Many European companies are keen to enter the China market and develop long-term partnerships in China. In order to achieve this, they are often willing to transfer their latest technology to Chinese subsidiaries of European firms and joint-venture partners. Such technology transfers must be carefully planned out, as it can unwillingly result in loss of competitiveness and market share in the mid to long-term otherwise.
European companies should pay particular attention to the following common situations which can present a threat to your competitive advantages that lie in innovation, creativity, brands and know-how:
1. Compulsory Joint Ventures in Exchange for Market Access
For certain sectors such as car and locomotive manufacturing, you are required to enter into joint ventures with Chinese companies. Approval to form a joint venture or to operate may depend on the supply of specific technology, including future improvements of this technology. In some cases, you are not allowed to choose your partner, which may result in your new partner being a competitor or concurrent joint venture partner of another competitor. In other cases, increasing a pre-existing investment may require setting up a local R&D centre or another form of know-how transfer.
2. Public Contracts/Procurement
If you would like to take part in public tenders, you must ensure that part of your production is local. In some cases, the requirement for local production is up to 80% and production by foreign subsidiaries in China is often not considered local. Instead, you will have to work with a Chinese general contractor, involving a full technology transfer during the process.
In addition, it is also often mentioned in the bidding process that the contract will be given to the company that promises the greatest transfer of know-how, leaving you with a difficult choice to make.
3. Design Institutes
For projects specifically involving the manufacture of machinery and equipment, the Chinese government requires a thorough review of industrial drawings and designs by a Chinese design institute. Your drawings and designs may later be used by other Chinese projects. In addition to the detailed technical documentation, you may also be asked to train Chinese staff members so that they can independently design machinery and equipment in the future.
4. Certification and Licenses for Market Access
Many products must be certified by a Chinese certification institute or are subject to a license by a Chinese ministry before they are allowed on the market. Some certification procedures require inspections of production plants in your home country. However, the Chinese inspectors are sometimes from competitor companies and may ask technical questions that are not necessarily relevant to certification.
I. What Can I Do to Protect Myself?
1. Identify your company’s strengths. By identifying your company’s competitive advantages, you can use both registrable (e.g., patents, trademarks, copyright) and non-registrable rights (e.g., trade secrets, contractual barriers) and minimise the risk of IP exposure.
2. Analyse your competitors and the specific Chinese market that is relevant to your business. Do you know who your competitors are? What are their strengths and specific objectives? When analyzing these competitors, the list should also include your potential and existing partners in China. Some state-owned enterprises may have to abide by local and state industry policy which requires them to focus more on gaining know-how and investing in R&D rather than short-term profits.
3. Devise your own IP protection measures when dealing with China. If you are in an industry where you must share your know-how to operate in the China market, ensure that all your rights are protected before you enter the market. Define your limits and vigorously defend your position.
II. What Other Practical Steps Can I Take to Help against Unwanted Loss of Technology and Know-how in China?
The keys to protecting your IP in these types of compulsory know-how sharing situations are vigilant monitoring and proactive registration of your rights before entering negotiations. Conduct due diligence of a potential Chinese partner, paying close attention to the local industrial policies and laws, the goals of the potential partner and ownership of the potential partner company. Monitor for unusually frequent personnel changes.
Even if your key patents, trademarks and copyright are registered already, it is strongly recommended that you build in contractual barriers to prevent your partner from abusing your IP. For example, clearly define in writing with your chosen or designated partner the extent of technology transfer requested and make absolutely clear who may use the technology transferred to the joint venture. Be sure to include non-disclosure and confidentiality agreements as a clause in the contract. In case of future creations made as part of the joint venture, you should also include a clause that defines the ownership of inventions and which party owns the invention in case the partnership comes to an end. Where possible, grant licenses to the joint venture to use the technology instead of actually transferring the rights.
You may also want to consider building in internal physical barriers to ensure that your core technologies are protected. For example, you can implement a need-to-know basis for access to know-how, build in passwords and codes to physically restrict access, and ensure that some of your employees know part of the technology but not every part of it. Regularly scheduled internal training of staff members regarding IPR protection measures can also raise their awareness to the risks involved.
In case of the compulsory certification inspection, be aware that you may not have to answer every question about the technical product details relating to your firm’s confidential know-how. Find out if the question is relevant to comply with the standard and if necessary, negotiate with the certifying body. Also, it is possible to request for a European certifier who can inspect your premises on behalf of the Chinese authorities.
III. Conclusion
Under certain circumstances, you may be required to share technology know-how with local partners in exchange for market access. Technology transfer should be approached with caution and it is strongly recommended that you implement as many protection measures as possible before entering the China market and beginning negotiations with your desired or designated Chinese partner. Be sure to conduct thorough due diligence of your competitors and potential partners to identify their specific objectives. An overview of the local industrial policies to understand the extent of your rights and the extent of your technology sharing is also recommended. Most importantly, take advantage of both registrable and non-registrable rights, as well as internal employee trainings and incentives, contractual barriers and physical barriers to best protect your know-how in China using a holistic IPR strategy.
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