China’s leap forward on patents

How groundbreaking are China’s patents? How innovative really is China?

What a difference seven months makes. In May 2014, the Economist lauded China’s patents. Endorsing an upbeat report, by the World Intellectual Property Organisation (WIPO), on China’s international patenting, the newspaper headlined: ‘Ever more inventive’.

Fast-forward to December 2014. Now, on the same subject, the same publication headlined: ‘Patent fiction’. http://econ.st/1DulGsx The Economist attacked a second upbeat report on China’s patents – this time, from Thomson Reuters. http://tmsnrt.rs/16HOXmo It accused Chinese bureaucrats of imposing targets that led China to go ‘merely churning out patents’. That kind of approach, it concluded, ‘does little to advance innovation’.

Clearly the Economist finds Chinese patents a tricky issue. So what’s the true picture?

Patents filed in China: exploding

First, take patents filed domestically. They’ve multiplied 10 times, 2000-12, to getting on for 2.5m filings. Over the same period, China’s world market share of patents rose from four to 28 per cent – chiefly at the expense, interestingly enough, of Japan (31 to 15 per cent). Since 2012, too, China’s State Intellectual Property Office (SIPO) has been the largest in the world. It has 6000 staff.

China’s domestic patenting isn’t all froth. In 2014, SIPO says, http://bit.ly/1Ab1Tx8 869,000 of the applications it received were for ‘utility model’ patents, which relate http://bit.ly/1AOW5L0 only to novelty in shapes and structures, and which are taken out to gain short-term protection. About 600,000 other applications were for design patents, which again rarely feature genuine breakthroughs. Nevertheless, ‘invention’ patents, which protect real inventive leaps for 20 years, were 12 per cent up on 2013, at 928,000 applications. About 800,000 came from Chinese sources – more than 80 per cent from companies, rather than lone inventors (declining fast) or universities (very small). Foreign firms, however, took an unmistakable 70,000 of 223,000 invention patents actually granted.

Yes, neither China’s patents statistics nor its invention patents are perfect. But which country can fairly claim such laurels? Yes, China’s government subsidises invention patents… just as Britain, the Netherlands and Spain will go on giving new patenting firms tax breaks until 20 June 2016. http://on.ft.com/16YDoqP And yes, since 2012, Chinese-owned firms, rather than the subsidiaries of multinationals, have filed four in every five applications in China – zealously pursuing, no doubt, directives laid down in the 12th Five Year Plan. The Chinese State Council’s December 2014 Action Plan for Deepening the Implementation of National IP Strategies announced that it wanted China to triple its patent output, taking the number of invention patents per 10,000 inhabitants from four in 2013 to 14 in 2020. That has prompted some derision. So, too, have those Chinese convicts, or those Chinese about to go to jail, who have cut their jail terms by developing patents, or even by buying them from other people. http://bbc.in/1veAMez

Yet if derision sometimes attends patents registered in China, firms based there now win foreign patents, which are often weightier than domestic ones, in numbers that, though small, are rising fast.

Chinese patenting abroad: on the rise

WIPO found that China applied for about 25,000 patents abroad in 2012, more than half of them in the US. In 2009, at least, nearly 90 per cent of China’s 10,000 foreign-orientated patent families – sets of interrelated patent applications filed to protect the same invention in both China and one or more other countries – were in the exacting ‘invention’ category. And in 2009, too, nearly 40 per cent of China’s international patent families covered more than one office overseas.

The rise in Chinese patenting abroad needs getting in perspective. China’s US patents have enjoyed rapid growth, but in 2013 they still lagged significantly behind the big players:

US patents granted, thousand, 2013 http://1.usa.gov/11ODuiF

• US 148
• Japan 54.2
• Germany 16.6
• South Korea 15.7
• Taiwan 12.1
• Canada 7.3
• China 6.6

Given China’s vast population, its US patenting still has a long way to go. Its more broadly international patent families could also be much more numerous. Back in 2008, at least, China only filed five per cent of its patent families abroad, against a German figure of 57 per cent (uncharacteristically low, for Germany), and a US figure of 50 per cent.

