Exporting Technology from China: Is It Legal?

Just when China is starting to look promises for foreign companies looking for a higher educated workforce, they go and change their patent laws. As of a few weeks ago, Beijing has decided to issue “compulsory” licenses to domestic companies looking to manufacture patented drugs in China. The changes are said to be “for public health” and is allowed under the WTO for nations where expensive drugs are unaffordable. With a burgeoning middle class, China clearly intends the generic drug licenses for export markets.

China’s MNC licensing and operating regulations aim to keep the export-to-import ratio high, block foreigners from marketing competing products in China, and develop the Chinese economy into a global competitor. Although Chinese IP laws have become increasingly reliable with a few major cases such as the WTO U.S. versus China win on movie licenses, the tech industry continues to struggle. Apple is facing a lawsuit over its iPad trademark while Chinese phone manufacturers are warned of impending suits thanks to their rapidly expanding Andriod export market.

合作项目: Right to Produce

A common model for foreign companies has been a 合作项目, hezuo xiangmu, sharing-the-work mutually: “是指专利权人将其所拥有的专利技术许可他人实施的行为”; “The law allows says the licensor allows the licensee to exploit the patent”, exploit meaning implement or carryout the patent. These are often manufacturing agreements and the foreign company retains protection for its patents. These type of relationships are tricky because the intellectual property transferred has been very difficult to protect, and Chinese courts historically sided with domestic companies in order to facilitate domestic development.

WOFE: Right to a Factory

In order to protect technology, beginning in the eighties some companies chose to set up WOFEs, wholly owned foreign enterprises, located in SPZs, special economic zones. SPZs can offer lower taxes and local government investment in infrastructure. WOFEs can only take advantage of Chinese labor for manufacturing and are not allowed to sell their products in the Chinese market. Protecting intellectual property is easier in a WOFE, because not only is there complete sharing of patented technology with a Chinese firm, but the MNC can keep tabs on exactly who else may have access to technology, such as suppliers and temporary workers.

合资企业: Right to Sell

When looking to sell products domestically, foreign companies found the easiest entry was through 合资企业, “hezi qiye”, joint ventures or “mutual earnings enterprises”. Most original ventures were with a 国有企业, guoyou qiye, state-owned enterprise. In a Communist country, all companies were state-owned. In modern times privately owned Chinese companies not only exist, but are doing extremely well. Joint ventures with any Chinese companies usually allow 51%+ ownership by the foreign firm, and contracts may stipulate the foreign enterprise is allowed managerial control.

As the Chinese name implies, 合资企业 financial gains are shared based on the percent ownership, but what about the intellectual gains from products developed in China? In a joint venture, the enterprise which is established is a new company. Board members represent both the Chinese and the foreign company. Intellectual property developed by the enterprise belong to the newly created Chinese-based company, and joint venture contracts with the companies may span decades, effectively tying the foreign company to the Chinese firm.

Conversely, in recent years foreign companies are feeling less attractive to Chinese entities, and more of a short-term partner. The change is coming as China comes into itself and has begun to think of itself as a global competitor. The joint ventures which once helped Chinese the government through 国有企业 share profits from foreign businesses operating in China, now are consider a training process for Chinese companies looking to acquire technology and go global. Companies entering these type of relationships first should register IP with Beijing.

R&D: Right to Innovate

In order to win over the Chinese government, many MNCs have created R&D centers in China. L’Oreal, Seimens and Merck are a few. The Chinese government often builds R&D centers with the latest infrastructure, design and telecommunications systems to cater to foreign MNCs. The trade-off is giving the foreign MNC access to domestic markets while giving educated Chinese workers experience in high technology and science industries.

Right to Remunerations?

What began as a show of good will, has turned into a battle for rights to the innovations coming out of developed R&D centers. According to article 20 of Chinese patent law, a Chinese entity or individual looking to file a patent abroad must first file in China. China’s patent laws are a first-come-first-serve basis and do not require proof of invention. Although an R&D center may be a WOFE, as long as it is on PRC soil, it is subject to the PRC’s patent law.

