The effects of China Manufacturing 2025…to 2049 – Part I

China Manufacturing 2025 (CM2025) will result in an increased intellectual property (IP) assertiveness by China, both domestically and internationally. In this article, Elliot Papageorgiou, national chair of the European Chamber’s IPR Working Group and head of the greater China intellectual property practice at Clyde & Co, and Gu Zhengquan, IP litigator and partner at the Chinese law firm WESTLINK, outline how companies can ‘recalibrate’ their perception of China’s IP. This includes dispelling pre-conceptions regarding China and explaining how businesses can adapt their global IP strategies.

In May 2015, the State Council of the People’s Republic of China announced its CM2025 national initiative with the clear aim of making China a global manufacturing powerhouse in three stages: first, the central government will upgrade and improve the quality of its manufacturing sectors and master technologies in significant industries by 2025; second, by 2035 China will become a mid-ranking manufacturing nation by increasing its IP ownership and achieving key technological breakthroughs in significant sectors; and third, by 2049 China will become a global leader that drives innovation in high-end manufacturing. The plan is ambitious, however what it means for China’s IP is even more significant.

Expectations in the IP environment
The most significant impact CM2025 will have on China’s IP will no doubt be from the implementation of the nine strategic tasks to take place in the 10 priority sectors. What will the impact on IP look like? The following two sections break down CM2025’s effect on China’s IP.

Domestic effects in China
• Increased IP filing in the 10 priority sectors and a greater push for encouraging, recognising and rewarding indigenous innovation.
• Greater scrutiny of foreign IP filings in outlined priority sectors found in CM2025, and a continuing increase in the number of invalidations filed against foreign patents, utility models, and designs.
• Greater investment levels in government-encouraged sectors along with the consolidation and creation of ‘national champions’ in preparation for China to make its presence increasingly felt in the global market place.
• The further encouragement of Chinese technical experts and scientists to return to China. This could be accomplished by increasing the amount of funding and financing opportunities, along with preferential tax treatment for relevant tech ventures.
• An increase in the number of high and new technology enterprise applications by Chinese companies operating in CM2025 priority sectors.
• The continued growth of IP disputes. While the total number of disputes involving foreigners will remain relatively low (in 2016 and 2017 merely 1.2 per cent of IP disputes involved foreign parties), foreign companies should expect increased Chinese assertiveness. Expect an even higher number of IP disputes if the enacted version of China’s fourth amendment to the Patent Law of the People’s Republic of China (expected to be issued in late-2018) includes increased enforcement powers for the patent administration authorities.

Global effects from Chinese enterprises
• Increased out-bound IP filing by Chinese entities in CM2025’s 10 priority sectors.
• In the trademark field, expect a greater push by Chinese brands to internationalise. Some movement in this direction is already visible. For example, Huawei has an international campaign with popular actress Scarlet Johansson as their brand ambassador, while Tencent has begun to offer its widely used social media platform, WeChat, in 22 languages.
• For patents, there will not only be greater levels of outbound filing, but a greater number of Chinese patents being validated internationally. In summation, expect a greater number of Chinese international patent filings to go ‘triadic’, meaning that those Chinese patents will be validated in arguably the three most important international jurisdictions, the United States (US), Europe and Japan.
• Expect more Chinese companies to be active in standard-setting bodies and processes. For a long time, many of the international standards the world complied with were dictated by the West. Expect CM2025 to bring a newfound assertiveness by reflecting Chinese interests in the setting of international standards.
• Expect greater levels of Chinese outbound direct investment (ODI). Even while the Chinese Government is scrutinising currency outflows, expect the ’green light’ to continue to be given for Chinese companies to invest in overseas rivals and market leaders. However, it will not be completely smooth sailing for Chinese ODI as greater protectionism in the US, calls for a ‘level playing field’ and reciprocal investment rights by European countries (including Germany and France) will impact their ability to acquire applicable foreign IP.

Adapting to a changing IP environment
In order to maximise opportunities offered by CM2025 while minimising potential risks, IP strategies must be adapted. There are several ways that companies can accomplish this.

Branding and trademarks
Foreign companies should continue to develop strong Chinese brand identities and reinforce links to their international brands and services. This will allow them to differentiate themselves in the increasingly competitive Chinese marketplace. At the same time, these companies need to invest in innovation internationally.

These companies must also examine priority sectors listed by CM2025, and file trademarks for appropriate products and services within, and adjacent to, those sectors. On the services side, for example, filings for services like “promotional activities…” (Class 35 in international classifications), “maintenance and repair of…” (Class 37) and “training in relation to…” (Class 41) should be considered.

Technology and patents
On the technology side, foreign companies need to rigorously search and monitor their competitors’ patent, utility model and registered design filings. Given the vast number of filings in 2017 (1,382,000 patent applications, 1,688,000 utility model applications and 629,000 design applications), monitoring by subject filed/subject matter, or international patent classification will not be practicable. Therefore, foreign companies may find they need to narrow the search to filings of known or suspected competitors. In other words, searching by ‘proprietor’ rather than by ‘technology’. While this carries certain risks, it may be the only way to stay up to date on the high number of filings in China.

Foreign companies active in the 10 priority sectors will need to upgrade their patent filing strategies and apply Chinese inventiveness standards (for both patents and utility models) to trigger their filing decision, rather than those from their country of origin. Additionally, irrespective of sector, they should be looking to file patents in the intersection between their technology and the fields of connectivity, software, and business methods. The State Intellectual Property Office of the People’s Republic of China signalled in 2017 that it would consider applying a similar patentability standard for software, and possibly business methods, to the one applied by the European Patent Office. This could result in a greater number of granted patents, an opportunity foreign companies cannot afford to miss.

Preparing for disputes
Foreign companies have previously been reluctant to commence or provoke IP disputes in China, preferring to let ‘sleeping dogs lie’. In light of China’s CM2025 initiative, companies will instead have to be more aggressive when it comes to defending and projecting their IP in China. They must be prepared to proactively attack adverse patents, utility models and designs earlier and more frequently. If they fail to do so, they will increasingly find themselves on the defensive side of IP litigation.

Companies must also increasingly file pre-emptive patent litigations. Being a plaintiff in China puts you in the driver’s seat and carries procedural and often substantive advantages (such as choice of jurisdiction), which foreign companies should not surrender easily. By some measures, over 80 per cent of patent litigation is determined in favour of plaintiffs.

Besides going on the offensive, foreign companies must prepare a defensive strategy in the event they become targets of IP litigation. This includes building up a strong, defensive IP portfolio; evidence of prior use and prior publication (where applicable); and preparing clear instructions for local businesses that can be used when an IP dispute comes calling.

Having skin in the game
You cannot win if you do not play the game. Maintaining active levels of engagement, and positive participation in CM2025 will be key in determining how foreign companies fair under this wide-sweeping initiative. This means businesses should continue advocating and participating in rules setting; help shape outcomes for each of the stages outlined in CM2025; and most importantly, actively seek support, representation and advocacy from the European Union, their national governments, and various non-governmental organisations throughout the CM2025 process.

With over 2,500 staff across six continents, Clyde & Co is well known its expertise in emerging markets, international trade, and high profile and/or difficult dispute resolution work. It has a well-established IP practice in the Middle-East and North Africa, and launched its Greater China IP practice in 2017 centred around Elliot Papageorgiou. It’s core industrial sectors centre on industrial manufacturing, infrastructure, insurance, international trade, transportation and natural resources, with a fast-growing reputation in other industries as well.