Made in China? Winds of Change for Intellectual Property Strategies

MADE IN CHINA; words that adorn millions, if not billions, of products every year originating from China and making their way around the globe.  However, is there evidence that China’s position as the world’s leading manufacturer is set to change?
 
Numerous reports illustrate how China’s wages are increasing along with the average standard of living.  Salaries vary tremendously across the country and so too do the annual pay rises.  For the coastal regions, where the bulk of manufacturing takes place, the cost of that abundantly cheap labour has risen dramatically.  For example, this year UK companies report that they have already seen an increase in the average salary of over 10 percent.  This has a direct effect on manufacturing costs and is leading some manufacturers to think again about where they place their production facilities.
 
Many international businesses are now looking for new sources of cheap labour and reduced regulation.  Countries including Myanmar, Indonesia and Vietnam are welcoming many of the world’s largest names to build manufacturing plants on their soil.
 
But is this anything to worry about?  Looking purely at manufacturing costs the answer is of course no.  If it’s possible to manufacture more cheaply in another country then that is surely good news for manufacturers and deciding on the location for manufacturing plants is simply one of the lowest cost.  But is there more to the decision than simply manufacturing costs?  In today’s competitive global market, intellectual property rights (IPRs) play an ever increasingly important role in protecting innovation, technology and brands.
 
Historically, protecting IPRs in China was at best difficult and at worst impossible in some regional areas.  This used to be particularly so in areas where the local economy was dependent on one or two large businesses.  An injunction or damages would be hugely damaging to the local economy and this, unfortunately, led many to believe local courts were biased. 
 
However, as China developed so too did the laws that protect technology, innovation and brands.  In fact, China’s intellectual property laws correspond substantially to those in Europe and whilst there is some deviation in terms of how the laws are implemented in the Chinese Patent Office (SIPO) and the Courts, fundamentally the laws and legal tests are very similar indeed.
 
Looking at China as an example, IPRs fundamentally play two roles: 
 

• For manufacturers outside China, they protect the Chinese market from competitors who might otherwise import imitating products or technology.  This secures the Chinese market for importers into China. 
• For manufacturers inside China, it allows technology to be shared with Chinese companies safe in the knowledge that IPRs will prevent unauthorized manufacture, sale and of course export.  This secures the global market from products manufactured in China. 

IPRs in China are therefore a valuable commercial tool, protecting the market and preventing export of competing products.
 
However, what does the trend to move manufacturing away from China mean in terms of protecting your brand or technology?  The protection conferred by IPRs in these new manufacturing nations is not at present as sophisticated as it is elsewhere and the legal framework is far behind that of western countries, and indeed of China.  It can therefore be more difficult to protect technology introduced into the country from your competitors.  In developing countries, the local market is unlikely to be significant in terms of product sales and so the value of IPRs only really resides in their ability to prevent the export of products to a company’s other markets. 
 
Another issue of interest is the phenomenon of ‘pop-up’ manufacturers.  These are businesses that set-up manufacturing plants with the sole purpose of making counterfeit products and typically luxury branded goods.  They can be formed and dissolved very quickly using modern manufacturing technology which makes them very difficult to track and to deal with using IPRs.  By the time an injunction is in place, the factory has disappeared.
 
So, if you want to move manufacturing out of China to enjoy the cheap manufacturing these other countries offer, how should you adapt your IP strategy?
 
The first question should be: Is obtaining the same rights as in China possible?  If yes, duplicate your strategy from China and obtain local IPRs.  If the answer is no, then perhaps a subtle shift in the focus of your IP strategy is required.
 
Many companies adopt the conventional approach of first seeking protection in their marketplace and then in the country where their competitors are operating.  But if you can’t get adequate protection where your competitors are operating, what can you do?
 
One approach to reinforce your position is to look at how your products get to the market, i.e. the supply chain.  For example, products leaving Asia for European markets typically travel through a container port such as Singapore or Dubai (or perhaps both) before arriving at one of Europe’s principal import hubs.
 
The issue of whether IPRs are infringed in a country whilst in transit is a matter of national law and these laws vary.  Also, some goods may not formally enter public circulation whilst they are in transit.  However, countries such as the United Arab Emirates are also a large consumer of goods, particularly luxury goods.  In these transport hubs, IPRs can be used to seal off the local market, even it if is not always possible to enforce rights against the remaining goods in transit.  By picking off the markets along the supply chain you can erode your competitors’ global market share and the monetary value of transporting copied technology or goods.
 
Companies manufacturing in developing nations should analyse their competitors’ supply chain as part of the overall IP strategy.  By closing down routes to local markets, as well as the markets themselves, it becomes difficult for the goods to reach and damage a company’s markets all along the supply chain. 
 
Manufacturing is global, so too is the market.  A company’s intellectual property strategy should reflect this to effectively protect the business.  There are synergies and strategies which can be employed when handling international IPRs meaning that this type of global IP strategy is not as expensive as you might think.
 

Anthony represents companies across a range of technologies extending from telecommunications and medical devices to the oil industry and engineering.  His clients - located around the world - range from universities and technology transfer organisations to SMEs and multinational corporations.  A regular visitor to the US and to Asia, Anthony frequently lectures on law changes and developments in Europe. D Young & Co is a leading intellectual property law firm, proud to represent over 25% of the top 50 global brands. Specialist teams provide guidance on using IP rights efficiently and effectively to multinational businesses from Europe, America, Asia and around the world: www.dyoung.com.
 
Anthony Albutt can be contacted by phone on +44 (0)20 7269 8550 or alternatively via email at aja@dyoung.co.uk