresses why business in China is a necessity, discusses the reasoning behind China's policy to adopt different high technology standards, and suggests how to prevent foreign high technology intellectual property rights from losing value in China.

Background

To compete within any industry, companies often look for an edge over their competitors. To gain that edge, companies based on high technology intellectual property rights are looking toward China. "High technology intellectual property rights" refers to property rights dealing with advanced electronic devices or ideas. With the current growth of the Chinese economy, the value of high technology intellectual property rights have the potential to skyrocket, similar to as their predecessors did in the recent technology boom of the late 1990's and early 2000's. Blindly jumping into the Chinese market, however, has proven to be fatal for many high technology companies in the past. The failure is primarily due to the Chinese government's failure to protect foreign intellectual property rights.[1]

Aware of its past failures to protect foreign intellectual property rights and desirous of becoming a global player, China has begun to take affirmative steps to protect intellectual property rights, such as updating its intellectual property laws for entry into the World Trade Organization ("WTO"). The new laws effectively eliminated China's two most serious problems with intellectual property rights: its inability to catch thieves and its unwillingness to punish thieves.[2] However, a new threat to the value of foreign intellectual property rights in China is rapidly surfacing as China begins adopting high technology standards that differ from the current international standards.

Analysis

The Chinese economy is currently the strongest market worldwide and, since it does not appear to be slowing down, companies with high technology intellectual property rights must legitimately consider adapting their business towards entering the market. The Chinese market essentially kept the global market afloat in 2003.[3] While the rest of the world's economies suffered, the Chinese market alone accounted for nearly one-sixth of global economic growth.[4] Additionally, the Chinese market is responsible for a 21% growth in U.S. exports since 1999.[5] With the world's largest population and the fastest growing market, China now has the second highest number of Internet users[6] and has surpassed the United States to become the global leader for receiving foreign direct investment.[7] With these statistics supporting the potential profit of investing in China, companies that possess ownership in high technology intellectual property rights and are foreign to the Chinese market must consider how to swiftly include China in their business plans. They must incorporate themselves into the Chinese market to remain competitive.

However, China is not making entrance into its market easy for foreign companies with intellectual property rights in high technology. China has adopted a policy to obtain its own domestic intellectual property rights and is implementing this policy by establishing high technology standards that differ from the international community.[8] The combination of the policy and having a strong economy is the reason why Fortune Magazine declared that China would set the standard for technology in the 21st century.[9] Therefore, foreign intellectual property right holders for high technology are left to wonder if their intellectual property rights will have any value in China.

The acts of other countries have heavily influenced the policy to actively seek to establish more domestic intellectual property rights. The China Electronic Standards Institute ("CESI")[10] reported that China is forced to develop its own intellectual property rights because of non-tariff trade barrier tactics utilized by developed foreign countries.[11] CESI argues that even though membership within the WTO insures the nonuse of trade barriers against other members, China has fallen victim to a form of non-tariff trade barrier it referred to as a "technology barrier."[12] CESI defined "technology barriers" as "the use of laws, directives, regulations and standards to regulate trade between countries."[13] Developed countries, such as the United States, cannot compete economically with developing countries, such as China, in the production or development of technologic devices or ideas.[14] CESI accused developed countries of implementing technology barriers into international treaties and laws to suppress progress by the developing countries.[15]

As a result of the technology barriers, China and other developing countries were left with two options. "One is to develop new technology to replace the patented idea [while still following the established international standard]. The other is to pay [a] license fee to use… [the foreign] patent. The first one would result in lost [sic] of opportunity [to sell while the market needs the product], while the second choice would lose cost competitiveness."[16] Either choice contradicts the economic plan for any country. With the largest market and fastest growing technology sector in the world, China developed a policy to help its economy while still maintaining its international agreements. The Chinese government decided to help its constituents obtain domestic high technology intellectual property rights.

