Inside the IP Markets of North Asia

North Asia

Inside the IP markets of North Asia

Observation 1: There are four unique The IP marketplace in Japan, Korea, countries in North Asia and each one Taiwan and China is sophisticated wants IP and developing rapidly. To make the The first thing I heard when I came to Taiwan was that “people in Asia aren’t like most of it, local knowledge is Americans, they don’t buy IP for no absolutely essential reason… Decisions to buy are much rarer and well-thought out.” This is the US By Sachin Desai viewpoint as well. As a result, people often focus on IP protection in manufacturing North Asia is a region which is on the partnerships (China) or on commentaries on ascendant, despite the current global Japan’s internal systems. All too often the economic turmoil. And along with economic market for IP in the region is painted in a growth has come an increased understanding conservative light or is missed altogether. of intellectual property. This article focuses To take such a view, however, is to fail to on opportunities for hard-IP (patent) take note of the evidence. Consider the data transfer and work in the region. Of course, from the USPTO, for example. Both Japan no single article can ever paint a complete and Taiwan have similar patent grant rates picture of the situation on the ground; in per capita to the US. While USPTO grants fact, given the dynamic pace of change, do fell for almost all countries in 2007, Korea not assume that what is said below will hold and China continued to surge ahead. There true indefinitely – always check for yourself. are three countries in Asia arguably crazier But hopefully the article will inspire further, than the US about IP in the US: Taiwan, in-depth research into the possibilities that Korea and Japan. And China will eventually are now available, not only in Japan, but also join that list. So why the original in China, Taiwan and Korea. stereotype? That has to do with observation number two... Overall view of IP in the region North Asia is very diverse, so to address it as Observation 2: Culture does not affect a homogenous whole is a somewhat specious business needs, but how they are acted upon approach; but one has to start somewhere. When dealing with IP in Asia, merely The concept of IP assets as marketable hearing that “culture is important” is of entities has caught on in the region. The word little help. Attempts should be made at least innovation is often mentioned too, and people to clarify what this phrase means. In any want to use IP to innovate their economies case, culture does not necessarily affect and business models. Yet the drivers of business desires for IP. In Asia, as change in Asia are not politicians or lawyers, elsewhere, the heads of major industries or even laws themselves. In most cases, understand that intangible assets have legislation is a reaction to commercial desires, value. And they understand cause and effect which in turn are influenced by a variety of – that IP lawsuits have the potential to factors, including industry changes, trade, crush their companies. societal changes and changes in the way that Culture does affect how people in Asia IP is utilised in the primary markets of the US go about procuring IP. In some cases (as in and EU. China), that might mean not always paying www.iam-magazine.com Intellectual Asset Management October/November 2008 57 North Asia

