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Facing the China Challenge

Using an In te l l ec tua l Proper ty S t ra tegy to Capture G loba l Advantage

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“Riding the Next Wave of Outsourcing”

Opportunities for Action in Consumer Markets, July 2004

Capturing Global Advantage: How Leading Industrial Companies Are

Transforming Their Industries by Sourcing and Selling in China, India,

and Other Low-Cost Countries

A report by The Boston Consulting Group, April 2004

“What Is Globalization Doing to Your Business?”

Opportunities for Action in Industrial Goods, February 2004

“Made in China: Why Industrial Goods Are Going Next”

Opportunities for Action in Industrial Goods, November 2003

In addition, BCG and the Wharton School are jointly publishing a series of

four reports that explore China’s impact on business operations and strategy.

The first report is titled China and the New Rules for Global Business. It is

available at http://knowledge.wharton.upenn.edu/weblink/68.cfm.

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This report is part of a continuing series of publications by The Boston Consulting Group on China and the new era

of globalization. Other BCG publications on the topic include:



DAVID MICHAEL

KEVIN RIVETTE

S E P T E M B E R 2 0 0 4

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2 BCG REPORT

3Facing the China Challenge

Table of Contents

A Word from the Authors 5

The Need for an Intellectual Property Strategy for China 6

Protecting and Leveraging Intellectual Property Rights 7

Influencing the Development of Key Standards 11

Managing Intellectual Property with the Broader Business Strategy 13

An Action Agenda 14

Know Where You Stand and What You Must Protect and Influence 14

Develop a Game Plan 14

Organize to Achieve Results 15

Get Moving 17

Review and Reassess 17

A Strategy Health Check 19

4 BCG REPORT


A Word from the Authors

Global companies realize that China is critical to their future—as a market, as a supply base, and as a sourceof talent. Yet China also presents enormous challenges to global companies, especially when it comes to intel-lectual property (IP) rights.

In our view, developing and executing a far-reaching IP strategy for China is of fundamental importance tosenior executives. IP issues in China should not be delegated to the legal affairs department or, even worse,become a matter that doesn’t get managed at all.

In this report, we focus on three critical aspects of IP strategy in China:

• Protecting and leveraging IP rights

• Influencing the development of key standards

• Managing IP with the broader business strategy

Each of these areas deserves the attention of senior management and requires aggressive and sustainedaction. There are practical, value-creating steps that executives can take in all three.

Despite a difficult environment, intellectual property issues should not be a showstopper for global compa-nies in China. Indeed, an intelligent and well-executed game plan on IP issues can reap enormous benefits.We regularly help clients make rapid, tangible improvements in their China IP strategies. This report sum-marizes insights and practical guidance that can assist you as well.

The report is sponsored by two of BCG’s major practice areas. The Technology and Communications prac-tice regularly works with technology-oriented companies in China, for which IP issues are particularly promi-nent. The Operations practice works with companies that wish to optimize their global operations. For suchcompanies, leveraging China’s strengths in manufacturing and engineering talent is of utmost importance,and IP issues are critical obstacles that must be navigated successfully.

We would like to thank everyone who assisted in preparing this report, including

• Todd Bryan, the lead researcher and driver of the report under the authors’ guidance

• David Dean, leader of the Technology and Communications practice, and Harold L. Sirkin, leader of theOperations practice, both strong advocates and thought partners for the report

• Jim Hemerling, head of BCG’s Greater China business, who lent his own perspectives to the report

• Barry Adler, Patricia Berrian, Gary Callahan, Kim Friedman, and Sharon Slodki—BCG’s editorial andproduction team for this project

We hope you find this report helpful, and we look forward to discussing it with you.

Kevin RivetteExecutive AdviserSan Francisco [email protected]

David MichaelVice President and [email protected]

The Need for an Intellectual Property Strategy for China

6 BCG REPORT

China is on the CEO’s agenda at virtually everyglobal company. At the heart of decisions affectingeverything from investments and partnering to mar-ket access and sourcing are powerful concerns aboutintellectual property. And with good reason: China ishome to a tangle of IP issues, with large sums ofmoney and future strate-gic positions at stake.

Newspaper headlineshave highlighted some of these issues. Disputes over IP usage have pitted Cisco Systems against Huawei Technologies,Magnequench against major Western retailers andelectronics companies, global drug companiesagainst the Chinese government, and Lucentagainst two of its own employees. Meanwhile, therace to create standards has set WiFi against WAPI,CDMA2000 and WCDMA against TD-SCDMA, andDVD against EVD.

Consider just one recent contest involving stan-dards, this one over WAPI (the WirelessAuthentication and Privacy Infrastructure), devel-oped jointly by 24 Chinese vendors. In late 2003,the Chinese government announced that by mid-2004 all wireless LAN chips in China would have touse this security standard—thus earning royaltiesfor the Chinese developers. China backed downfrom this requirement, but only after intense lobby-ing from major corporations supported by theOffice of the United States Trade Representative,the U.S. Department of Commerce, and even theState Department. Despite that resolution, China’sinterest in and assertiveness toward standards areclearly growing. We will see many more such con-tests and challenges in the near future.

