Chinese Companies Tackling Intellectual Property Rights Issues

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In September, a Beijing district court ruled that China's top Internet search provider, Baidu.com, infringed the copyrights of 34 recordings belonging to the Shanghai-based agency Push Sound and must pay US $10,000 dollars in compensation. This case—the first such suit against a Chinese Internet firm—represents only the tip of the iceberg of copyright infringement in China. As these disputes become more frequent, Chinese businesses are paying a high price for their limited awareness of intellectual property rights (IPR) issues, a lapse that has hindered foreign investments in China and slowed domestic industrial transformation.

Since China's entry into the World Trade Organization in 2001, Chinese companies have been involved in a range of international patent, trademark, and copyright infringement cases. In May 2005, the consumer electronics and appliance maker Hisense Group agreed to pay 500,000 euros ($670,000) to its German counterpart, Bosch-Siemens, for use of the "HiSense" trademark, registered in several European countries. In late 2004, the world's No. 2 hard-drive maker, Hitachi Global Storage Technologies, filed a lawsuit in the United States against Chinese competitor GS Magic for selling patent-infringing products in the United States. And in 2003, U.S.-based Cisco Systems, Inc. sued the Chinese network firm Huawei Technologies for violating several of its IPRs, which resulted in an agreement by Huawei to make changes to its router and switch products.

Multinational companies usually rely on IPR protections as a way to shield their products and extend their global market share. By 2004, foreign firms had applied for 230,000 patents in China, according to the State Intellectual Property Office. Foreign companies now control 81 percent of patents in China's information industry, 87 percent in the bio-engineering field, and 90 percent in chemical pharmaceuticals.

While Chinese companies are world leaders in manufacturing, they have less experience in building and shielding their brands. Xinhua News reports that 99 percent of businesses in China haven't yet established patents, while only 40 percent own trademarks. In the absence of core technologies and IPR development strategies, these firms risk being sidelined by foreign rivals as they seek to enter the global market. For example, since 2002, foreign companies have required Chinese manufacturers to pay royalties for DVD players, digital cameras, and other hi-tech exports.

Chinese companies are learning from these losses, as demonstrated by recent developments in the digital disk technology industry. To shake China's dependence on foreign DVDs, domestic manufacturers have worked to promote EVD (enhanced versatile disk) alternatives. Beijing E-world Technology Co. Ltd. has already applied for 25 EVD patents, and 40 more applications are in the pipeline.

According to Minister of Commerce Bo Xilai, the Chinese government will provide a fund of 700 million yuan ($86.4 million) in 2006 to help domestic companies build their brands with legal IPR protection. Well-known Chinese firms such as Haier, Legend, and Huawei, as well as traditional brands like Tsingdao, will develop new products, undergo technological transformation, and set up research centers and sales networks with the government's assistance.

Without a sound IPR system, China cannot ensure innovation in its manufacturing and high-tech industries, putting its products at a disadvantage on the competitive international market. China only began developing patent, trademark, and copyright legislation 20 years ago, and its IPR regime has remained weak on account of inadequate implementation and a pending legal overhaul.

To boost domestic IPR awareness and encourage innovation, the Chinese government has moved to enhance law enforcement and has made IPR protection a key priority in the 11th five-year plan. In 2004, the State Intellectual Property office began working with companies to build and improve IPR management systems and boost their safeguarding capacity. The establishment of IPR agencies is also on the agenda, and the state office has started training high-level professionals in international IPR rules and laws. As China's IPR system catches up with international standards, domestic firms should soon have solid ground on which to develop their technologies and cultivate their brands.