much more than lip service to Western- new IP laws as a real reform of the system. style legal documentation such as patents However, in the long term this model is and trademarks. In Japan, it may mean advantageous because it implies that the making IP internally. Personal contact and desire for IP will eventually arrive, tailoring dominate most business decisions regardless of policy or culture. As more and and upfront contractual systems are far less more countries in North Asia enter the trusted. As John Tao stated in his Gathering second and third stages on the economic 2.0 webinar entitled Collaboration, Joint curve, IP becomes inherently valuable. And Developments and IP Issues in China (4th even where a country’s internal IP system is March 2008), guanxi (the Chinese word for still catching up with its economy, as in relationships) is everything. Taiwan or Korea, there can still be strong The desire for IP does not mean that demand for US and EU IP. firms in Japan will come calling to license The best legal analysis should thus your university’s new nanotechnology examine laws relating not to the protection patents after a seminar. Potential licensors of IP, but rather to its promotion at a are going to have to have dinner with clients fundamental cost level, or to developments first, take their time and maybe even learn that stimulate economic sectors that require how to sing before making a sale. Intentions large amounts of IP. Afterwards, enforcement will be hidden until the last minute – will follow. A clear example is Taiwan’s something that can often be mistaken for Science and Technology Basic Law, which lack of interest. established the country’s IP industry but was Even China’s IP piracy rates indicate a created in response to economic demands. strong desire for IP and merely a preference for different acquisition methods. The The situation in Japan interest in IP in Asia is independent of Japan is a high-tech economy. Theoretically, culture, but it should be approached keeping this should be good news for IP, as such local culture in mind. economies produce large numbers of patents. Unfortunately, however, despite the Observation 3: In Asia, IP follows the volume of patents that Japan produces, economy, not policy most are concentrated in the hands of large They are both export-oriented economies Japanese corporations. This makes it harder with large IP systems and similar histories; so for potential licensors to get their foot in why is China so different from Taiwan when the door; it also compounds the difficulties it comes to IP rights and IP procurement? that Japan’s closed and hierarchical culture There are many reasons why, but the most presents. Japan has very strong internal important have less to do with IP structure or R&D and even most tech transfer is culture than with industry and market. internal. So licensors should not be Director Paul Liu from Taiwan’s NCCU surprised if they generate a lot of interest University describes three simple stages in a that does not go anywhere. However, it is country’s IP-related economic development: not impossible to enter the market and this • The first is piracy, when copying what is all means that the rewards are greater if you plainly visible helps to generate fast do make a breakthrough. economic growth. Japan is starting to flex its IP muscle, • The second is imitation, where a copied but this can be hard to spot because it is design is expanded, improved or made mostly being done in Asia. This means that more efficient. Japanese firms are not only using their IP, • The third is innovation. but also inspiring other players in Asia to buy IP. As US companies arguably still have Taiwan’s high-tech innovation economy most the key patents in many sectors, it is needs a US and European-style IP regime – logical that companies in Japan first get its advances are R&D-heavy and easy to their legal feet wet close to home and in the copy. China’s economy is simply at a point process defend themselves from lower- where IP enforcement is not profitable. priced players in their own technological The negative implication of this model and geographical backyard. is that Western concepts of IP will be For those wishing to engage in IP adopted only when needed on the path. So relationships within Japan, there are while it is, of course, important to know a opportunities for foreign medium and large- country’s IP laws if your company is selling sized technology companies. Obviously, products or innovating there, any analysis Boeing and HP can talk to whomever they should also factor in the country’s want to. The rest should enter the country economic demands. This may sound through respected Japanese third-party controversial to those who view China’s brokers that have a history in the country.

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Chart 1: Year on year USPTO granted patent growth rate

14 ROC, ROK USA + EU + Japan 12 China

Normalized Patents Growth / 1995 Normalized Patents Growth 2

0 1995 1997 1999 2001 2003 2005 2007

Country USA Japan EU** R.O.K. R.O.C. China

2007 USPTO – Pat. Granted: 79527 33548 22996 6295 6128 772 (Rk. 1) (Rk. 2) (Rk. 3) (Rk. 4) (Rk. 5) (Rk. 16) Patents per Capita (Mil.) 264 263 47 128 268 0.6 Patents per GDP (Bil US$) 5.8 7.7 1.4 6.4 16.4 0.2

* Patent growth rate found to be very similar among the three regions ** EU data only from top 14 USPTO-grant EU countries

Source: 2007 CIA World Factbook, USPTO 2007 Patent Grant Data

Look internationally, too. Firms and The situation in Korea brokerages in Korea and Taiwan have built It is hard to believe that in 1985 Korean relationships with Japan that many may not applicants were granted just 41 US patents have thought to exercise. Just to note, the (in comparison to Japan’s 12,000 and the Japanese internal IP system actually ranks US’s 39,000). Today the country sits at first in terms of patent grants to domestic number four in the USPTO rankings, having applicants. As the Japanese dominate their just overtaken Taiwan. Korea has a faster domestic market, Japanese patents are overall patent grant growth rate than its worth investing in for those seeking to other advanced neighbours. enter the market. One might assume that, given the Matsushita (Panasonic), Toshiba and relatively closed Korean culture and the Hitachi had the greatest recent increases in limited size of its legal system (10,000 patent grants between 2000 and 2006. Sony attorneys in Korea, compared to 750,000- had large increases in 2005 and 2006, and plus in the US), the country would not have its IP activity is worth watching. Matsushita an interest in IP. However, while it is true is probably the most interesting to keep an that patent disputes in the country are rare eye on, as it has one of the most complex (although there have been some high-profile records of IP enforcement both inside and ones involving Asian firms), real-life outside the US. Additionally, many large circumstances are crossing the toughest of Japanese companies work in groups, so take cultural barriers. Not only are the big firms a look at them as well. in Korea creating intellectual property, but Japanese universities are also becoming they are creating it globally. This is simply more active in IP transfer. Japan technology because their high-tech, innovation-based licensing offices are increasingly export economy needs it to happen. competitive. They earned roughly US$2 Generally speaking, Korea’s business million in 2006 through tech transfer. As a model is similar to Japan’s. A few large result, Japan’s TLOs are attracting interest corporations such as LG and Samsung lead from regional partners. the pack and set the trend for industry. If www.iam-magazine.com Intellectual Asset Management October/November 2008 59 North Asia