The Chinese government assumes a right of the Chinese entity to any improvements made, meaning any contractual or joint-work done in China allows the Chinese counterpart to claim IP rights, equity, profit-sharing or some other ownership of any invention done by them. This rule even applies to Chinese citizens employed by a foreign firm!

In order to file for a patent abroad, the foreign firm must then go through the Chinese patenting procedure. The process begins with finding a Chinese patent agent to represent you, then obtaining the right to file a patent claim. According to article 10: An assignment, by a Chinese entity or individual, of the patent application right, or of the patent right, to a foreigner must be approved by the competent authorities designated by the State Council. This process can test a company’s guanxi, or political connections, and may subject it to bribery requests.

Once patent filings are made, the Chinese patent bureau will investigate the claim in a similar way as the U.S. government does – however the patent will be liable to Chinese export-import laws which regulate technology and industries considered advantageous or unique to China. The laws also take into account technology such as computer security, which may be considered a domestic threat if exported to foreign countries.

If the patent is approved, the Chinese employees working on the development may still claim royalities or payouts for their work. MNCs employing Chinese workers need to stipulate in contracts that the rights to patent filings and any work done under their employment belongs to the foreign MNC’s parent company. A compromise may be joint patent ownership in China and full ownership abroad.

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“Missing Women”: China’s Greatest Challenge

In 2004 NBC reported on the rising social problem in China:

The male surplus progressively rose to 111 in 1990, 116 in 2000, and is now is120 boys for each 100 girls at the present time, according to a Chinese think-tank report.

The shortage of women is creating a “huge societal issue,” warned U.N. resident coordinator Khalid Malik earlier this year.

“In eight to 10 years, we will have something like 40 to 60 million missing women,” he said, adding that it will have “enormous implications” for China’s prostitution industry and human trafficking.

A new problem is emerging in human trafficking as women are being literally “kidnapped” and “sold” to men without wives. One report actually blames the families.

This has put a premium on baby boys, while baby girls are often sold off as couples try for a male heir.

Second Financial Crisis Coming

From what I understand, the mortgage crisis was brought on by the falling prices of real estate, with homeowners who had homes more than they could afford being unable to refinance as the value of their homes dropped. Something is fishy about this I don’t understand: Why were suddenly so many homeowners not able to pay? I understand that it was building up bad mortgages, but I can’t help but think in 2005-6 something must have been slowing in the economy for so many homeowners to all be behind in 2007…

So here we are, in the second dip of the Recession, arguing whether balancing the budget will get us out or if overspending, as the government did after the Great Depression will help. Currently the US government is backing Freddie Mac and Freddie Mae, which means they are responsible for about half the mortgages in the U.S. If unemployment continues to skyrocket, and the housing market continues to tank, the government may have to bail out even more mortgages. Thanks to a dwindling taxable population, “Obamacare”, the continued “wars” and democrat spending, we’re looking at an increasing deficit.

Interesting, banks and the Fed have had exactly opposite reactions to the economic crisis. While banks are looking to deleverage, (one friend told me small banks were at 40x debt to equity before), the Fed has been leveraging up, loaning and purchasing $7.8 trillion over two years. All while keeping interest rates, the amount banks pay to borrow, at nearly 0%. This was down to stall deflation after the market crashed by pumping money into the market, thinking this would spur growth. Except it hasn’t.

There’s four big problems right now:

1. Small businesses are struggling
2. Investors are moving money overseas
3. The Fed’s money policy has us set up for inflation
4. We’re not making things

First thing to remember about small businesses is they grow into large businesses. Without entrepreneurs we have little innovation in industries. According to the small businesses association, they generated 65% of new jobs over the last 17 years and employ half the private sector workforce. They generate 13 to 1 more patents per employee. The account for 97% of all exports. Now, small businesses are having a harder time borrowing money from banks and investors are more wary. Obamacare has added burden on small businesses with the health care bill. If we’re looking to reduce unemployment, look at Main Street.