Executives must act now. On the positive side, thereare tremendous opportunities to leverage IP intonew revenue streams and partnerships, as well as toinfluence the shape of emerging standards.Moreover, the Chinese government is working hardto improve the environment for IP rights, and it

welcomes the support ofthe foreign business com-munity. But action mustalso be taken to ward offthe threat of Chinesecompetitors illegitimatelyharnessing your IP to

their low-cost production machines or to preventyour company from being boxed out of key stan-dards by faster Western competitors.

The answer is not paralysis, nor is it delegatingthese issues exclusively to lawyers. Senior executivesneed to take sound and practical steps to integratetheir business goals with a comprehensive IP busi-ness strategy in China.

In our experience, most companies need to pursuethree IP-related objectives in China:

• Protecting and leveraging their IP rights

• Influencing and monitoring the development ofkey standards

• Managing the relationship between IP concernsand the broader business strategy

Of course, China presents formidable challenges ineach of these areas, requiring top management toact with speed, caution, and persistence. Thisreport offers concrete guidance as well as a “healthcheck” framework to help you get started.

China is home to a tangle ofIP issues, with large sums

of money and future strategicpositions at stake.

Protecting and Leveraging Intellectual Property Rights


Although the environment for IP rights is improv-ing, executives still have good reason to lose sleep.Consider a few situations recently faced by foreigncompanies in China:

• A global automaker discovers a local companyproducing a car with design and styling nearlyidentical to those of its own product

• A global turbine maker finds itself under extremepressure to transfer its technology to its localjoint-venture partner—which is increasingly alsoa competitor

• A global pharmaceutical company finds that localcompanies have been the first to file for Chinesepatents on technology that it considers core to itsglobal IP portfolio

• A global consumer company struggles to sign uplocal companies as licensees of its patents, andthen struggles some more to collect royaltiesonce the license agreements are in place

These anecdotes highlight the challenges of pro-tecting and leveraging IP rights. Companies mustwork to prevent theft and inadvertent loss of theirrights, and they must also work to monetize their IP,internally or by licensing to others. That meansusing their IP to grow new revenue streams, developstrong partnerships, and build successful cutting-edge low-cost products. The question is, how do youplug your IP into China’s market without havingsomeone seize it and become your competitor, notonly in China but in traditional markets as well?

On paper, China has in place most of the WorldIntellectual Property Organization (WIPO) lawsrequired for its 2001 entry into the World TradeOrganization (WTO). The Chinese government istaking steps to improve IP protection. For exam-ple, in July 2004 it launched a major national edu-cation campaign on the subject and pledged tocontinually update its approach toward patents.Indeed, the explosion in patent applications inChina offers hope for future protections there.(See Exhibit 1.)

In practice, however, China’s legal systems for pro-tecting and monetizing IP rights remain embry-onic, and the challenges to realizing those objec-tives are enormous:1

Cultural traditions hinder the enforcement of aneffective IP legal structure. Many Chinese have tra-ditionally viewed IP as a common good, to be usedby all for free. Licensing is sometimes seen as “a salewith installment payments,” leading to outrightownership and thus the right to resell. Domesticcompetitors frequently copy each other withimpunity, and foreign companies from wealthiernations are expected to exchange know-how formarket access.

Patent registration processes remain arduous. Theboom in patent applications has overwhelmed

E X H I B I T 1

PATENT APPLICATIONS ARE GROWING FAST IN CHINA

SOURCE: State Intellectual Property Office.

NOTE: Includes applications from both foreign and domestic parties.

0

50

100

150

200

250

300

350

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

CAGR1993–1998 1998–2003

12% 20%

Patent applications(in thousands)

1. Sources for some of the analysis in this section include “IntellectualProperty and Licensing,” Chapter 10 in China Hand: The Complete Guideto Doing Business in China (The Economist Intelligence Unit, 2002);Rouse & Co. International Web site: www.iprights.com; “IPR Protectionand Enforcement: A Guide,” China Business Review, 1 November 2000;various press reports and articles from 2003 and 2004.

8 BCG REPORT

China’s State Intellectual Property Office (SIPO),which lacks sufficient qualified manpower toprocess the steep rise in applications. For exam-ple, in 2002, SIPO received three times as manyapplications as it reviewed. SIPO currently faces athree-year backlog of unread applications, leadingto drawn-out approval periods. Given their highercomplexity, applications for high-tech patents typ-ically take an additional two to seven years toprocess. Although SIPO is rapidly adding staff andhas launched an Internet-based application ser-vice, the backlog is likely to worsen before itimproves, given thesteady increase in vol-ume. (IP issues are han-dled in China by a com-plex web of governmentagencies. See the sidebar“Alphabet Soup: China’sIP-Related Government Bodies.”)

Differences with U.S. patent laws can catch compa-nies unaware. Unlike the United States but similarto Europe and Japan, China follows “first to file”patent-award practices instead of “first to use.” Thisenables a Chinese company to patent your IP aslong as it obtains approval before you do.

Gaps or inconsistencies with international laws stillexist. For example, China lacks significant trade-secret laws, which makes it harder to prevent theft.Also, protection time periods awarded with patents,trademarks, and copyrights are valid only if thosepatents, trademarks, and copyrights are used.Foreign companies that license their trademarksand obtain patents in China before actually enter-ing the market must prove that they have used suchinstruments over time or the patents can be voided,even if the protection time limits have not beenreached.