you were forced to make assumptions when emerged? One management school professor Patenting activity of major Asian doing business in the country, it may be in the country has said: “Maybe it’s because corporations in the US easiest to default the Japanese business and of Chinese culture… everyone wants to open cultural models, which are very similar. up shop and call themselves lao ban” [“boss” Firm, average Growth Again, work within the system and within in Mandarin]. But it also has to do with the USPTO grants from the country to get a foot in the door. Taiwanese government, which has 2005-2007 2000 Samsung and LG both have the largest significant influence in setting trends in this general patent portfolios and are the first to small country. Taiwan’s Small and Medium Japanese firms of note use them. The latter has been willing to use Enterprise Association is at the forefront of them in Asia as well as outside. this. After the enactment of the Science and Canon 2060 9% One potential advantage of Korea is that Technology Basic Law in 1999, R&D Matsushita 2006 68% the country is in or approaching the sweet organisations were able to commercialise Toshiba 1483 20% zone of patent procurement. While Japan, their research. Now, every university and Hitachi 1461 41% Taiwan and the US may be getting closer to research institute of stature has an incubator Sony 1453 5% their IP ceilings or approaching the quality for small firms. Collaborative research at Comp 1-5* ∼8500 17% end of the patent curve, Korea is at an every level is very strong, with two of Comp 6-15 ∼6200 6.0% earlier stage. Its GDP growth rate is higher Taiwan’s best universities next to its best Comp Rest ∼19000 -6% than those of its top two competitors in research lab and across the street from its Asia (Japan and Taiwan), and its medium to best science park. The country’s Industrial * Discounts NEC (unknown patent num) large-sized companies can still support Technology Research Institute (ITRI) has ** Fuji Corp + Fujifilm + Fuji Xerox more growth in intangible assets. played a key role in the development of Taiwan’s industry, with many leading Korean Firms of Note The situation in Taiwan companies originating there. Since 1999, Taiwan has a lot of IP potential, despite ITRI’s incubator alone has helped to create Samsung+ 2472 72% being the Asian country most vulnerable to well over 100 businesses. LG++ 986 329% the rise of China. Overlooked in most In the near term, the IP situation in Hynix+++ 414 40.9% modern economic analyses, the country’s Taiwan will probably get better for sales environment and system for IP development and management. There are three reasons + Samsung Elec + SDI and R&D, as well as procurement of foreign for this: ++ LG Corp + LG-Philips LCD +++ IP, is arguably the strongest in the region. • Many small firms are looking to brand Hynix + Hyundai Elec Corp Many things set Taiwan apart from the out of their OEM and ODM pasts as a other advanced countries in Asia. For one, result of cost pressure from China. As a Taiwan firms of note its high-tech business model is very result, they are competing against their different from Japan’s and Korea’s, but is former customers and getting sued for TSMC 471 22% more advanced than China’s. it. The HP v Acer litigation is an example ITRI 215 8.6% Taiwan’s business arena is full of small of this; while IBM has just filed a and medium-sized companies, not giants. complaint about Asus at the US ITC. Both Hon Hai and Mediatek engage in significant patent Taiwan has a string of science parks. The Both Acer and Asus have already procurement, so USPTO numbers are unclear most notable of these is located in Hsinchu, decided to separate their brand names where dozens of SMEs are based. Hsinchu from their manufacturing base, so Note: These statistics are not 100% accurate inspires a capitalist, “arms-race” model for becoming IP companies. as companies may hide patent strength and IP among its residents, and makes each • The victory of the more China-friendly business structure individual company an easy target for Kuomintang (KMT) Party in the recent lawsuits if it is not protected by its Taiwanese elections is likely to result downstream US clients. Each company’s in a more open Taiwan, economically individual R&D capacity is small, leading to speaking. Short-term economic significant IP exchange. growth will inspire many more In Taiwan, semiconductor and IT- companies to move on from their OEM related products dominate the market. They past and transfer their manufacturing account for 70% of the total revenues of the base to China. Hsinchu science park companies, for • Taiwanese firms are far less fearful than example. This field of technology is their Japanese counterparts of engaging predicated on patent protection, with huge in litigation. Taiwan’s Foxconn varieties of designs entering the market that exemplifies this. One of Taiwan’s larger are easier and easier to reverse-engineer. firms, it faced severe patent pressure Semiconductor components are also tied from companies in the US; but instead into much larger products, allowing of succumbing to this, it responded by downstream clients to be held liable for developing a huge patent arsenal and infringement. So it is unsurprising that going to court. Its former legal head Mr Taiwan’s IT firms lead the charge in US Zhou said: “If you don’t have patents patent procurement. tested in court, then you don’t have So why has this business model good patents.” Staff of NCCU’s graduate