China’s international patenting isn’t all about first steps. As Neil Wilkof has perceptively written on the IPKat website, http://bit.ly/1zDxDKO ‘perhaps the low percentage of foreign filings might signal that only more promising inventions are being pursued abroad’. Anyway, the picture is more complicated still – for China’s patenting in the US and Europe is not as Chinese as one might think.

China’s US patents – not very Chinese just yet

Looking at patents granted China by the US patent office in 2010, Leo Branstetter and his colleagues at Carnegie Mellon university (1) found that just a quarter were purely Chinese-invented and assigned to indigenous firms. However, 30 per cent were Chinese-invented, but assigned to foreign multinationals; and a dominating 37 per cent were assigned to foreign multinationals, but were the product of  ‘international co-invention’ – the Carnegie term for intra-firm collaboration, across borders, in patents. Much of this collaboration is aimed at bringing innovations not just to China, but also to global markets. A similar, global complexion to Chinese patents is registered, according to the Branstetter team, among the patents Europe grants China.

As the Carnegie Mellon academics note, the mixed national origins of China’s US patenting effort mark it off from Japan, Taiwan and South Korea, whose international patents have long been both produced and owned on a purely indigenous basis:

‘China opened its borders more completely to foreign companies and did so earlier in its economic development than did many of its Asian forebears. Second, China’s vast size and rapid growth motivated multinationals to establish research and development centers in China at an early stage, to ensure their success in this key emerging market. Third, the Internet made it possible for engineers based in China to collaborate on research projects with colleagues all over the world in something approaching real time.’

This account convinces. Further, it brings out how China has nothing to be ashamed about over that part of its US patents that derives from international divisions of labour established inside foreign-based multinationals. If Chinese firms closely participate in patenting efforts that are so clearly international, the suggestion is that they can sometimes, if not always, punch their weight in innovation as much as the West.

In an earlier (2013) paper again using data up to 2010, http://bit.ly/1Fxf23L Branstetter and colleagues add that Taiwanese and US firms are behind most of China’s US. By undertaking R&D in China, where science/technology graduates and PhDs are plentiful, they can get innovations to global markets at low cost, and can adapt them to Chinese and other emerging markets. However, co-invented and multinational-sponsored patents are more sophisticated and lucrative than indigenous ones, and ambitious Chinese researchers prefer to work at foreign firms rather than indigenous ones.

Despite the non-Chinese component of China’s US patents, the Carnegie Mellon evidence up to 2010 suggests that China was still benefiting from multinational subsidiaries performing R&D there. It’s true that, among subsidiaries that are allowed to do their own thing in R&D, it was those Chinese staff who possessed extensive educational and work experience in the US were often the ones in leadership positions. But multinational companies’ patents in China were as good as those they generate at home. More significantly still: after doing experience R&D in China for 10 years, the quality of a multinational’s patents there, in terms of subsequent citations, was actually higher than that which it achieved in its home country.

That many multinationals’ labs are near China’s elite universities is also more about the scale and quality of China’s human resources than it is about their cost. Nevertheless junior Chinese engineers – though not senior ones – still come cheap.

The prospectus isn’t completely rosy. Foreign multinationals’ orientation to university patenting is also aided by the Chinese state, and what the Branstetter trio calls that state’s ‘aggressively funded efforts to promote collaboration between Chinese universities and industrial enterprises, including foreign firms’. In addition the Chinese government has subsidised some of the costs of international patenting – whose quality, according to Branstetter, has been ‘limited’.

And yet… things have already changed.

Chinese patenting gains more than policy support

Both domestic and international patents taken out by China began to soar after 2000. Changing legislation on IP helped. The 1984 Patent Law was amended in 1993, and patents rose; changed again in 2000, to allow accession to the World Trade Organisation (WTO) in December 2001, and substantially strengthened in 2008 in terms of the novelty demanded of inventions and the damages payable for infringement. By 2008, however, other forces beyond legislation and policy began to accelerate Chinese patenting. For one thing, both private firms and state-owned enterprises (SOEs) were intrinsically more interested in patents – the latter, after all, had for 10 years been forced to face the market, where they had not been privatised outright. After 2008, too, China’s R&D spending as a percentage of GDP overtook the EU’s. Inward investment relative to GDP leveled out after a decline from its pre-WTO peak. Both China’s ambitions with and its exploitation of patents grew to embrace occupying and expanding markets, protecting new technologies from imitations, and ‘occupying a technological space, averting litigation, increasing bargaining power in IP negotiations, improving… corporate image and deriving revenues from royalty and license fee income’. http://bit.ly/1FndMjJ