Protection laws are not always applied equally todomestic and foreign parties. For example, inresponse to extensive copyright and trademarktheft, China has devised a “Famous Brands” systemfor accelerated trademark approval. So far, 200Chinese brands, but no foreign brands, are pro-tected. Additionally, foreign patent applicants mustpay higher fees than Chinese applicants, and for-eign applicants without a legal Chinese presencemust use a Chinese agent.

Enforcement of protection laws is difficult. SIPOonly registers patents, although it was established tointegrate official bodies responsible for patents,trademarks, and copyrights. Outside of patent reg-istration, it remains largely a policy-setting body,with limited investigation and enforcement powers.The China Trademark Office (CTMO) and theNational Copyright Administration of China (NCAC)remain separate bodies, while still another entity, theMinistry of Commerce (MOFCOM), administerstechnology transfer issues. Beyond the problem offragmented authority, none of these bodies enjoys

any legal power to actuallyenforce regulations.

China’s court system stillstruggles to handle IPissues. Although China’scourts do have the ability

to enforce laws, and most provincial courts haveestablished IP sections, many judges have not yethad adequate legal training. What’s more, foreignparties cannot initiate legal action in China; theymust persuade the courts to pursue a case. China’slaws require proof of illegal sales for criminalaction, and they base penalties on a percentage ofillegal sales. This is a futile effort because even legalsales are usually not recorded accurately. Fines arelow and hardly a deterrent.

Most IP issues end up before administrative bodieswith limited enforcement powers. Most foreigntechnology companies have resorted to the StateTechnology Supervision Bureau (STSB) for actionbecause it can conduct raids, inflict financial penal-ties, and even close production facilities, albeit onthe basis of low product safety. Some foreign com-panies have resorted to the General Administrationof Customs (GAC), which can impound exports.But these approaches are not foolproof, since raidscan be held up in court. Additionally, given the tra-ditionally loose control exercised by China’s centralgovernment, provincial bureaus will have varyinglevels of interest in pursuing action.

Administrative bodies also have conflicts of inter-est. The priorities of these administrative bodies areoften at odds with those of foreign companies. Forexample, the State Administration for Industry andCommerce (SAIC) can conduct raids, investigateviolations, impose fines, and close factories. But

China’s patent-award practicesenable a Chinese company topatent your IP as long as it

obtains approval before you do.


CAS Chinese Academy of Sciences.Conducts critical research in sci-ence and technology; sets researchpolicy across multiple industries.

CATT China Academy of Telecommunica-tions Technology. Research bodyformed under the Ministry of In-formation Industry (MII) to developtelecommunications technologies.Also known as Datang TelecomTechnology and Industry Group.

CTMO China Trademark Office. Registerstrademarks.

GAC General Administration of Cus-toms. Enforces intellectual propertyrights registered with customs; canimpound exports.

MII Ministry of Information Industry.China’s telecommunications regula-tor. Will award 3G network licenses;has required vendors and operatorsto put the homegrown TD-SCDMAstandard into trial along withCDMA2000 and WCDMA.

MOFCOM Ministry of Commerce. Overseesforeign trade and economic cooper-ation; develops trade policies. Alsooversees technology transfer andtechnology licenses.

MOST Ministry of Science and Tech-nology. Creates science and tech-nology strategies at the nationallevel, promotes technology develop-ment, and oversees developmentbudgets.

NCAC National Copyright Administrationof China. Registers and overseescopyrights.

A L P H A B E T S O U P : C H I N A ’ S I P - R E L A T E D G O V E R N M E N T B O D I E S

People’s Courts China’s court system. Undertakeslegal action when the PublicSecurity Bureau (PSB) provides evi-dence of illegal activity. Cases aredecided by judges.

PSB Public Security Bureau. China’spolice bureau, responsible forenforcing laws and investigatingcriminal activity for court action.

SAC Standardization Administration ofChina. Establishes and overseesstandards across multiple in-dustries.

SAIC State Administration for Industryand Commerce. Manages theCTMO; local bureaus provideenforcement services for the CTMO.Main role is to promote economicdevelopment.

SETC State Economic and Trade Com-mission. Economic policy and plan-ning arm of the State Council(China’s highest government body).

SIPO State Intellectual Property Office.Established to integrate patent,trademark, and copyright policy andrelated administrative bodies. Re-views patent applications andgrants patent rights; on trademarkand copyright fronts, mainly prom-ulgates policy, with no other ac-tive role.

STSB State Technology SupervisionBureau. Ensures product quality;can confiscate products it considersdangerous.

SOURCES: “Intellectual Property and Licensing,” Chapter 10 in China Hand: The Complete Guide to Doing Business in China (The Economist IntelligenceUnit, 2002); official Web sites of Chinese government ministries, administrative agencies, and bureaus.

10 BCG REPORT

since its main role is to promote economic devel-opment—and in some provinces counterfeiting is ahuge industry and employer—it often will not acton behalf of foreign complainants. In addition, allof these agencies have the right to sell confiscatedgoods to finance their operations. There can alsobe conflicts if these organizations have any ties tothe violators.

