There is a story of a GE lawyer writing to a manufacturing company in China to complain of the use of ‘GE’ on a radio. The response was reputedly along the lines: ‘why should we stop? It helps to sell the radio’. Whether this story is true or apocryphal, China’s reputation as the counterfeiting capital of the world is well deserved. It is estimated that two thirds of all counterfeit goods entering the EU originate in China. On the face of it at least, the Chinese legal system is wholly ineffective against counterfeiters, while intellectual property (IP) would seem to be of little value.
Such concerns have not deterred too many players from investing in the region. ‘The level of scientific expertise in China is rising rapidly,’ says Novartis chairman and ceo Daniel Vasella, announcing plans for a new $100m R&D centre in Shanghai at the end of last year. Activities at the new centre ‘will go far beyond’ conducting early stage clinical trials, Novartis says, and will initially focus on addressing unmet urgent medical needs in the region, such as cancer. ‘The Shanghai centre will allow us to combine modern drug discovery approaches with those of traditional Chinese medicines that have been used for thousands of years.’
However, companies doing business in China will be aware that the concept of IP there is still very young. There was no patent system at all in China until the early 1980s, yet in the short time since then the country has come a long way. In 2001 China signed up to the World Trade Organisation’s TRIPS agreement, which committed the country to bringing its IP laws into line with agreed minimum international standards, which it has now done. The laws are published on the State Intellectual Property Office (SIPO) website in English (www.sipo.gov.cn/sipo_English/) and, significantly, the system is being used by domestic as well as foreign companies.
The number of applications by Chinese enterprises to SIPO for Chinese patents has increased from around 165,000 in 2001 to more than 380,000 in 2005. Similarly, numbers of Chinese patent applications by foreign companies have more than doubled over the same period, up from 37,800 in 2001 to more than 93,000 in 2005, with nearly 40% of these applications originating in Japan. Companies such as GE, for example, now have a publicly stated policy to apply for patents in China as a matter of routine, whereas a few years ago this was strictly optional.
But if foreigners own around a fifth of Chinese patents, only 5% of patent litigation in 2005 involved foreign companies, lamented China’s IP chief justice Jiang Zhipei, speaking at a meeting on IP and China organised by the Intellectual Property Institute late last year. Many foreign players, it appears, still lack confidence in levels of IP enforcement in the region and opt not to pursue what may often be legitimate claims in the belief that these will not be upheld.
Cases such as that over Pfizer’s erectile dysfunction drug Viagra show that times are changing. The rejection of Pfizer’s patent in 2004 by SIPO, on the grounds that Pfizer had failed to provide enough information on how the active ingredient, sildenafil citrate, was manufactured, has often been cited by detractors of the Chinese system. But in June 2006 that decision was reversed on appeal, while separately in December a Chinese court ordered three local drug firms to pay $38 000 each in statutory damages to the US giant for infringing its trademark on the shape of the Viagra tablet.
The fact is that the civil system in China now has specialist IP tribunals in all major cities, while chief justice Zhipei appears determined to apply the law impartially. Zhipei’s advice for foreign companies doing business in China starts with one seminal point: register your rights. As in any other country, a necessary requirement for starting a patent action is that a patent has been applied for and granted. Admittedly, this process is not as quick as it might be: a Chinese patent typically takes over three years to be granted, but this is actually no worse than the record of the European Patent Office. Likewise, the typical cost – some £15 000 – is similar to the equivalent costs in Europe.
China’s commitment to embracing IP comes from the highest levels, and is part of the government’s strategy to reclaim its place as the world’s dominant trading country. The parallels with Japan are striking. Post-World War II Japan became a low-cost manufacturer. It built up its industry, technology and know-how, and established its IP enforcement system, but suffered from having to pay high royalties for the use of technology imported from the west. As its own IP was developed, Japan finally became home to some of the world’s most respected hi-tech companies.
China is still some way off that, but given its huge natural resources, what are the odds that within 15 years the next ExxonMobil or Shell will be Chinese? Companies seeking to be a part of such developments should be reassured that doing business in China may be a safer bet than they thought.