Chinese Joint Venture Rules and Respect for IP Cause Concerns

China Danger ConceptThere are 1.4 billion people who live in China, currently making it the world’s most populous nation. In terms of gross domestic product alone, China has the world’s second largest economy, trailing only behind the United States. However, when applying purchasing power parity valuation techniques, which take into account the amount of one country’s currency needed to purchase the same quantity of good or service in another country, to determine GDP values, China actually edges out the United States, albeit only slightly.

The massive scope and how much the Chinese people consume by themselves is incredible. Annually, 20 million trees, each about 20 years old, are chopped down to create the 80 billion pairs of disposable chopsticks used as eating utensils. Bacon lovers may be interested to know that half of the world’s pigs live in China and yet Chinese nationals consume so much pork (52 million tons as of 2012) that the country is a net importer of pork. As Business Insider points out, that’s the same amount of weight as 5,200 Eiffel Towers.

Levels of manufacturing production in that country are also out of this world. Sock City, a settlement in Zhejiang province, produces a third of the world’s sock supply. In 2011, that worked out to be about two pairs of socks for every living human being. In terms of food production, China feeds one-quarter of the world’s population but only uses 7 percent of its arable land to do so.

The consumer economic growth of this country, however, has been tantalizing to foreign investors all over the world. According to the Boston Consulting Group, consumer spending in both China and India, another emerging economic powerhouse, will triple between 2012 and 2020 to $10 trillion annually. Anyone looking to bring a product to market in order to make revenues would have to at least consider how operating in the Chinese market could put them in touch with one of the world’s largest consumer bases.

Of course (and China certainly isn’t the only example of this), there are certain government regulations that seem to be pretty unhelpful to the populace as a whole. One example of this is the fact that the government of China only observes one time zone, even though the country spans an area similar to the continental United States, which observes four time zones. Because of this, there are some areas of the country where the sun will rise after 10 AM during the winter and there are regions where ethnic Uighurs observe their own time zone, which adds to the problem of synchronizing activities across thousands of miles.

For foreign businesses coming into China, the country’s joint venture rule poses a similar challenge in that it can increase the costs of doing business in the country. An economic policy paper by the Federal Reserve Bank of Minneapolis discusses many of the impacts of joint venture rules as they relate to technology transfer from foreign companies to domestic Chinese companies. Foreign companies operating in China are forced to operate as 50-50 joint ventures with domestic companies and technology transfer has been a part of the price of entering the Chinese market going back to the early 1980s. Nominally, this practice runs afoul of tech transfer regulations that the Chinese government must respect as a member of the World Trade Organization, which it joined in 2001. However, as the economic policy paper points out, the regulations are difficult to enforce, private firms are dissuaded from speaking out publicly about negotiations while entering the Chinese market and the Chinese government stands to gain by letting the system continue as it has. The paper concludes that these practices have hurt foreign investment from multinational firms.


These rules of the game for operating within the Chinese market are especially troubling given the lack of respect paid to American patent rights by Chinese firms. As the MIT Sloan Management Review points out, nearly 80 percent of all IP thefts from U.S.-based firms during 2013 were perpetrated by parties based in China. Those thefts represented lost business of about $300 billion thanks to counterfeit products circling the market. China has been listed in the U.S. Trade Representative’s annual report of countries that need to improve intellectual property rights protection for each of the 25 years during which that office has released the report.

Yet China wants to compete globally as a major technology powerhouse. By the year 2020, China hopes to increase patent filings by its citizens to 14 patent application filings per 10,000 people, up from four patent application filings per 10,000 citizens in 2013. About one-third of the total of all patent applications filed throughout the world come from China. The lack of respect paid to American patent rights by China prompted the U.S. Chamber of Commerce to comment that the country’s long term science and technology plan was “a blueprint for technology theft on a scale the world has never seen before.”

Automotive technology and changes to the Chinese car market in recent years provides a fairly helpful lens through which to view how China’s joint venture rules typically affect foreign investment and IP rights. Between 2000 and 2013, the share of the Chinese auto market earned by Chinese automakers dropped from greater than 65 percent down to 45.1 percent. Through joint ventures, multinationals have been capable of capturing more of the market and Chinese companies have not learned how to make vehicles more competitively. With autonomously driven vehicles and many other technology trends burgeoning across the automotive industry, it will be interesting to see how China respects the growing IP portfolios of multinationals in this industry.

It is encouraging to see the Chinese government take more responsibility for adjudicating in cases where patent infringement is alleged. In late October of last year, the Supreme People’s Court of the People’s Republic of China (PRC) published Provisions on the Establishment of Intellectual Property Courts in Beijing, Shanghai and Guangzhou which provided for courts with jurisdiction to handle intellectual property cases in those three cities. These cases could involve civil and administrative cases related to patents, trademark recognition and copyrights. These courts do not, however, have jurisdiction over criminal cases.

The lines of communication between the United States and China have been open in recent months and international patent rights have been at the center of some of those discussions. In the middle of December, the 25th U.S.-China Joint Commission on Commerce and Trade was held in Chicago, IL. Part of the three-day conference focused on subjects of technology localization and as a result China committed, along with the United States, to treat foreign intellectual property rights as domestic IP rights between the two countries. This includes leaving enterprises free to base tech transfer decisions on business and market considerations and, importantly, leaves firms free to decide under what circumstances to assign IP rights to other enterprises, even affiliated ones. In late January, a draft regulation for new foreign investment laws put forward by the PRC Ministry of Commerce proposed new rules governing commercial contracts from foreign investors that would streamline the process of entering the market in many respects.

Still, there is plenty of reason to be wary when trying to access the Chinese market given the fact that tech transfer has been a de facto if illegal cost of entering that market. Some best practices regarding China patent licensing recommended by Asian business tech blog International Technology Law Blog include first transferring older, less valuable intellectual properties and working with multiple business partners so that no one firm has a complete picture of a U.S.-based patent portfolio. Certain contract provisions are also encouraged, such as negotiating for lump sum royalties to avoid gamesmanship in revenue-based royalty payments as well as ensuring that detailed royalty reports are delivered at regular intervals and include specific data including locations of sales and net selling price of units manufactured and sold.


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