Arbitration doesn’t always work, although it is oftenthe only resort. Arbitration can be faulty owing tothe lack of standard procedures and the unavail-ability of truly impartial arbiters. Surprisingly, arbi-

tration can sometimes result in the violator and thepatent holder forming a joint venture, as was thecase with one German manufacturer of textilemachinery. After discovering at a trade fair thatthree different companies were copying its machin-ery, the manufacturer opted to form joint ventureswith all three rather than deal with difficult courtand administrative processes.

Out of frustration or ignorance, too many foreigncompanies have not even bothered to file for patentsin China, whether they are in the market or not—anoversight that only invites further problems.

Influencing the Development of Key Standards


In a few short years, China has gone from being a“taker” of existing standards (such as GSM inmobile telephony) to becoming a new but increas-ingly astute “shaper” of emerging standards. Oftenthe motivations cited are to assist local producersand to hasten technology transfer. Increasingly,China’s real motivation is to use the mammoth sizeof its market to shape global standards. China’s“shaper” role can havedramatic consequences—good or bad—for compa-nies, depending on howthey play the game.Companies now realizethat they must participateactively in China’s standards development. Other-wise, they will miss the opportunity to have ade-quate access to the Chinese market and could evenlose out on global opportunities as well.

Communications, electronics, and software are allmajor areas in which China is attempting to shapestandards.

• Communications. China has a well-publicized spec-ulative effort under way to develop a mobile com-munications standard known as TD-SCDMA.Siemens has committed heavily to codevelopingthis standard, while some other global rivals havechosen not to participate. There is currently littleinterest in TD-SCDMA outside China. However,the future of the standard in China remains anopen question—and the outcome will shape theplaying field for 3G equipment there.

• Electronics. In consumer electronics, China hasdeveloped the Enhanced Versatile Disc (EVD)standard to add IP control to its growing role asthe world’s leading manufacturer of DVD equip-ment. As the first commercially available high-definition DVD standard, EVD competes withBlu-ray, being developed by Sony and Philips,and with HD-DVD, from Toshiba and NEC, indetermining the future global standard. Withpatents for EVD, Chinese companies could steerroyalties from DVD patent holders and shapethe future royalty market for high-definitionDVD products.

• Software. Chinese efforts on the standards frontextend to the desktop as well. Red Flag Linux,based on the open Linux platform, competesdirectly with Microsoft Windows in China, and aninternational English version is under develop-ment. The motivations cited by the Ministry ofInformation Industry (MII) for this initiativerange from protecting national security to driving

deeper penetration ofpersonal computersthrough lower softwareroyalties.

Similar efforts will extendto digital set-top boxes,

radio frequency definition, encryption, and futuregenerations of wireless LAN.

These efforts should not be viewed as merely com-mercial; increasingly, they are nationalistic andpatriotic movements driven by the Chinese govern-ment. The government is often a majority owner ofcompanies that develop such standards, it retains itsrole as the main technology catalyst in the country,and it markets cooperation in such efforts to theChinese developers as a point of national pride.Additionally, the organizations that set standardsare often closely tied to the central government orare in regulatory positions in key industries.Foreign companies will increasingly face a highlyunified effort by the Chinese government andChinese companies to set standards.

For example, the EVD effort was originally spear-headed by the State Economic and TradeCommission (SETC), which granted developmentfunds to a consortium of 13 Chinese companies.Meanwhile, the champion of the TD-SCDMA stan-dard, Datang Mobile, is a majority-owned subsidiaryof Datang Telecom Technology and IndustryGroup, which is better known by its governmentname: the China Academy of TelecommunicationsTechnology. CATT is administered by the MII,which is responsible for determining the 3G stan-dards Chinese operators will adopt. The MII hasnot always acted in TD-SCDMA’s favor—for exam-ple, it withheld new development funding in recentyears—but it has required vendors and operators to

Increasingly, China’s efforts to shape standards are

patriotic movements driven by the government.

12 BCG REPORT

conduct 3G trials using that standard. And considerRed Flag Linux, which was spearheaded by theChinese Academy of Sciences (CAS) and laterreceived funding from the MII. The governmenthas since given explicit support to Red Flag Linux,requiring all government agencies to use onlyChinese software as of 2003.

Multinational corporations also face a challengefrom the existing strong positions of the Chineseplayers that set these standards. Those playersinclude Shinco, the leading Chinese DVD manufac-turer, which dominates the Beijing E-World EVDconsortium, created by the government. Siemens,the leading multinational champion of TD-SCDMA,is now working with another strong player, HuaweiTechnologies, the self-appointed “Cisco of China.”Huawei holds a large position in China’s marketsfor data communications and fixed-line switchingequipment. It is also one of 11 companies involvedin developing the WAPI standard, along withChina’s leading personal-computer manufacturer,Lenovo.

These efforts on standards, and the ways in whichcompanies will react to them, carry a number ofdramatic implications:

• If foreign companies gamble correctly on win-ning standards and partners, they could earnunique benefits. However, they may also faceincreased costs stemming from developing prod-ucts for multiple global and Chinese standards.The cost factor is currently a major concern of

wireless equipment companies in confronting theTD-SCDMA effort.

• Foreign players could face exclusion from futureopportunities in the Chinese market if they donot gamble at all, however. This outcome is alsolikely if companies directly combat standard-set-ting efforts by Chinese entities, displeasing thegovernment.

