Beware of “IP Exploration”

2010/07/13,By Yuan Zhenfu,[Comprehensive Reports]

After more than ten years of negotiations, the Disney project in Pudong, Shanghai has finally been unveiled.
From an operational perspective, Disneyland has been a “cash cow” for Disney, but will it also be a cash cow for the Chinese party? As to this question, the media has issued a warning: The Hong Kong Disneyland project is still in the red.
On October 20, 2009, Kevin Geiger, chief computer 3D animation officer of The Walt Disney Company, delivered a keynote presentation titled “OEM Serves, But IP Rules” at the 1st China (Zhengzhou) International Cartoon/Animation Forum.
Walt Disney has done just that. Hong Kong Disneyland reportedly pays a huge amount of management fees and royalties every year to US Disney under the cooperative joint venture model. The onerous royalties are treated as operating expenditures, which is the root cause of the losses at the Hong Kong Disneyland project. In other words, even if the Disney project is operating poorly, US Disney will still collect a sizable amount of royalties from IP; if the project generates profits, US Disney will harvest 43% of the returns on equity from IP investments.  
As a matter of fact, the Disney model has been commonly practiced by multinationals; that’s to say, apart from equity returns, high profits can be reaped through IP leverage in cooperative or equity joint ventures. Some people denounced the practice as “exploitation” because a number of multinationals have furtively snatched away a substantial part of benefits from the joint ventures through IP licensing. Even if the joint ventures have suffered yearly losses, the multinationals are still able to secure stable income from licensing fees.
The concept of “IP exploitation” is meant to highlight the fact that a lot of (perhaps the majority of) multinationals will make use of IP rights to skim away too much of the revenue from their cooperators. Of course “exploitation” is no longer easily acceptable. Wikipedia explains that exploitation is considered an immoral or unjust act under most circumstances. Compared with exploitation, another word has been more familiar to Chinese companies, namely, “trap”.
In the past decades, quite a number of well-known Chinese brands have been consistently neglected by foreign partners in joint ventures; consequently, they were substituted by the foreign brands in just a few years. In the beverage industry, six of the previous so-called “Eight Big Brands” have vanished as a result of cooperation with Coca-Cola or Pepsi, which have been held up as “good” examples.
The same stories are still repeated today. Wahaha Group of Hangzhou signed a trademark assignment in February 1996 with Danone, transferring Wahaha to the joint venture. By accident, the Trademark Office did not approve the assignment, saving Zong Qinghou in the legal battle over WAHAHA in 2007. Otherwise, the mark would have fallen into the hands of Danone; hence repeating the same old story.
The “trap” has been noticed, warnings have been issued, and care has been taken, but the warnings about “exploitation” have not been sufficiently conveyed. While a nest is built to woo the “phoenix,” it may attract a wolf the in the guise of a foreign multinational.
In fact, multinationals’ IP exploitation pattern is not complicated: After establishment of a joint venture with a Chinese partner, the multinational will allow the joint venture to use its IPR, but it only licenses, it does not transfer, the IPR. During operations of the joint venture, even newly launched brands or newly developed technologies still rest in the hands of the multinationals. This can be easily verified by researching the registrants for joint ventures’ trademarks in the official register of the Trademark Office.
Certainly, “there is no free lunch.” The joint ventures are obligated to pay reasonable royalties for their use of IP. In this way, multinationals enjoy at least double proceeds from joint ventures: They receive IP licensing fees and equity returns, and also obtain more benefits by bundling core components of IP rights. Some joint ventures have no profits to share between Chinese shareholders and even go into the red after the payment of IP licensing fees.
In addition to joint ventures, Chinese enterprises are prone to becoming a target of “exploitation” in the process of mergers and acquisitions. In recent years, there has been a surge in overseas mergers and acquisitions by Chinese enterprises, and some even, “bucked the trend to buy the dips” in the financial tsunami. However, some enterprises acquired only plants of foreign enterprises and solved the employment problems of the other side without getting more valuable brands, patents and other IP rights. On the contrary, as acquirers, Chinese enterprises have to continue to buy the other side’s patented technologies or trademark licenses.
In January 2003, Michael Perelman published an article entitled The Political Economy of Intellectual Property in the US Monthly Review which criticized IP as a practical tool and tactic for the West capitalist group to maneuver state power to maintain their monopolistic positions and exploit developing countries, thereby preventing a decline in the profitability of capital.
As far as the actual situation is concerned, sometimes there seems to be no other alternative available; however, it does not mean that Chinese enterprises do not understand “IP exploitation” and some have already been cautious to avoid this kind of “exploitation”. For instance, the main reason behind the failure of the bid for Opel by Beijing Automotive Industry Holding Co., Ltd. (Beijing Auto) was a disagreement between Beijing Auto and General Motors over the terms of the transfer of IP rights related to automobile designs and technologies. Beijing Auto considered the IP rights of Opel models an essential part of the deal, while General Motors was worried that the transfer would damage its interests in China and cooperation with its partners. Clearly, Beijing Auto was not willing to buy the empty shell of Opel if it required being left to the mercies of General Motors on the IP issue.
Guarding against IP exploitation does not equal opposition to cooperation with multinationals. Some laugh at that idea, stating, for instance, that Qualcomm has more lawyers than engineers, and launching a patent litigation is more important than doing research. In fact, this shows that multinationals have attached extreme importance to IP rights. As Premier Wen Jiabao put it, “The competition of the future world is the competition of IP rights.” Therefore, Chinese enterprises must understand the rules of IP games in order to avoid traps and exploitation.

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