Goldman Sachs is predicting up to 14% growth in non-Japan Asia. Why non-Japan? As an industrialized nation Japan has already seen its biggest spur in growth, so when investors are looking to high returns they’re going to look at economies which still have a long way to go. Although many say China is currently “overleveraged” and admits to stalling out because of reduced exports to bankrupt Western nations, they will still see about 7% growth rate. Four reasons for that: 1. As our WalMart nation goes further in the red we’re relying more on cheap Chinese goods, 2. They are not dumb enough to float their currency and will continue to subsidize businesses 3. They have a had a higher savings rate so consumers still have money to spend 4. They are a developing country and so have farther to climb. Other countries to look at include developing Southeast Asia, South Korea and wait for it…Mongolia, whose gold mines are riding the gold boom.

As said before, the Fed has been pumping money into the economy to increase growth, but there has been no increase in growth. Add a 33.8% increase in fuel import costs in the last year and you have inflation. After WWII, the government was in a similar position, highly leveraged and set up for inflation. At this point we were going from an industrialized nation to a manufacturing nation. Most of the government’s money had been put in things like new technologies and infrastructure – roads to move military goods which would soon serve to move consumer goods faster than trains and cheaper than planes. Our only hope for avoiding inflation as in the 1950s would be major economic growth so the rising cost of goods was offset by increases in productivity and new products.

That’s not happening because we aren’t innovating fast enough. From Obama who has no idea how to run the economy to Bloomberg who kicked the Occupiers out, politicians are finally getting we have a problem with the innate value of the economy. Obama’s Presidential Address was littered with references to South Korea and their impressive focus on infrastructure and technology, including putting high-speed internet into every home in the country. Bloomberg recently visiting Hong Kong made a speech “Stop Blaming China” calling out Congress for focusing on a “trade war” with China and trying to label their clean energy as noncompetitive. His argument was why would we want to attack a country for creating cheaper ways to green energy, innovations that would benefit every nation, especially our own? Instead the U.S. needs to focus on what it is we’re going to offer the world in return.

What China Thinks You’re Worth

This post obviously deviates from my previous posts on digital strategy, but I feel it justifies the overall theme: Marketing in a global economy. It’s also been burning on my mind for a couple weeks…

How to Speak French in China

The picture in my blog banner was taken in Carrefour on a Sunday. Carrefour is a French grocery store which became successful in China. When I first went to Carrefour in 2006, it was the best place to get imported brands, a little higher priced and moderately patroned by Chinese. In 2008 when that picture was taken, Carrefour had dramatically reorganized the store to cater better to Chinese tastes. They had gone from a Whole Foods style store to a SuperFresh.

It was still a little above the normal Chinese grocer, but focusing on fresher produce, an impressive fish market and household staples. The bakery was more “Chinese”, and catered to bulk buying of mooncakes and local candies for holidays. There were more discount signs and the ads were of happy Chinese couples. The foreign goods were pushed into a smaller section and the previous space was stocked with wine. The beauty selection was extensive, and staffed with saleswomen as in a department store. And as in the picture, the store was packed. Clearly Carrefour had figured out what was “foreign” was valued at in Chinese.

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Your Value in RMB

In international finance we briefly covered a concept called derivatives (my professor’s pet fave). Derivatives in calculus are horrible equations talking about the growth rates of growth rates. Abstract math ideas have always bugged me so I cringed hearing of financial derivatives. In finance however, they are any financial asset whose value is derived from a real asset. Mortgages are a type of derivative, and as we saw in the crisis, there can be derivatives of derivatives, which get riskier and riskier as you move away from the real asset.

In a way the economy is a derivative. There is no direct asset underlying the U.S. economy as the government stands to borrow on it or as currency exchange rates tend to fluctuate on it. The dollar is no longer backed by gold, and the government doesn’t own enough assets in land or patents to back itself up. The asset is the American people, and the promise of us continuing to innovate and pay more in taxes over forever. So how do we crawl out of this recession and become an asset worthy of the American dollar?

I chose to make references to Asia because I know Asia. I’m also a firm believer they have the right focuses: Education, self-interest, hardwork, saving, innovation. Many would agree those focuses created the strong middle class in America from the 1940s to 1960s. South Korea in the 1990s was just beginning to emerge on the world market. Their focuses were on education, hardwork, South Koreans and frugality. Samsung up until that point had been “ripping off” American innovations in technology, making the same goods cheaper and somewhat shotier.

