Innovative moves

Ruud Peters, CEO of the intellectual property and standards operation of Philips, visits China at least once a year, but one of the main purposes of his visit this April was a little different from those previous.

Before he usually talked with Chinese officials, universities and manufacturers about protection of intellectual property rights (IPRs) belonging to the Dutch electronics giant because Philips, as one of the world's largest patent holders, has been trying to defend its rights in all areas, including optical disc storage.

But in his latest visit, one of Peters' main topics was creating innovation. He participated in a discussion with local partners on the Philips Teenage Patent Award, which was organized by the Shanghai Intellectual Property Office and the Dutch firm.

Over 100 patent applications from almost 40 high schools and primary schools in the metropolitan areas won awards in the finals and as many as 250 patents were filed in the competition.

"The Chinese government has set a great objective to make China an innovative nation by 2020 and an innovative society needs a healthy IPR system," says Peters.

"In a dozen years' time, these teenagers will become the pillar of the country, and their creativity and IPR knowledge will become a critical factor contributing to industrial and economic growth."

The Philips effort echoes strategies of the Chinese government on development of IPRs.

One significant change is a shift of focus from purely protection resulting from pressure by foreign governments or organizations to the construction of an active IPR system, including fostering innovation and promoting uses for those innovations.

Tian Lipu, director of the State Intellectual Property Office (SIPO), said in March that coming guidelines for the national IPR strategy will aim to encourage companies and organizations to innovate, to activate use of patents and stop abuses of patents, as well as promote the trading of patents.

Last month, SIPO also announced 100 national patent creation pilot organizations, including top Chinese universities Tsinghua University and the nation's biggest telecom equipment maker Huawei Technology, to encourage innovation and new domestic and international patents.

Philips, one of the most successful multinationals, has also been active in IPRs in China. By the end of 2006, its research teams genetrated over 1,500 patents, which can be used around the world.

Shanghai-based Philips East Asia Research, one of Philips' three major research campuses, actively aligns with local academics and government for innovation. The TD-SCDMA, the first Chinese standard on the next generation standard for mobile communications (3G), is a result of the cooperation between the Chinese firm Datang Telecom and foreign partners like Philips.

"We always regard Philips in China as a local company, and we are in fact a part of the Chinese industries where we have businesses," says Peters.

As China wants to use innovation to improve the national economy and encourage companies to increase their international competitiveness, Peters believes that it will not only benefit local companies, but also multinationals like Philips.

Philips has been criticized by some people in the local electronics industry and IPR professionals as "exploiting" local manufacturers. Philips is in charge of collecting patent royalties on DVD players and discs. Some manufacturers claim the prices of their DVD players are just over $30, but they need to pay as much as $25 on royalties to Philips and other foreign patent holders.

"More importantly, the main problem is rooted in unfair competition, not the royalty, which is superficial," says Peters.

Manufactures in China produce about 90 percent of DVD players in the world, but price wars have eroded profits and competition often favors smaller contracted manufacturers, which usually escape royalties and do not always comply with Chinese laws on labor, environmental protection and taxation.

Many branded makers like Shinco in East China's Jiangsu Province had to significantly cut investment and turned the focus to its own disc players and even TV sets.

Trying to help those companies paying royalties and to provide more services, Philips started a new licensing system called Veeza, which is only applied in the trade for recordable disc. But Veeza encountered strong resistance from manufacturers in Taiwan Province since it was launched at the beginning of 2006.

The combined disc production by Taiwan and the Chinese mainland accounts up to about 80 percent of the world market. The turning point came last fall when Ritec, followed by CMC, the two leading disc producers in the world, accepted the new licensing system.

"Not easy, but you have to keep communications with your stakeholders," says Peters. "As long as we believe that it is good for the whole industry, we will pursue it with persistency even though we have suffered from being misunderstood."

Encouraging domestic companies to innovate and build their own IPR system will increase their competitiveness and help build an awareness to respect IPRs, analysts say.

Tian Yujing, a TV technology expert with China Electronics Technology Corp, said in an earlier seminar that Chinese manufactures face serious trouble with royalties because the development model of the industries is wrong and the royalty collection system is faulty.

"A frequently seen situation now is that a domestic company innovates and many other firms just take the innovation and use it in their own products, paying nothing," she says.

"Only when you create an atmosphere to respect others' intellectual properties, will companies continue to invest in IPRs."

However, IP rights should be balanced. The advantages in DVD technologies put Philips under the suspicion of market monopoly. The story came to light when one of its patents was challenged by five Chinese IPR professors. The year-long case has drawn much attention in IPR circles and the DVD industry, and ended in peace in December.

"Since both sides share one common goal to improve the IPR system in China and help the industry grow through healthy market competition, there is no better solution for both sides than settling the dispute in peace," says Peters.

(China Daily 04/23/2007 page9)