To help obtain domestic high technology intellectual property rights, the Chinese government will assist its technology industry when needed. For example, when the Chinese nanotechnology industry struggled, the government created a committee under the China National Accreditation Board for Laboratories to provide aid to the sector.[17] The vice-mayor of Beijing commented, "We are now pushing the development of nanotechnology into a new phase-gaining independent intellectual property rights of the core technologies in the gradual process of industrialization."[18] As a result of this new policy, domestic patent applications in 2003 outnumbered foreign applications for the first time in China since it became a member of the Patent Cooperation Treaty in 1994.[19]

Concern for how far China would help obtain domestic intellectual property rights did not arise until after it started to adopt high technology standards that were incompatible with international high technology standards.[20] Though there is no official group or organization to establish world-wide technology standards, there are many organizations within certain sectors of the technology industry that determine standards for their respective sectors.[21] Correspondingly, high technology companies align their research and development, in an effort to obtain valuable intellectual property rights, with the decisions of these groups. [22] In an effort to make their markets more inviting to high technology companies, developing countries set their national high technology standards to the agreed standards of the international community. In theory, this procedure would help the country develop faster, while also helping the company by providing it with a market for its products. With its strong economy, China gambled away from this idea and started to adopt high technology standards based on the standards invented by Chinese companies. Unfortunately for foreign high technology companies, the gamble is paying off. China's development continues to grow and its economy is still holding strong. While foreign high technology companies may still profit from other markets, their years of research and development are deemed valueless in the world's most profitable market.[23]

The enormity of new high technology standards truly became an issue for foreign high technology companies in the first half of 2004. In January, the Intel Corporation ("Intel"), the world's number one chip producer, came in direct conflict with a Chinese established security standard for wireless chips. China allowed all chip vendors six months to comply with the Wireless Authentication and Privacy Infrastructure ("WAPI") security standard for all circuitry utilizing wireless local-area network ("WLAN") technology. Upon failure to comply, chips were banned from the Chinese market. Intel complained that the standard did not comply with the standard agreed upon by the Wi-Fi Alliance. The Wi-Fi Alliance is an international organization set up to help WLAN devices stay compatible with each other.[24] Had the Chinese not "suspended" the standard due to international pressure, Intel would have lost the entire Chinese market for its now popular Centrino chipset.[25] Because China has shown that it has the ability to stop a company as big and strong as Intel from profiting in its market, other high technology companies are growing worried that they will receive similar treatment.[26]

Sometimes China is put in a position to develop its own standards by acts of foreign intellectual property right holders. For example, China attempted to license the next generation of the international standard for audio video compression from American intellectual property right holders.[27] When negotiations among licensors of H.264, a High-Definition Digital Versatile Disc ("HD-DVD") format, failed to provide China with a license, China adopted its own standard, the Audio Video Coding Standard ("AVS").[28] The AVS is a completely Chinese owned compression technology that, when fully developed, will compete against the H.264 codec technology.[29] China further used its new standard for technology to rival DVD. Enhanced Versatile Disc ("EVD") is partially Chinese owned and was designed to offer high definition for audio and video. Licensing for EVD will be simplified for any licensee and may become a new global standard if it proves to be technologically superior.[30]

Foreign industry groups and organizations are extremely worried about China's new policy and have asked their respective governments to get involved. The American National Standards Institute ("ANSI"), an organization setup to administer the United States' "voluntary standardization and conformity assessment system" issued a report to U.S. Commerce Secretary Donald Evans, Secretary of State Colin Powell, and U.S. Trade Representative Robert Zoellick[31] titled "Intellectual Property Rights Policies in Standards Development Organizations and the Impact on Trade Issues with the People's Republic of China." The report requests that the U.S. government intervene and dissuade China from developing its own standards.[32] The report emphasizes that international involvement in standard-setting is critical to the entire technological community.[33] Additionally, ANSI claims that the Chinese government favors domestic patent applications, favors Chinese companies over foreign companies, and changes international standards such that [foreign] patents are "neutralize[d]."[34]

The U.S., however, has greater issues to worry about with the effects of China's new policy. The U.S. is admittedly wary of the global stance the Chinese government is gaining through its new high technology standards. Roger Robinson, the Commission Chairman for the U.S.-China Economic and Security Review Commission, issued a statement at a hearing before the House Armed Services Commission stating, that "[technology] advances allowing China to challenge U.S. competitiveness in technology development is a vital matter for U.S. economic security."[35] Moreover, American military analysts are keeping a keen eye on China's advances in high technology. The Defense Department reported to Congress in its 2004 report that the "civilian electronics industry plays a key role in military modernization."[36]

Due to pressure from the technology industry and its own concerns at the governmental level, the U.S. has tried to keep open communications with China. The U.S.-China Joint Commission on Commerce and Trade ("JCCT") has been used as a vehicle for such communications. On April 21, 2004, the JCCT discussed and agreed to "technology neutral [approaches]" for establishing current Chinese standards.[37] This meant that China would make it easier for companies to build around its newly adopted high technology standards. Unfortunately for high technology companies, this agreement does not actually fix the problem imposed on them by new high technology standards.