Samsung had a great CEO at the time. He was what Jim Collins would call a “level 5 leader”. He was sick of shotty goods and copycatting and knew Samsung would never grow to compete globally without innovating. So he called together his top people and all the workers of a manufacturing plant and had them pile Samsung electronics into the middle of a field. Then he set them on fire. From that day forward he said, Samsung was going to be known as innovator, and they were going to create products that hadn’t been done before.

Its far-fetched to say a single change can take place in American culture as happened in that factory which will alter behavior substantially. It would not be a change that happened quickly. It would not be one that would be appealing, as any drastic change involving hardwork isn’t immediately. It is a necessary change though, as Warren Buffet, and Bloomberg and even the Occupiers agree with.

The change has to begin with an admission of guilt: We defaulted on the American Dream, and it’s going to take a long time to earn it back.

Making Money Move

I know/knew a crazy guy who’s story I like to tell. He was 21, and on a date with my best friend of the time, drinking coca cola on the water in Hou Hai, Beijing. “What are you going to do with your life?” says my friend, the actionary, activist, to her globe-trotting, silver spoonfed, soap operaesque paramour. “I’m going to make money move,” he responds.

“You see this coke can?” he says. “Someone had to make this coke can, build the factory, produce the coke, transport it, create the advertising and sell the can to us.” “Ok,” she says, “so you’re going to make that coke can?” “No,” he responds, thrilled with his audience. “You’re going to make the coke?” she says. “No.” “You’re going to sell the can?” “No.” “You’re going to do the advertising?” “No”. “What are you going to do then?!” she says, realizing she’s talking to a nutjob. “All those things need money,” he responds like philosopher. “I’m going to make money move.”

This story I tell again and again, about that crazy a-hole my friends once dated, and how very opposite my “type” he is. But I think it’s time to eat my can. Since Jobs death the Apple ad “here’s to the crazy ones” has been boinging around the internet. (Often by me, I’ve watched it about 100 times.) It’s a very GenX,GenY, rebellious, appealing, au moment concept – let’s be the creative crazies, the Don Drapers of the world. It encompasses the artists, the writers, the social media evangelists, the PR pros and the creative technologists, like Roman Cortes, the one who created the scrolling pure CSS coke can you may click the above image to view.

It’s easy to worship the artists, theologians, philosophers, the Georgia O’Keefes, Ben Franklins and Steve Jobs of the world. We can see what they created, repeat their wisdom to our children, even hold their art in our hands as tools for our own creativity. I’ve made it no secret I worship these American Gods, as well as the armies of developers, coders, entrepreneurs and creatives “building the digital matrix”. Their work is judged by its beauty, visual appeal and “cleanliness”. A line of code, like a geometry proof, is considered “beautiful” if it is simple. This is an easy skill to admire, cleanliness.

The people I’ve neglected to show my admiration for are Untouchables of the artistic world: The business people. My people. They are the stark grey and blue-pinstriped background to an artist’s painting, the cool steel frames holding up a Frank Lloyd Wright, the red electricity shooting through the Matrix. Without them businesses do not grow, offices do not exist, value is not stored in currency, exchange rates do not even out, buildings do not rise, and developers go hungry on ramen.

For Georgia O’Keefe her patron became her husband, Alfred Stieglitz. Apple became Apple, Inc thanks to Angel investor Mike Markkula. And Benji, one of our Founding Fathers himself was a financial guru. Franklin actually left $1000 pounds each to Philadelphia and Boston, with the wisdom of compounded interest.

Franklin was also a champion for paper currency. Money was a hard idea for the colonists to accept. Paper currency had no innate value, unlike gold, silver, or even copper coins. (Anyone in this bad economy who’s had their wiring ripped out by scavengers while on vacation can attest to the value of copper.) Even the first documented currencies, seashells, beads, even salt, held some innate value. Paper, as the Germans found out when their economy crashed, has no innate value, save for the ability to create interesting wall paper. But crazy Franklin saw things differently, and in treatise after treatise, he ushered in the “second era” of paper money, where we moved from colonial checkbooks to cold hard cash.

