China Moves From Piracy to Patents

More Companies Are Trying To Be Product Innovators Rather Than Just Imitators

By ALEX ORTOLANI
Staff Reporter of THE WALL STREET JOURNAL
April 7, 2005;

SHENZHEN, China -- In the modest offices of Netac Technology Co., Chief Executive Frank Deng keeps a copy of a U.S.-issued patent awarded to his company in his desk drawer.

"I keep it close at hand for whoever wants to see," the executive says of the patent covering small drives for storing computer data.

Closely held Netac is one among many technology enterprises in tech-heavy Shenzhen -- and across China -- that are paying closer attention to patents these days. As more companies throughout the country try to become product innovators rather than just low-cost manufacturers of goods born elsewhere, Chinese concerns are vying for patents like never before, and some are even taking on multinational corporations such as Sony Corp. and Intel Corp. over intellectual-property matters.

But they show Chinese companies are getting more aggressive about intellectual property. A filing takes time and money; the average fee for a WIPO patent application is 1,250 Swiss francs, or about $1,037.

"Awareness of intellectual property in China is relatively new," says Francis Gurry, a WIPO official. "But that awareness is spreading, and Chinese enterprises are looking to protect their technology."

Some of the Chinese applications, such as Mr. Deng's, ultimately are filed in the most important market for technology: the U.S.

Touting local technology and promoting innovation are now priorities for China. For instance, in Guangdong province, profits made through patented products are exempt from corporate income tax for five years.

The central government, which directed such efforts, has been spurred in part by increased foreign competition. After joining the World Trade Organization in 2001, China had to revamp its patent-application process. Once the gates were opened to foreigners, Beijing naturally wanted its own companies to file early and often, says Li Yahong, a professor of law at Hong Kong University.

Some of the busiest filers, such as Huawei Technologies Co. and ZTE Corp., boast of focusing heavily on research and development. A ZTE representative says the company has a total of 2,300 patents filed domestically, in Europe and in the U.S.

The trend could foreshadow the burst of patents like that seen in Taiwan a few years ago as it moved from an imitator to an innovator in semiconductor manufacturing. But experts in intellectual property note that patent applications in themselves don't necessarily translate into unique products.

But while it is statistically true that Chinese companies are filing for more patents, "it doesn't mean China is actually innovating more," says Anne Stevenson-Yang, managing director of the U.S. Information Technology Office in Beijing, a trade group representing more than 6,000 U.S. high-tech companies in China. She says the real test of innovation is how many Chinese companies are making money on new technology, rather than on price cutting.

"If you look at Chinese companies that compete internationally...the overwhelming majority compete on price," she says.

Netac is too small to exploit economies of scale and compete on price alone, so it relies on its ability to innovate, says Mr. Deng. It is also turning to the courts to protect its technology.()

"Most of these cases aren't very successful," Wen Ping Chen, a partner at King & Wood PRC Lawyers in Beijing, says of infringement claims in China. "But I cannot exclude the possibility that there are good patents by local companies" that could win in the courts.

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(Reshipment and little deletion by Netac)