Part 1: An introduction to IP in China

In the week of the Business of Intellectual Property Asia Forum (BIP Asia) 2011 there is surely no better time to explore the development of Intellectual Property in China.

There is a Chinese proverb that, translated literally, means “If you have money you can make the devil push your grindstone”. In other words: money makes the world go round. An investigation conducted by the Economist suggests that 2019 will be the date in history at which China surpasses America economically while a recent report published by the International Monetary Fund suggests the moment could come as early as 2016. If the 2016 date is accurate then there are but five years left of American dominance. But are these dates reflective of the increasing importance of Intellectual Property (IP) to the global economy? With the value of intangible assets in publicly-held companies in the US being valued at an astonishing $14.5 trillion and global licensing income reaching $180 billion it is right to ask whether the slowly awakening China can ever catch up as the world tilts from being dependent on capital resources to IP.

A recent article in the Intellectual Asset Magazine suggested that in respect of intellectual property assets the Chinese are light years behind the rest of the world in being able to exploit what is undoubtedly a rich vein of an ignored asset class. They lack so-called “intermediaries” which denies them access to, as the article points out, “top class strategic, analytic and valuation advice”. Metis Partners are such an “intermediary”: business analysts and specialists in the assessment, exploitation, monetisation and sale of IP assets. IP assets can constitute as much as 80% of the value of a business and undervaluing them, as China has done for so long, is a risky business in the 21st century.

As was quite evident recently in the imitation Apple stores being discovered in the city of Kunming, ironically, by an American blogger China has long been viewed not as an innovator but as a serial imitator. The Chinese consider imitation to be flattery and their conceptions of privacy do not resonate with Western notions of the private sphere and the public sphere – indeed the Chinese do not have a word for privacy. Alongside such farcical imitations are some staggering statistics: in 2010 1.2 million applications were received by the State Intellectual Property Office (SIPO) with 814,825 granted. China is expected to leap ahead of the USA and Japan in terms of patent applications by the end of 2011. These figures, however, fly in the face of economic reality for what is the value of these patents if they are not being properly exploited and lying ignored on balance sheets or copied on the streets with ease? Consider this quote from the Wall Street Journal from May 2011:

“Rampant piracy means Microsoft Corp.’s revenue in China this year will only be about 5% of what it gets in the U.S., even though personal-computer sales in the two countries are almost equal, Chief Executive Steve Ballmer told employees in a meeting here.”

This quote sums up the current state of play in China quite well as they run their horse and cart through the established world order. Microsoft products are available on Chinese streets for $2 and $3 although China will one day become Microsoft’s biggest potential market. IP in China is a great paradox: on the one hand it will soon surpass America and Japan in patent applications but on the other hand they display a ruthless lack of respect for the established IP of the West and inside their own country.

In respect of infringing IP the Chinese clearly have a lot to learn although they have clear precedent in history as the Economist from April of 2009 observed: America infringed patents on a colossal scale in the 18th century as they first started to develop. Perhaps this fertile period in China, where infringement occurs on an industrial scale, is but a foreshadowing of a future where China holds all the playing cards. Let us not forget that the Communist party did not allow patents until 1985.

This blog is presented in two parts – next week will discuss the exploitation and monetisation of IP assets in China and how companies like Metis Partners and other “intermediaries” are really needed.

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