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China patents a must-have

Posted: 16 Mar 2006 ?? ?Print Version ?Bookmark and Share

Keywords:Mike Clendenin? SigmaTel? MP3 player? Actions Semiconductor?

A few years ago, Texas-based SigmaTel Inc. focused much of its patent strategy on the United States and Europe. Since cash was limited, CEO Ron Edgerton reasoned, it made sense to concentrate on markets where people were snapping up MP3 players!products that drove sales of SigmaTel's chips.

But at the same time, a little-known company from Zhuhai, China, Actions Semiconductor Co. Ltd, started planning its own attack on the MP3 market, reckoning the Chinese would also be big buyers of the popular music players. Its bet is paying off as the company racks up enviable sales growth and basks in the success of a recent Nasdaq IPO.

Actions' meteoric rise has drawn the attention of SigmaTel and a lawsuit. In Edgerton's view, Actions is succeeding on the back of SigmaTel technology and is costing the company sales. Consequently, protecting the company's IP in China by applying for local patents is quickly taking on greater importance, especially as analysts predict that annual sales of MP3 players in China will outstrip global growth in the years to come. Moreover, nearly half of the world's MP3 systems makers are in China.

SigmaTel's experience is part of a wider trend that finds technology companies aggressively patenting innovations in China, even if they experience mixed results when it comes to enforcement. The outcome has been a patent explosion in China during the past five to six years that shows little sign of slowing as foreign corporations increasingly see China not only as a cheap place to assemble gadgets, but also a growing end market in which to sell them.

Edgerton isn't second-guessing his strategy of first focusing on U.S. and European patents. But as the market expands, he thinks China will be key to patenting strategy because of increasing consumer demand there. "You need to balance the cost of protecting your IP in the end markets with where the products are being manufactured," Edgerton said. SigmaTel, he said, has reached the tipping point where "it is essential to have patents in China."

Since China made the first improvements to its patent law in 1992, applications by foreign companies or individuals have increased at a rate of 22 percent every year, with 2004 clocking in at roughly 75,000 applications and 45,000 awards, according to a recent study by China scholars Albert Hu of the National University of Singapore and Gary Jefferson of Brandeis University.

Locals are also learning the value of patents. Since 1985, when China revived its patent law, Chinese applications have increased more than tenfold!in 2004 alone, they accounted for about 275,000 applications and about 150,000 awards.

That puts the Chinese patent system nearly at par with its U.S. counterpart, with annual applications of about 350,000 and 382,000, respectively. Yet Xu Xiaotian, secretary general of the China Semiconductor Industry Association (CSIA), warned that the numbers don't tell the full story. "We are growing fast, but if you put it in a global perspective, we are only at about a half percent of issued patents," he said.

The recent uptick!which accelerated in 2000, just before China entered the WTO!doesn't necessarily mean the Chinese are tearing it up when it comes to innovation, either. Yu pointed out that most of the invention patents are awarded to foreign companies in China, not domestic ones.

That tracks with data collected by Hu and Jefferson. They noted that 85 percent of foreign patent submissions in China in 2004 were for inventions, and a little more than three-quarters of them were approved. By contrast, Chinese companies filed the same raw number of invention applications!about 65,000!but that figure represented only 23 percent of their total applications. Only one-tenth of those were approved. This discrepancy is adding to the urgency behind Chinese officials' calls for more core innovation among local enterprises.

There seems to be an acute understanding of the benefits related to IP development and protection, especially in the semiconductor industry. It's their devotion to rapidly protecting IP, especially foreign IP, that many question. In a report last year, the U.S. Trade Representative acknowledged that China made "satisfactory progress" in upgrading its IP laws to meet WTO commitments, but criticized China in painstaking detail for a lack of enforcement.

Movement is noted on numerous fronts, optimists say, yet they caution that the best one can probably hope for is evolutionary change as China realizes the self-interest of IP protection. Ultimately, they need to believe it will improve the environment for innovation, which will drive China beyond its reliance on low-end assembly and manufacturing and toward the high margins that entrepreneurs crave.

Despite all the work going on, nobody expects breakthroughs overnight. But what is expected is that China will slowly improve its reputation as a protector and creator of IP. Statistics show that invention patent awards are sharply on the rise for both foreign and domestic companies, and experts think that trend will continue.

In the meantime, companies are advised to take preemptive measures, said Gabriela Kennedy, a Hong Kong-based partner who specializes in technology at the law firm Lovells. "Most of the time, companies rush into China and they haven't actually checked whether they are able to register their patents," she said. "By then, it may be too late."

While many big multinationals understand China's patent process, legal advisers say small and medium-size businesses also need to pay attention. Kennedy has seen domestic companies sue foreign corporations for IP infringement and win. Anecdotal evidence also suggests that some domestic companies exploit the patent law to register patents of foreign designs, so they actually have the upper hand when foreign firms come into China and discover their own inventions are denied them.

In short, companies that like the long-term odds of China as a growth market need to make sure they start covering their bets soon. "The worst thing you can do is to rush into China without having thought about getting patents," Kennedy said.

- Mike Clendenin
EE Times

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