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Chart 3: 2005 distribution of medium-high IP programme have even identified such revamp its IP laws in order to meet TRIPs technology Taiwan and Korean firms attitudes as a problem, stating that requirements. medium-sized firms in Taiwan can get For Taiwan now, read China – save that Global sales Korea Taiwan too involved in their cases and forget the scale is 60 times larger. Despite the US$ (mill) business logic. differences that separate the two countries, they have many parallels. Both countries are <50 27% 84% In the long term, however, Taiwanese composed mostly of SMEs, which leads to 50-250 21% 5% companies in some industries will enter the the same type of economic competition. 251-500 6% 5% flight to quality stage, so limiting IP growth Both also have strong government direction 501-1,000 6% 5% in the region. Foxconn initially chose a of the economy, albeit for different reasons. >1,000 41% 0% quantity-over-quality approach to patent China is hastening this connection by procurement. It has now changed gear and arguably basing many of its IP laws on Source: Innovation Strategy of Asian Firms in while managers say they do not plan to drop Taiwan’s (which in turn copied them from the United States (Poon, MacPherson) the company’s patent count, something has the US). Additionally, particularly in to give. UMC has already gone that way. Shenzhen, China is establishing business One US lawyer has also noticed a change: development facilities similar to those in Chart 4: 2007 distribution of Taiwan’s major “Taiwan firms are sophisticated enough to Taiwan. Even the head of Shenzhen’s patent science parks realise that litigation is a business. Their office is a graduate of Taiwan’s top IP first question is: ‘Can we settle today, and programme. So if you want to gauge what Hsinchu Southern Central for how much?’” will happen in China, look at Taiwan; and Taiwan is a much easier country to enter considering Taiwan’s share of US IP grants Manufacturers 475 198 103 as an individual than anywhere else in Asia. per capita, that tells you something. Revenue (US$) 22 Bil 9 Bil 3-4 Bil Big firms like Mediatek often publicly Every economy reaches a point where it Staff (1,000’s) >100 50 50 engage in IP procurement instead of R&D. needs to create in order to advance, and at The larger organisations license tens of that point IP gains its intrinsic value. Given millions dollars’ worth of IP annually and China’s progressive investment in high-tech hold open international IP transfer events. and basic science R&D, the country will Universities are active as well, but are small, reach that point. Then there will be not only with their combined IP transfer revenues enforcement in China and the growth of its totalling just a few hundreds of thousands of own IP system, but procurement of IP as dollars annually. For companies with good well. No doubt the government will throw turnkey technologies that Taiwan is looking in its own pro-domestic adjustments, but for, it may even be possible to find deals at a the market will still be profitable for outside techno-marts or at IP seminars in Taipei. investors. Note that IP education aimed at domestic Unfortunately, in terms of local Chinese firms stresses the use of third-party brokers firms to follow in the IP world, there are few (guanxi), so make connections fast. answers. Only one Chinese company made the top 100 USPTO patents-granted list in The situation in China 2006 – Huawei. Until China can get to the There are already plenty of articles that give point where it either has effectively branded good introductions (especially legal) to IP in companies or has key technological parity China. But perhaps a comment reportedly with US or EU markets, only a few companies made by an unnamed Chinese official to a will stand out. Top universities currently lead US Federal Circuit judge sums the situation the IP charge in China, but it is unknown how up best: “I know that our economy requires much of that is government-backed PR. IP to innovate and advance…but there are Shanghai’s new IP trading office is worth those that have other concerns.” mentioning, but that is likely just talk again. Nevertheless, the situation in China will It may be of interest to watch the change; Asia is certain of this. Moreover, activities of smaller IP brokers in China. change will come not from any new legal Given China’s economic model, these small push, but from businesses themselves. How but connected firms are likely to be the first do Asians know this? Because they all say to take advantage of emerging that Taiwan was the same way 15 years ago. opportunities. Many of these firms, such as While China is notorious for piracy now, Intepro-IAG, have their roots in Taiwan or previously Taiwan was known as the biggest other Asian countries. In addition to patent source of many forms of counterfeit trading, many deal heavily in trademarks. electronic goods. So what changed Taiwan’s For those looking to get involved in ways? Economic advancement was the China IP quickly, there are two routes. The biggest catalyst. This prompted the easiest is to make contact with well- government to lower barriers to R&D connected people with strong roots in China commercialisation and necessitated entry to who live outside the country or foreign law the WTO, forcing the government to firms that have established themselves www.iam-magazine.com Intellectual Asset Management October/November 2008 61 North Asia