• Companies also could be excluded from globalopportunities if they take no gambles on standardsetting, while Chinese players use the sheerweight of their market to drive standards. Thethreat of EVD is most evident here.

• Strong competitors could emerge from partner-ships with Chinese companies that previouslywere considered marginal but that could becomesignificant global players through standard-set-ting efforts.

• Lower royalty rates may result, regardless of howforeign companies respond. Chinese companiescould use Chinese standard-setting efforts todrive royalties down on non-Chinese technolo-gies, such as WCDMA. In fact, negotiationsbetween Chinese and global players on loweringWCDMA royalty rates are already under way.

Companies must expect that China will seek toshape standards in their industries. They must iden-tify the mechanisms for setting standards and thenmake clear and early decisions about whether andhow to get involved in the process.

Managing Intellectual Property with the Broader Business Strategy


Companies risk great peril if they manage their IPissues in a vacuum, disconnected from the rest oftheir business strategy. For example, it might seemlogical to use an antidumping lawsuit or a customsseizure to block a Chinese competitor’s product inforeign markets, but such a move could also embar-rass the Chinese company and the Chinese govern-ment. This unintended result might then invite“soft” reprisals in China, severely hindering a com-pany’s operations there by making it difficult toobtain investment approval, new factory permits, ormeetings with key government agencies. The chal-lenge is compounded for a multinational companybecause the interests of its U.S. and Europeandivisions could conflict with those of its Chineseoperations.

Companies can also stumble into problems withsourcing. Although sourcing from China can cutcosts, it can lead to unintended violations of othercompanies’ IP rights. Those violations can occurwhen companies export products from China tomarkets with strong IP laws, such as Europe, Japan,or the United States. For example, Magnequench, aU.S.-based manufacturer of components for DVDplayers, recently sued several Western companies in

the United States and Europe for selling finishedproducts containing parts that allegedly violatedMagnequench’s patents.

Still another problem area is royalty rates.Preferential royalty rates critical for building goodrelations can lead to significant market opportuni-ties—but they can also involve a tradeoff in theform of complaints from other licensees. Forexample, in order to gain a favorable position inChina, one Western technology company agreedto a royalty rate of 2.65 percent for domestic hand-set sales in China, compared with 5.25 percentcharged to Korean handset manufacturers. Thisaction may explain why that company is havingproblems collecting royalties from some Koreancompanies.

Last, many foreign companies fail to synchronizetheir IP-related actions effectively with other majorbusiness activities. For example, too many foreigncompanies address IP issues only after making majorinvestments. However, a company’s leverage isgreatest before making a major investment. It is crit-ical to use this leverage to gain as much protectionfor IP as possible.

An Action Agenda

14 BCG REPORT

Despite all the challenges described above, compa-nies continue to operate in China, of course.Indeed, companies increasingly look to China as acritical source of future growth and as an importantbase for manufacturing, sourcing, talent, and R&D.

A China IP strategy, aggressively pursued and coor-dinated closely with a company’s overall strategy,can contribute enormously to success in China. Apractical agenda for getting started consists of thesefive components:

• Know where you stand and what you must protectand influence

• Develop a game plan

• Organize to achieve results

• Get moving

• Review and reassess

Know Where You Stand and What You Must Protect and Influence

Companies should ask a number of questions inthis area.

What are the existing critical IP assets, or “valuegates,” that must be protected? Take a very broadview of this question, and include all brands,processes, innovations, licensed technologies, stan-dards, and distributor relationships that createvalue in your business. Then identify the following:

• All sources of competitive advantage in your prod-ucts—in essence, what do customers identify aboutyour brand that makes it superior to others?

• Product features that underlie the superior brand image

• The technology underlying the features

• The processes underlying the technology

This should not be a static view of current IP assets.Future IP assets should be anticipated, and stan-dard processes developed, to ensure their protec-tion as well.

What are the major developments regarding stan-dards that you will want to influence? An importantpart of ensuring both current and future returns onIP will be influencing standards. Chinese efforts toset standards will continue on both current andfuture technologies. Identify standards critical toyour business that you should influence now, andidentify other standards that are not yet affected bythe Chinese but that require your attention andinfluence.

What are the likely points of conflict between IPissues and the rest of the business? Try to keep IPissues from creating conflicts between differentparts of your business. A coordinated IP strategycan greatly reduce the likelihood of such conflictsoccurring. If they do occur, the coordination effortwill minimize their impact on the organization. Atthe outset, it’s important to identify the potentialflash points.

Where do you stand on these issues today? Gain abetter understanding of whether your IP is actuallypresent and protected in China. Many companiesare surprised to discover that their IP has already“migrated” to China and is in use by others, withminimal protections in place. Companies may alsofind that they lack a focused internal effort to pro-tect their IP in China, have little internal coordina-tion, and are not sufficiently involved in developingkey standards.

Develop a Game Plan

Develop a plan to provide deep protection for yourkey “value gates.” Best-practice companies do so bymeans of three separate actions.

Determining which IP assets should be present inChina and how they should be present. Not all ofyour IP assets need to be in China in order for youto do business there. Those that are present canexist in several forms—used only in your propri-etary functions, shared with partners, outsourced,or donated outright to Chinese companies as anentry ticket into the market. Best-practice compa-nies consider the following factors in determiningwhich assets to have in China and in what capacity:


• The importance of the Chinese market in rela-tion to other markets for your overall business, interms of size, growth potential, and competitiveadvantage.