200 years later, with the extinction of Confederate currency, the Gold standard, the rise Wall Street, the Crash, the runs on the banks, and a new clever phrase no one could ever attribute to this Franklin, “money is the root of all evil”, and Ayn Rand, novelist, creative, artist, echoed crazy Franklin’s idea of money:

“So you think that money is the root of all evil? Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?”

In 1886 John Stith Pemberton a pharmacist from Georgia, worked with druggist Willis Venable to formulate, test, and perfect a beverage to be used in curing what ailed you–and relieving Pemberton of his morphine addiction acquired during the Civil War. Pemberton never created a business from his concoction, but sold the formula to entrepreneur Asa Candler. Candler would become an American tycoon and briefly owner of America’s tallest building from coca-cola. It was Candler who set up the factories to produce the syrup, began the bottling franchise system which puts the burden of selling on the bottlers, and began the marketing department which made Coca-Cola a world wide brand.

If it wasn’t for Candler, the multi-millionaire, dirty businessman, with his aggressive marketing, and inventive distribution system, my friend may never have had her conversation on the banks of Hou Hai, the other side of the world from Venable and Pemberton’s Georgia pharmacies. Candler not only made money move, but the artwork of a coca-cola can.

Quickie: Chinese Social Network Vocab

Partly because I haven’t blogged on China in awhile…partly because I was talking to @thePekingOrder of Ogilvy tonight…and partly because I’m restless for my summers in Beijing.

Courtesy of Renren, the dominant Chinese social network which I better not catch you calling “Chinese Facebook” or we won’t be pengyous, ming bai le?

Fun 乐趣 le4qu4 (literally joy)

Share 分享 fen4xiang3 (actually mean’s “get your share”!)

Connection 关系 guan1xi4 (most important word you’ll ever learn)

Real 真实 zhen1shi2 (prefer “zhende”, like “true dat”)

Discovery 发现 fa2xian4 (interesting because the fa means to show one’s feelings…not common in Kongfu culture)

Ever yours, the original White Coke.

Golden Nugget to Chinese Success: Why Best Buy Failed



Best Buy is shuttering up its windows and moving out, a defeat on the heels of Home Depot’s similar move out. Home Depot’s model was to have expert salestaff who could show their target demographic, couples with time on their hands, how to cheaply do remodels using Home Depot supplies. This model failed because in China it is much cheaper to buy supplies wholesale and use the vast migrant labor force for any building projects.

Where Home Depot failed was in thinking they could compete on price in labor. In the US labor is expensive so do-it-yourself is cheaper, even when the supplies aren’t. Best Buy was competing on price within consumer goods though. So why did Best Buy fail? The reason is closely related to the challenges my good friend faces in wine imports. He imports South American wines, which are considerably cheaper than continental, and highly regarded in the US. In China however, Napa won’t sell before Naples, and Buenos Aries bows to Bordeaux. Just as the wealthy have built gated condo communities outside of major cities, China is eager to import the cache of true European luxury. “Taste” is only relevant to label choice.

It would seem Best Buy targeted the same demographic, middle to slightly affluent Chinese consumers. So what is China’s middle class? According to Key Indicators for Asia and the Pacific 2010, “middle class” in China is defined as a daily consumption of $2-20. A latte in China is comparable to the US, even at Starbucks ripoffs. Clothing is considerable cheaper, although the middle class prefer foreign brands which on nearly on par in price with brands targeting middle class consumers here. Foreign brand electronics in China are also similarly priced to discourage black market selling.

Now ask yourself, if you could only spend $600 a month, minus utilities and phone bills, would you spend $200 on a DVD player? Or a $700 tablet? And if you were going to buy a tablet, would you buy the Korean rip-off (Samsung), or would you go over to the Apple store to get the considerably cheaper $500 iPad, which has far more cache? Or, given the option and loose IP protection, would you buy a $250 black market iPad? When Best Buy first opened they had inhouse Apple stores. Apple soon opened their own stores. This erased Best Buy’s main offering: Access to the same luxury goods as foreigners coveted.