China has made itself even more attractive by increasing trade growth 17%,, which enabled them to reach one trillion U.S. dollars in 2004,[38] and by holding conventions such as the International High-Tech Exposition in May 2004 in an effort to "strengthen international co-operation in the [technology] industry."[39] Wu Banguo, Chairman of the Standing Committee of the Chinese National People's Congress, visited four developed Eastern European countries in the second quarter of 2004 to encourage global market relations.[40] Trade between the U.S. and China has increased an average of 43% in each of the past three years[41] and the Ministry of Science and Technology of China planed to spend $1.3 billion in 2004 "to fuel the country's high technology."[42] These statistics leave high technology companies no choice but to keep pursuing entry into the Chinese market. Even Intel, after its chagrin over the Chinese adoption of the WAPI security standard, continues to enter the Chinese market. Knowing that the Chinese government has favored domestic companies in the past, Intel licensed out a portion of its manufacturing to a Chinese startup called Nanotech Corporation.[43] Although Intel is not committed to any foundry work within China,[44] the deal gives Intel the ability to compete amongst other Chinese semiconductor companies. Intel did not shy away from the Chinese market, but it carefully set up its business plan for China due to the realization that investments might prove futile if standards are changed.

Solutions?

Companies must be aware of the loss of value their intellectual property rights may face when operating within the Chinese market. This poses the problem of recognizing when a change in Chinese technology standards will occur. Considering that previous standards that China has attempted to set were at the cutting edge of their respective industries (see Figure 1[45]), a highly innovative idea may be one indication of a possible standard change. For example, EVD, the possible new standard change from DVD, was not designed to merely replace the DVD standard. It was actually designed to replace the next generation of DVD. In effect, EVD will be able to handle high definition audio and video just as HD-DVD purports to do.

Another possible indication of change in Chinese technology standards may be found within intellectual property right licensing plans. The AVS standard and the Time-Division Synchronous Code-Division Multiple Access ("TD-SCDMA"), a mobile-phone standard, are both being adopted by China following problems with licensing the established industrial standards.[46] These problems arise when royalties are set too high, when licensors cannot decide how much to charge for licenses, or when licensors cannot decide how to split the royalties amongst themselves.[47]

Technology related to the Chinese military may also be subject to a standards change. The Defense Department's report to Congress in 2004 warned of a direct link between China's civilian and military electronics sectors.[48] However, with the inherent sensitivity of China's military information, forecasting high technology standard changes based upon the Chinese military will likely be impossible.

Saving intellectual property rights from the changing standards in China necessitates taking some basic protective measures. One such measure is to register intellectual property rights in China and other international markets. This requires knowledge of key domestic and international rules and laws. Additionally, creating joint ventures with Chinese companies will help protect intellectual property rights because China has always protected intellectual property rights of domestic companies. Finally, easy licensing of intellectual property rights is the most important protection measure because China has decided to invent its own solutions when licensing problems occur or when the licensing price is set too high.

Another option might include participation in the new Chinese standards. Inventing or obtaining intellectual property rights that are compatible with new standards may be a better option than risking loss of intellectual property right values that are incompatible with Chinese standards. American companies, such as LSI Logic and On2 Technologies, have taken this approach and are helping China develop EVD.[49]

Conclusion

China is the fastest growing economy in the world.[50] The potential for high technology companies to profit in the Chinese market is undeniable. However, due to China's effort to increase the intellectual property owned by domestic companies, China is setting high technology standards that differ from the international community. With a strong economy, China's new technology standards are affecting foreign intellectual property rights. The most profound effect of China's changing standards is the diminution of intellectual property right value. Protecting intellectual property rights in such a turbulent environment is difficult. But keeping licensing simple and reasonably priced, as well as remaining informed about the Chinese market, will improve the chances of protecting intellectual property rights.