Chinese market ‘too big to ignore’ despite IP concerns

A 'Kuka' industrial robot performs a programmed routine at the Huawei booth at the CeBIT computer fair in Hanover, northern Germany, 11 June 2018. [EPA-EFE/FOCKE STRANGMANN]

Foreign companies have encountered problems related to the protection of intellectual property in China but most, if not all, want to continue doing business in the country because of its size and fast pace of growth, EURACTIV.com has learnt.

For Nicolas Correa, the CEO and president of Correa, a machinery manufacturing company, China’s dubious practices over intellectual property are not an abstract problem.

“We trained a Chinese employee for a year in Spain to become chief assembly officer in our factory in China”, he told EURACTIV.com during the China International Import Expo (CIEE).

But in less than 24 hours after his return to China, the employee disappeared. “He did not even wait for a week!” Correa said.

This example illustrates the formal and informal forced transfer of know-how and stealing of intellectual property that have become ‘hot issues’ in the relationship between China on the one side, and the US and Europe on the other.

During the opening ceremony of the CIIE, the Chinese government’s initiative to uphold rules-based international trade, Chinese president Xi Jinping said that “we will enhance the credibility of our Intellectual Property framework”.

To that end, he said, the country would put in place “a punitive compensation system to increase the costs for offenders.

Dispute settlement

The Chinese leadership took advantage of the Expo to show its willingness to improve Intellectual Property Rights complaints. 

The government made special arrangements to protect the IPR of goods and services displayed at CIIE. Among others, the organisers set up information and dispute settlement offices on site to mediate in conflicts.

“In our view, these are signs of commitment to honour the pledges President Xi Jinping made during the Boao forum to protect IPRs and align China’s practices with International economic an trading rules,” Ernst & Young consultancy said in a report published on Wednesday.

Ambassador Zhang: China will do more to strengthen IP protection

China and the EU are “in the same boat” when it comes to preserving multilateralism, China’s ambassador to the EU, Zhang Ming, stressed in an exclusive, wide-ranging interview with EURACTIV.com, which also addressed next week’s ASEM summit and China’s relations with its Asian neighbours.

European and US companies attending the CIIE confirmed they were suffering the consequences of these practices. “Problems exist,” said a member of a multinational company who was reluctant, like many others, to speak on the record given how “sensitive” the issue is.

Despite the stealing of companies’ best secrets, or the difficulties of operating in the Chinese market, half a dozen firms consulted stressed the importance of remaining in China.

Size matters

A senior representative of a ‘tech’ multinational said that there are “some complaints” regarding IPR, but they can be “tolerated” given the dimensions of the Chinese market. “If it was a small market, perhaps we would give up”, he told EURACTIV, on condition of anonymity.

“Some firms are reluctant to operate in China because of the difficulties, but that means you are neglecting half of the world’s consumption of machine tools,” added Correa.

Correa has been working in China for more than three decades. However, he admitted that his most sophisticated machines are made in Spain.

The size and growth of the Chinese market are eye-catching in the fields of technology and telecommunications. 

Not least because China is putting innovation at the heart of its economic development through various state-driven initiatives, including the 13th five-year plan on scientific and technological innovation, the big data industry development plan (2016-2020), the three-year action plan for cloud computing development (2017-2019), and plans for the next generation of artificial intelligence (AI), in which the country is investing billions of dollars.

In the case of AI, skyrocketing growth may reach 75% annually in 2018, according to some estimates. 

The numbers are telling: the digital economy already represents 55% of China’s GDP in 2017, close to or higher than the levels of many developed economies, said the EY report.

Revenues in the telecommunications industry reached RMB 2,755.7 billion in 2017, up 76% compared to the previous year. 

For the companies, the benefits are also clear. Microsoft is registering double-digit growth in mainland China, already surpassing the increase of sales in Hong-Kong and Taiwan, a representative said but declined to disclose specific numbers.

Joint ventures

The Chinese government is one of its biggest clients. Although Microsoft does not need to partner with local players for selling licenses of their products, a joint venture with Chinese stakeholders is required for business initiatives. 

These joint ventures with Chinese companies or public entities are the prerequisite imposed by Beijing to let foreign companies operate in the country.

Microsoft is working with the government to develop a Chinese version of Windows 10, and it also set up another joint venture for cloud computing. This strategic sector is being primarily developed by the public administration.

In most cases, the Chinese representatives are members of the Communist Party, as is the case with Correa. “We have a polite relationship with our local partner”, he explained.

Foreign buyouts

But China’s absorption of foreign technology does not only take place inside its borders. Chinese firm Midea bought Kuka in 2016, a leading German maker of cutting-edge robotics. The takeover was a ‘wake-up’ call for many in Europe to protect strategic sectors against China’s buyout.

But Kuka played down the consequences of the acquisition. “We want to be a good example of Sino-German cooperation,” said a member of the company, which was present at the CIEE.

The new situation of the company did not force them to scrap their ambitions in the US despite US President Donald Trump’s concerns over China’s technology practices.

Once the buyout was approved by US authorities, Kuka continued to operate ‘smart factories’ in the States.

Trade tensions between China and the US could have put US companies operating in China in the crosshairs. However, none of the companies consulted expressed any problem so far.

“The key message is that we want to serve our customers, regardless of who they are and the political environment,” summed up a PR member of the US computer-maker Dell, which has two factories in China.

China responds to Trump’s barriers by opening its wallet

Chinese president Xi Jinping promised on Monday (5 November) to continue opening up his nation’s economy and to increase imports by fuelling citizens’ spending power, as a response to growing protectionism and unilateralism.

Subscribe to our newsletters

Subscribe