• The importance of the IP asset to your globalbusiness and competitive advantage in relation toits importance to your Chinese business and com-petitive advantage. For example, software thatpermits users to input Chinese characters ontouchscreens is critical to some companies fordeveloping competitive advantage in China, so itmust be present there,although it most like-ly has little value else-where.

• The importance of theasset to building criticalgovernment relations in China.

• The importance of the asset to enjoying advan-tages of production in China, such as low cost.

• The cost of, or the ability to afford, additionalcapital investment in China, which can be used toseek government protection of IP.

• The structure of your global value chain and itsrisks, such as suppliers or partners bypassing youby going directly to your customers.

This analysis can lead to actions that were not obvi-ous before. For example, not initiating legal actionin other markets against Chinese competitors—ineffect, giving technology away—could be a morevaluable decision in the long run because it createspositive impacts for your operations in China. Thisis especially true if your operations and market inChina are much larger in value than the marketswhere the infringements are occurring.

Incorporating IP issues carefully throughout thefull cycle of activities in China. For example, com-panies should do the following:

• Secure IP protection before making major invest-ments, as noted above, because that is when yourleverage and influence may be greatest and whenlocal governments are most eager to assist.

• Keep IP assets “on the table” as explicit bargain-ing chips in any type of partnership discussion.

• Tackle concerns about IP head-on before expand-ing R&D and other activities—in large part tohelp address the resistance points that willinevitably arise.

• Get involved in standard-setting activities early,and address the related uncertainties in yourbusiness planning for China.

Blocking and tackling. This approach is a combina-tion of interlocking patent, copyright, and trade-mark actions that creates a portfolio of IP assets.(See the sidebar “Blocking and Tackling: The Legal

Basics of IP Protectionand Monetization,” page16.) Such blocking andtackling actions are criti-cal, but they should notbe interpreted as yourentire IP game plan.

Additionally, you should not use the IP challengesin China as an excuse for failing to pursue thesebasic steps: do not allow a daunting five-to-ten-yearpatent-approval process to keep you from exer-cising your rights and using the tools available to you.

Organize to Achieve Results

Given the stakes involved, it is critical to have a sen-ior, global-level owner of your China IP game plan.Someone with appropriate power and insight needsto oversee the plan and ensure coordination acrossthe company. The needed alignment spans func-tions, geographies, and business units.

The plan’s owner must also consider what type oforganization is required. Best practice suggestsestablishing a senior-level “steering group” for IPgovernance issues and another group dedicated today-to-day action.

It is also critical that this IP organization not be cre-ated merely for blocking and tackling activities.With the recognition of intellectual property as astrategic asset and profit center, the IP organizationcan become as important as any product division.Qualcomm’s elevation of technology licensing tobusiness-unit status suggests the powerful contribu-tion IP can make to a company’s value. IP issuesshould have a champion at the business strategytable, since these issues can affect the shape of the

Secure IP protection beforemaking major investments,because that is when yourleverage may be greatest.

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16 BCG REPORT

In an environment as confusing, opaque, and fast moving as China’s, companies must take a number ofbasic steps, despite their desire to move quickly into deals.

• Apply for patents, trademarks, and copyrights in allsignificant markets, including China. By doing so,you can build a protective fence around key marketsin order to avoid potential problems in the Chinesemarket, where such protection is less available.This step can be thought of as an option on futurestrategic action, in case it becomes necessary.

• Create IP licenses, then license users and collectfees. Make sure that contracts with Chinese joint-venture partners clearly state that they must have IPlicenses from you in order to ship products insideand outside China; otherwise, you will need toenforce your IP rights.

• Build internal processes and policies for the protec-tion of IP rights, including employee contracts.(There are no trade secrets in China.)

• Ensure that your entire organization and any con-tractors or partners are aware of critical IP-rightsissues, IP protection measures, and processes forreporting violations.

• Perform extensive due diligence with all outsourcingproviders, licensees, and joint venture partners,covering issues such as their security processes,policies, and training; employee retention rates; lit-igation histories; and insurance.

• Make sure that all contracts specifically define thegeography of conferred rights. For example, makesure contracts made with partners outside Chinawill cover activities in China as well.

• Ensure that contracts include the option of arbitra-tion in Hong Kong, with results binding in China, toafford the fairest arbitration possible.

• Get customers and distributors on your side by offering rewards for reporting violations of IPrights.

B L O C K I N G A N D T A C K L I N G : T H E L E G A L B A S I C S O F I P P R O T E C T I O N A N D M O N E T I Z A T I O N

Several basic ongoing actions are also required:

• Perform extensive field research to monitor your IPin the marketplace.

• Identify and monitor competitors for violations.

• Perform value chain investigations to ensure thatsuppliers, buyers, licensees, and partners arerespecting both your IP rights and those of others.

• Before turning over sensitive technology, use a busi-ness or IP filter to determine if, in fact, it is reallynecessary to provide the technology. (In some casesit can be better to create technology interfaces thatdon’t require disclosing the technology if the pro-duction or R&D process is modified.) If it turns outthat you must provide the technology, determine thebest way to make the transfer.