there. However, following Taiwan into China Chart 5: Percent of Chinese patents granted to US patents granted for major high-tech firms is also worth considering. Taiwan is heavily invested in China, the countries share a 140% IBM language and a culture, and Taiwanese firms Ave. Matsusita & Sony know their own economic history. Given the 120% Ave. Samsung & LG relaxation in political tensions between the Siemens two countries, Taiwanese IP firms will 100% increasingly be able to assist in acting on, or finding third parties for, IP exchanges in China. They have the potential to provide a 80% cheaper partner with more end options. 60% Investing in Chinese IP There is great expectation in the growth in 40% value of Chinese IP. It is thought that China will have developed an IP policy similar to Ratio Chinese / USA pat. Grants that of the United States in anything 20% between five and 25 years, depending on the level of conservatism of the government. It 0% is hard to know how long this will actually 1998 1999 2000 2001 2002 2003 take (definitely not five years), but there is a general feeling that Chinese IP is going to become popular. Chinese companies getting sued more Yet for those marketing in China in the frequently as the country enters the high- near future, more than IP is needed. In tech world, and again do not expect them to addition to simply buying IP, European be acquiescent. firms appear very active in developing the All of this will not only present market in China in conjunction with opportunities for IP transfer, but will starting manufacturing relationships (as hopefully result in improvements to the IP opposed to the drop-a-textile-factory-in- systems of north Asian countries. Yunan method that many US companies seem to employ). European businesses are Getting involved working jointly with the government and Asia is looking for IP and IP expertise. But business sector there, and this is likely to it is important to know how to get through help ensure the existence of markets for the door. In Korea and Japan, a solid in- genuine high-tech goods. country broker would be best. In Taiwan and China, explore multiple options when Future directions for IP in Asia moving forward. It is true that in most lawsuits involving Technology drives industry and markets, Asian firms, the Asian firm is the defender. and in the end drives IP movements in Asia. But that is going to change – and in fact has Burgeoning biotech work in Taiwan and already begun to do so. But do not look for nanotech in China are just two examples of Asian giants taking on American companies future trends to explore. For those looking that hold key patents just yet. Instead, long term, consider the academic systems. watch out for lawsuits between Asian firms In-country educational rankings and in local and US/EU courts. R&D direction shape where future expertise Japan has been the first to strike, given lies, as graduates from the top schools its stronger IP history and position. almost always end up filling the ranks of the Japanese company Sharp has sued Samsung best firms. in the US and Korea, while Matsushita has Finally, when dealing in Asia, those that sued multiple firms in Taiwan. On the can should look to deal in sales if possible receiving end, Taiwan seems to attract the (for patents). Right now Taiwan is mainly most plaintiffs as its collection of SMEs in utilising a sales-based IP transfer strategy. the same technologies makes for many easy In China, selling also clarifies things greatly targets. Taiwanese firms Compal and First as the IP rules there are very complicated. International have both been sued by LG in Licensors in China also run the risk of the past few years, and Samsung has also ending up either pirated or on the receiving been active. Remember too that LG end of difficult court action. Everywhere, Electronics v Quanta, a suit involving two sales are easier to communicate, especially Asian firms, drove changes to the US IP to groups that are unclear of the legal Sachin Desai is president of INDIJEM IP, landscape when it was recently decided by benefits of licences and do not like being Taiwan www.indijemip.com the Supreme Court. Expect to see more dependent upon a foreign institution. [email protected]

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