Dispelling some of the myths – Manufacturing and IP in China

Posted on 8 Jan 2009 by The Manufacturer

It is no secret that protecting intellectual property rights (IPR) and maintaining good product quality in China is a challenge. Ross Parsonage, senior associate at Rouse & Co. in Beijing, explains some of the issues facing UK companies which work with Chinese partners.

In recent years, the media has gone to great lengths to highlight concerns with its legal system, its apparent inability to reduce piracy and product quality problems involving everything from tainted cough syrup and toxic pet food to toys decorated with lead paint.

With the latest product quality scare still in the headlines (this time involving baby milk power), and with counterfeiting still a major concern for manufacturers and consumers alike, it may take some time to resuscitate the damaged ‘made in China’ brand. This is bad news for Chinese firms and foreign ventures manufacturing in China, and it is no wonder, therefore, that companies that
haven’t already made the move to China are hesitating – being unsure what to do or what to believe.

The fact is that many IPR and product quality problems (or at least those widely reported) are, in part, self inflicted and generally reflect a poor understanding
of China’s legal and regulatory system, inadequate supply chain management, poorly drafted contracts and failures to register key IP.

While the legal framework for protection and enforcement of IP in China is becoming increasingly sophisticated, it is important to remember the development stage the country is in. Foreign manufacturers can protect their rights in China but must play a big part themselves in preventing the manufacture of counterfeit, pirated and poor quality products.

Addressing a number of the most commonly held misconceptions about intellectual property management in China we provide some simple
recommendations for maximising commercial and investment opportunities offered by doing business in or with China, while minimising the risks.

“There are no intellectual property laws in China”

Before China’s emergence back onto the world trading stage in the 1970s, the two main concepts underpinning average Chinese attitudes to personal
intellectual property were Confucianism, which regarded copying as a hallowed act and the ultimate compliment to an innovator or creator; and Communist ideology, which contended that all creative and innovative works were owned by the people as a whole.

Thirty years on and China is going to great lengths to introduce laws to protect the ‘western’ concept of intellectual property in an effort to encourage foreign
investment and conform to existing international treaties and conventions.

In the lead up to WTO accession in 2001, China enacted its third set of revised laws to protect different types of intellectual property including trademark, patent and copyright. These laws are now widely acknowledged to be of international standard and comply with the WTO Agreement on traded-related aspects of international property rights (TRIPs).

Further revisions to the IP laws, increased resources and training of enforcement officials, more public education and greater emphasis on creating an innovative economy are currently underway in China and will help further speed up and strengthen the enforcement process required to increase respect for IP and reduce the scale of the infringement problem.

The rule of law is still a long way from reality but with a real commitment from the Government (which is taking constructive steps to promote and reward innovation) and foreign and Chinese rights owners (looking to commercialise higher value-added goods) positive change to the IP system is slowly being brought about.

“I have a patent in the UK. Can’t I use that to stop infringement in China?”

As in most jurisdictions, registered IP (trademark and patent) protection is territorial – if you do not register in China with the appropriate Chinese authorities you have no rights there. Failing to register may make it difficult, if not impossible, to seek administrative or judicial assistance should problems occur.

As registering your IP rights is the most effective means of ensuring that your brand, packaging design or technology is protected, and as China is a first-to-file jurisdiction, you will need to identify and register your rights in China before introducing branded goods or services (or even earlier if possible), otherwise you run the risk of losing them to local companies that can and will register the
trademarks and patents for themselves.

To ensure that you identify and obtain the strongest portfolio of rights at the earliest opportunity, consider ways in which you can work closer with internal and external R&D, production, distribution, sales and marketing colleagues and partners during initial product, brand and media design processes. The
sooner you identify key rights, the stronger the brand and product protection you obtain.

As the registration process for registering patents and trademarks in China can take years to complete it is advisable to consider implementing some or all
of the following steps to immediately strengthen your IPR position.

Copyright subsists upon the creation of a work, and although registration is not required for protection per se it is wise to record key copyrighted works with
China’s National Copyright Administration (NCA). This will help you to establish evidence of ownership should enforcement actions become necessary.

Also, take steps to document the use and promotion of your brands and/or products in China from the moment they are introduced or manufactured in China so that you have the evidence, if infringement occurs, to show that your goods are ‘well-known’ and were first in the market.

It is easier to retain this information than to search for it once there is infringement and time is of the essence.

Finally, to ensure that you haven’t missed any additional opportunities, conduct regular audits of all your global IP assets (including Chinese internet domains such as ‘.cn’ and ‘.com.cn’) to assess where there might be gaps in your overall protection.

As with any investment, the costs associated with registration of your IP rights should be balanced with the level of risk your IP is likely to be exposed to, given
your particular business in China today.

But remember, even if you are not doing business in China now, businesses in China are watching and doing business with you! Register your rights early!

“We don’t spend much time on detailed contracts or supplier audits in China as we know they can’t be enforced”

Ensuring that you have rights in place is a must (without them you cannot do much) but managing them, your contracts and your supply chain carefully is the single most effective way of preventing IP infringement and ensuring good quality.

A strong contract forms the basis of any legal relationship. In China, from an IP perspective the contract is critical, as it sets out explicably the obligations and expectations of both parties.

Although the legal system in China is still trying to catch up with the pace of economic development and Chinese companies are still coming to terms with the
legal obligations associated with signing a contract, the situation is improving.
Chinese parties see a contract as a reflection of the current relationship which will change and grow along with the relationship in future. But they will understand
the express obligations to which they agree.

Taking a proactive approach to IP management in your internal operations can also mean developing IP compliance audit procedures as part of due diligence
before selecting partners, or during regular quality assurance and social compliance audits to highlight particular shortcomings, and to identify remedial
measures if a business relationship is to proceed or continue.

The first step generally starts with the IP owner and a review of the contracts in place with suppliers and what provisions are made in the agreements for IP control, if any. Just as important is a review of whether the IP relevant procedures have actually been implemented by staff.

Following that, a comprehensive assessment of how the supplier handles key IP issues such as auditing of production, control of sub-contractors, restricting access to the IP holders’ confidential information, confidentiality clauses in employee contracts, return of design drawings and tooling and disposal of surplus or waste product should be made.

The aim is to assess the awareness the supplier and its key staff has for IP in general, including its awareness of the IP owner’s IP rights and awareness
of its contractual obligations. It is also important to find out whether the supplier also manufactures competing products of its own or for other clients, whether it uses outside sourcing agents and submanufacturers to fulfil orders and whether it has a good IP track record.

Careful preparation

China recognises that counterfeiting and poor quality products threaten the reputation, goodwill and profitability of the country and the local business
environment and is taking steps to strengthen the existing legal framework in order to develop a modern, innovative and law-abiding economy.

With an increasingly skilled and motivated workforce, good infrastructure and growing appreciation for good IP protection and quality control measures China
continues to offer foreign manufacturers improving technical know-how, government-supported R&D, a growing middle class and significant economies
of scale.

The companies that will benefit most successfully from manufacturing in China are those that rethink their attitudes to China and to IP and come with a carefully
prepared and well thought-out strategy.