If violations occur or if competitors capitalize on loop-holes created when basic protective steps weren’ttaken, employ the tools available to you:

• Use the protective fences you have built aroundother key markets to deny violators access to thosecoveted markets.

• Block foreign distributors by threatening to makethem responsible for the violations of IP rights com-mitted by their customers.

• In China, use administrative bodies such as theSTSB as a temporary measure. Involve the courtsonly in developed provinces such as Beijing,Guangdong, and Shanghai. A fair verdict is morelikely in those provinces owing to higher proficiencywith IP laws. Use your government relations, builtthrough investment and technology transfer, to elicitaction. In some cases, consider whether joint ven-turing with violators will create benefits from marketaccess that will offset the losses resulting from vio-lations of your IP rights in other markets.

This series of actions and tools should not be con-fused with a China IP strategy. They are steps thatshould be followed as a matter of habit.

SOURCES: “At Risk Offshore,” CIO, 7 April 2004; “Intellectual Property and Licensing,” Chapter 10 in China Hand: The Complete Guide to Doing Business inChina (The Economist Intelligence Unit, 2002); “IPR Protection and Enforcement: A Guide,” China Business Review, 1 November 2000.


company’s overall strategy and the tactics used toimplement it.

Companies with significant scale in China shouldhave an IP team dedicated to China that is closelycoordinated with the global IP team. Companieswithout such scale—and even with no activities inChina—should make the country a primary focusof their global teams. This is important because ofthe risks a company can face even without operat-ing in China. Another solution is to make IP issuesa key responsibility of the China-strategy, business-development, or strategic-marketing team, ensur-ing that IP issues receivethe strategic emphasisthey merit.

Get Moving

IP rights do not protect and monetize themselves.To get moving, take these important steps.

Get Chinese companies, media, and governmentbodies on your side. Best-practice multinationalcompanies try to find local companies with alignedinterests and also try to educate the local media onIP issues. For example, in July 2004, U.S. companiesin China jointly sponsored a “media education day”for local journalists. Many of the featured speakerswere from local companies whose businessesdepend on the proper protection of IP rights. TheChinese government recognizes how important IPprotection is to China’s long-term development,and savvy global companies find constructive waysto help the government pursue this objective.

Tighten your own operational practices in China.Best-practice companies have a range of IP protec-tion procedures in place within their Chinese oper-ations. They include employee agreements, inter-nal controls on information flows—even physicalinspections of employees leaving the factory site.You need to identify the practices appropriate toyour situation and put them in place.

Get aligned to maximize your IP leverage. Forexample, the next time you consider a major invest-ment expansion or partnership negotiation inChina, make sure that your IP objectives are incor-porated. Align your various interests (such as pro-tecting IP and influencing the development of stan-

dards) and your various bargaining chips (foreign capital, job creation potential, and thelike), and use them for maximum gain in yournegotiations.

Get involved in standards activities and workcollaboratively with other companies on IP pro-tection issues. You must understand how stan-dard-setting processes work and find a way to par-ticipate. You should also seek to benefit fromcollaborative entities, such as the Quality BrandsProtection Committee and the China Anti-

Counterfeiting Coalition.

Bring IP to the table forall your critical businessdecisions in China.Ensure that your IP con-cerns are properly andconstructively addressed

These concerns must not paralyze your business activities in China, nor should they be ignored.

Do the blocking and tackling. Don’t overlook criti-cal yet basic steps, such as patenting and licensingyour IP, in your rush to enter the market.Depending on your business, you may have a verylarge agenda in this area.

Review and Reassess

The IP organization’s work should be ongoing, pro-viding necessary monitoring for IP both in Chinaand globally. IP issues should be built into quarterlyreporting, providing management with a dashboardfor analyzing and assessing the IP balance sheet.The following issues should be monitored:

• IP returns—essentially a profit-and-loss statementfor IP. This is not just an accounting of royaltiesreceived; rather, it should be a strategic measureof all IP value created and lost.

• Competitor actions—what competitors are doing interms of both potential IP violations and actionson standards. This analysis should include resultsfrom extensive field research.

• Emerging standards—what are they, what is theirstatus, and what is their potential impact on thebusiness? Also, what next steps are required to re-alize maximum value for the global organization?

IP issues should be built intoquarterly reporting, giving

management a dashboard foranalyzing the IP balance sheet.

18 BCG REPORT

• Compliance—how well is the company complyingwith the IP rights of others?

(For a framework that helps companies assess theirstatus regarding all five components of the actionagenda, see the section “A Strategy Health Check.”)

* * *

China is a “must play” for many industries.Protecting and leveraging IP is another “must play.”These two imperatives do create conflicts, given thechallenging IP environment in China. However,global companies must address the conflicts if theywant to succeed. Inaction and wishful thinking are

not options. Nor is “delegating it to the lawyers” anoption, since there are critical business questions tobe managed.

How well developed is your IP strategy in China?Companies that forge and execute wise strategieswill reap the benefits—greater revenues and profits,stronger strategic positions, and superior leverageof China’s strengths. Companies that fail to do sowill be forced into a potentially endless cycle ofreacting to events, playing catch-up, and missingmajor opportunities. They will fail to capture themany global advantages that should flow from astrong position in China. Can you afford not to act?