A Chinese citizen equivalent in age to American Baby Boomers, grew up during Mao’s “5 year plan” fiascos. They entered the job market only as Deng Xiaoping was just opening up the country to foreign businesses interested primarily in the Chinese labor force. They were exposed to foreign technology and design as a superior model, and with Gen X, began the transition away from the old propaganda claiming China was superior economically and developmentally. Chinese consumers themselves absorbed the negative stereotype of “Made in China” products. Just as we once equated French imports as “luxury goods”, China has equated Western imports with luxury.

Today’s Chinese Millennials have a lot more pride in their country and its potential. They emerged from universities during and in the wake of September 11th and Wall Street’s fall. They saw the US, and the West, as debt ridden, overweight and academically lazy countries whose time had come. The economic crisis however has hit China too. These same bright Millennials, often already sporting Masters, have had difficulty finding work in China’s urban centers. They’ve been nicknamed the “Ant” tribe, for the way they live in dilapidated apartment buildings, feasting on ramen and the dreams they were once spoonfed of a better China.

Unlike the US Millennials who have “returned to the nest” in droves, many of the Ant tribe do not have wealthy parents to live off. At least not “wealthy” by American standards. They also wrangle more with the Asian values of saving face and have taken up jobs as waitresses, cleaning people, delivery boys in order to continue to live in the urban centers they’ve grown accustomed too. Bottom line: GenY Chinese don’t have disposable income for fancy imported electronics.

For those who do have money, the prestige of having foreign goods is much more blunt than in America. A “preppy” revolution in the eighties in America separated the emerging middle class with the older affluent families. Taste was defined by subtle branding, classic looks and higher quality goods. The nouveau riche were more likely to be “blinged” out, favoring prominent logos, flashy cars and large homes. This trend continued as a widening middle class attempted to “keep up” adding on more debt and leading to the economic crisis. In China there were few “old families” besides those associated with the government. The majority of Chinese middle class and affluents are nouveau riche. The result is a culture where having an “LV” bag is every girl’s dream.

Now a winning example, because I wouldn’t be worth my stuff without giving some positive advice for success in China. KFC was one of the first movers into China. They came in with a cheap, but yummy product, and a business model which competed predominantly on price. Unlike Home Depot or Best Buy, KFC was quick to recognize they were dealing with an entirely different demographic, and needed to change their business model. Marketing and business are inextricably tied, and one of the best value adds your marketing teams can give you is feedback on your brand and the product itself from consumers.

What KFC discovered was Chinese consumers coming out of the bad years considered meat a luxury. They saw KFC, a foreign brand, as a luxury product. At $2 for one serving, equal to the total daily expenditure of the lower middle class today and of much of the upper class when KFC first entered China, KFC was a splurge. So KFC completely changed their store model, creating a middle class dining experience. They altered some of the menu to cater to Chinese tastes, (they put corn in everything, even pastries and yogurt, totally gross), and kept their prices comparable with the US so they weren’t competing there. In effect KFC sold an aspirational lifestyle which had no relation to their American consumers. They paved the way for other US fastfood chains, and to this day foreigners are more likely to be invited to a KFC at least once during their stay in China, over McDonald’s, Subway or any other foreign brand.

So my advice to companies trying to follow in the wasteland of failed foreign brands: Throw out what you know. Do your homework, focus on the goal, making money, and reconsider what your selling. Looking at what you’re selling from the Chinese consumer’s perspective is all the difference. For Home Depot they were selling expensive materials. For Best Buy they were selling marked up, mostly Asian-made electronics you couldn’t haggle for. For KFC they were selling the experience of an American lifestyle and with foods catering to local tastes. And remember: China doesn’t want cheap America. China made cheap America.

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For companies not interested in entering China: Same rules. If you’re sitting in your Mad Ave office ruminating on how to reach Midwestern Moms, and considering staging an “event” in Times Square, because there will probably be some tourists there: STOP NOW. Go back to your product. Go back to your market research (assuming you did your homework), and look at your product from those consumers’ perspective. Will this make my life easier? Will this impress the neighbors? (Who live on Park Street not Park Ave.) Can I, the Midwestern supermom see myself in this scenario? Is there an alternative currently in my life which makes your product or brand seem redundant? My mom bought an iPhone because she saw me finding directions to a restaurant on it.

When selling local, think like a local.