Recent moves to reform SOEs still further http://econ.st/1uObn0s promise to add further momentum to China’s patents. Patent expert Peter Drahos notes http://bit.ly/19eAHmJ that multinationals’ Chinese labs are not equipped with ‘doors leading to the secrets surrounding… core technologies’. But as he rightly adds:

‘as more and more multinationals are lured into the Chinese market under deals struck with the central government, locating their manufacturing and research facilities in China, the black boxes of secrecy that surround their core technologies will inevitably begin to leak, as employee mobility, reverse engineering, learning by doing and social processes of informal information exchange begin to drill holes into those boxes… Through a process of learning-by-litigating… [Chinese] enterprises will have become much more skilled at using patents against foreign competition’.

Conclusion: gaining its own dynamic

It will take some time for China’s patents to walk steadily on their own, independent account – to improve in quality, and to have, in the case of international patents, origins and owners that are wholly Chinese. Another barrier to overcome is that much of China’s rather un-Chinese international patenting has been around IT. In the shape of videoconferencing and software design tools, IT has also helped multinationals coordinate Chinese efforts with those made by their laboratories in other countries. There is nothing wrong with any of this; but it’s clear that strong, international patenting beyond the IT sector will take time, even if moves in that direction have already begun.

China’s patent system is being strengthened, and not just, as Drahos observes, because it hopes to have no fewer than 10,000 number licensed patent agents on its books this year. As Daniel Tang of IP lawyers Winston & Strawn LLP points out, http://bit.ly/1ux0cJr when a firm’s Chinese employees come up, in future, with service inventions, draft legislation now says that their work should be better rewarded and more formally protected than in the past. In December 2014, too, a new specialised IP court in Beijing heard its first case; similar courts in Shanghai and Guangzhou are now operating, complete with judges with at least six years of experience in adjudicating IP cases.

IPKat’s Suleman Ali notes http://bit.ly/1F5ul6c that Washington still has China on its IP ‘Watch List’. But then the US is also concerned about IP practice in Canada, Finland and Greece. The debate about IP in China has moved on from the old discourse on piracy. For Ali, China has even made a transition from ‘bad guy’ in IP, through ‘good guy’ (with handset manufacturer ZTE being harassed by a US patent troll, for example), to becoming a ‘patent superpower’.

That tag may overstate the situation, but it’s one that can no longer simply be dismissed.

Three scenarios for the future

Scenario 1: Same old story Despite new legislation, reachable targets and an official call for higher-quality patents, China’s output of patents remains large but superficial, and dominated, in international arenas, by the work of inward investors – who themselves grow more nervous about local rivals’ abilities, their own leakage of secrets, and rising Chinese research costs relative to Indian ones.

Verdict: Least likely. There is too much dynamism around patenting in China to allow it just to carry on in old ways

Scenario 2: Things turn fractiousAs economic and political tensions between China and America increase, inward investors find more and more Chinese court IP decisions going against them, while government procurement also tilts the playing-field. IP comes back to sour Sino-US relations, but this time China complains of being ripped off by American interests

Verdict: Most likely, by a short head. While there will always be opportunities for rapprochement between America and China, fundamental tensions divide the two and IP, long part of them, will not escape being a vexed question. Commercial and military espionage on both sides will alone do much to ensure tricky outcomes.

Scenario 3: Hunky-dory The formalisation, fairness and speeding up of procedure in China’s patent system win it international kudos. Half of China’s international patents are now owned indigenously, and inward investors, like the whole world, learn the hard way how wrong it is to continue to cast China as purely imitative. The burgeoning mass of domestic patents does contain, singly and in combination, more and more genuine innovation gems.

Verdict: More probable than people imagine. China has much to gain from playing by the rules of the international system, IP most certainly included.

(1) Lee Branstetter, Guangwei Li and Francisco Veloso, ‘The polyglot patent boom’, Scientific American, October 2013, pp62-3.