A Strategy Health Check


Are your company’s strategy and organizationcapable of protecting and monetizing your IPrights in China? BCG has developed the followingframework and questions to help CEOs determinewhere action is required. (For a snapshot of howone hypothetical company measures up, seeExhibit 2.)

Know where you stand and what you must pro-tect and influence.

• Do you treat IP as a key strategic asset?

• Have you identified your value gates? Have youidentified likely future value gates?

• Have you identified the crucial technologies andprocesses that underlie your value gates?

• Have you built protections around your key mar-kets, protecting those value gates?

• Have you identified current and future standardsthat require your influence?

• Have you identified likely points of conflict andnecessary coordination between IP issues and therest of the business?

Develop a game plan.

• Have you integrated IP issues into all facets ofyour China strategy: outsourcing, R&D, produc-tion, branding, distribution, and sales (bothimport and export)?

• Have you evaluated your Chinese market in rela-tion to other markets in terms of size, growth, andcompetitive advantage?

• Have you identified the importance of each tech-nology or process to your global business andcompetitive advantage?

E X H I B I T 2

A SCORECARD VIVIDLY COMMUNICATES IP CAPABILITIES

SOURCE: BCG analysis.

Score Recommendations Score Recommendations

Overall Score for Company X

Know where you stand and what you must protect and influence

Develop agame plan

Company X needs to better protect proprietary designs and pursue licensing

Company X needs to bring IP issues into joint venture negotiations earlier

Organize to achieve results

Key

The “score” is the ratio of Company X’s score to that of the global best-in-class benchmark (10)

“Recommendations” indicate what Company X must do to overcome its weaknesses

Senior management needs to make blocking and tackling a high priority until Company X “catches up”

Company X needs to build China IP into its quarterly China reviews

Review andreassess

Get moving

Company X needs to establish a China IP team and ensure that its China IP actions are aligned with its U.S. antidumping initiative

5/10

7/10

5/10

4/10 5/10

3/10

X/10

20 BCG REPORT

• Have you identified the importance of the tech-nology to your business and competitive advan-tage in China?

• Have you identified the importance of the tech-nology or process to building key relations in China?

• Have you identified the importance of the tech-nology or process to enjoying advantages of pro-duction in China (for example, low cost)?

• Do you know the structure of your value chain?

• How are you managing your China R&D activitiesin interactions with local players?

• Is IP at the forefront of your negotiations in China?

• Have you completed your “blocking and tackling”actions?

Organize to achieve results.

• Have you built a structure to take ownership of IPissues in your global organization? In yourChinese organization?

• Have you developed links between this organiza-tion and other divisions, units, or groups?

• Do you have an IP representative at the strategylevel of the organization?

Get moving.

• Has management in all divisions been educatedabout the importance and role of IP in the organ-ization?

• Have employees been educated about the impor-tance of IP and about their role in protecting andmonetizing it?

• Have you built critical relationships with govern-ment bodies to allow protection, enforcement,and official recognition of your IP?

• Have you joined key standards bodies, in Chinaand globally? Have you considered forming astandards body where none exists?

• Has the organization completed the basic “block-ing and tackling” actions?

• Have you optimized your business models to cre-ate advantage with your IP

—by geography?

—by product?

—by partnership?

—by distribution network?

—by supply chain?

Review and reassess.

• How often, in what format, and with what contentare IP issues communicated to top manage-ment—globally and in China?

• Do you measure the real strategic value of your IPin the following areas:

—Partnerships?

—Standard setting?

—Influence on both supply and distributionchains?

—Impact on sales?

—Impact on R&D?

• Do you perform such measurements on a quar-terly basis?

• Do you monitor competitors regularly for bothimpact on standards and IP violations?

• Does your organization monitor emerging stan-dards on a quarterly basis?

The Boston Consulting Group is a general management consulting firmthat is a global leader in business strategy. BCG has helped companiesin every major industry and market achieve a competitive advantage bydeveloping and implementing winning strategies. Founded in 1963, thefirm now operates 60 offices in 37 countries. For further information,please visit our Web site at www.bcg.com.

“Riding the Next Wave of Outsourcing”

Opportunities for Action in Consumer Markets, July 2004

Capturing Global Advantage: How Leading Industrial Companies Are

Transforming Their Industries by Sourcing and Selling in China, India,

and Other Low-Cost Countries

A report by The Boston Consulting Group, April 2004

“What Is Globalization Doing to Your Business?”

Opportunities for Action in Industrial Goods, February 2004

“Made in China: Why Industrial Goods Are Going Next”

Opportunities for Action in Industrial Goods, November 2003

In addition, BCG and the Wharton School are jointly publishing a series of

four reports that explore China’s impact on business operations and strategy.

The first report is titled China and the New Rules for Global Business. It is

available at http://knowledge.wharton.upenn.edu/weblink/68.cfm.

For a complete list of BCG publications and information about how to

obtain copies, please visit our Web site at www.bcg.com.

To receive future publications in electronic form about this topic or

others, please visit our subscription Web site at www.bcg.com/subscribe.

This report is part of a continuing series of publications by The Boston Consulting Group on China and the new era

of globalization. Other BCG publications on the topic include:



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