The rise of intellectual property in China

Article  \  22 May 2018

China has once again become a major world economic force to be reckoned with after playing an unprecedented game of economic catch-up since 1978. Its booming ecommerce market and a shift from primary products and manufacturing to more of a consumer economy, presents huge opportunities for Kiwi retailers looking to expand into the region in the future.

In recent years the ‘Middle Kingdom’ has turned to nimbler sectors such as ecommerce, retail and technology to generate growth. With almost 65% of China's gross domestic product now due to consumption and its ecommerce industry accounting for nearly half of all retail ecommerce sales worldwide, China’s growth is unparalleled. The sheer size of China’s ecommerce sales in 2017 dwarfed all other markets – totaling over $1 trillion and is expected to continue to grow to $1.7 trillion by 2020.

This spells good news for existing Kiwi exporters and those currently eyeing the market. New Zealand’s Free Trade Agreement, coupled with China’s increasing appetite for imported luxury and high quality consumer goods means the scale of potential business opportunities for New Zealand is immense.

China is now New Zealand’s largest trading partner for both exports and imports. The trade relationship with China has nearly tripled over the past decade, with trade volumes between the two countries rising from $8.2 billion in 2007 to $24 billion in the June 2017 year.

The growing middle class in China presents a huge opportunity for New Zealand exports of all types – from food through to technology. The second largest economy in the world has developed a huge thirst for international, high quality goods and New Zealand products have the advantage of being consistently known for being clean, green and pure.

But with increasing opportunity comes significant risk. Trading with China can seem complex – its business character is different to other markets and it operates at a different pace to New Zealand business.  This has the potential to create major problems for companies of all sizes – including giants such as Apple, Tesla and Lexus – who have all been caught out in the past and have ended up spending significant time and money to resolve issues relating to key products.

A number of Kiwi brands have already successfully established a strong presence in China’s retail and ecommerce marketplaces and, with our reputation as a trusted source for not only our primary products but also for quality consumer goods, demand is set to continue to grow.

Getting it right requires persistence, good partnerships and a clear understanding of the Chinese IP landscape. Get it wrong and you not only risk damaging your brand, but also the whole reputation of New Zealand Inc.

Establishing a successful presence in China starts with properly understanding the market and its cultural differences. Not knowing the nuances of China’s market can end up in costly, time-consuming battles.

Intellectual Property law in China

It was only a decade ago that China was considered the place to have products manufactured on the cheap. As a result, counterfeits were rife and it was known as a country where intellectual property (IP) was difficult to enforce.

The perception that protecting and enforcing IP in China was fraught with difficulties and, combined with the perception of a copying culture in China, led to many companies believing that protecting their IP, or even expanding into China, was not worth the effort.

Although there are still a number of risks involved with exporting to China, most notably trade mark squatters, China has made huge inroads in reducing these thanks to changes to its laws and trading environment.

China’s changing attitudes to IP has been a very deliberate move on the part of the Chinese government – although enforcement does vary from region to region.

As a result, many New Zealand companies are increasingly protecting their IP in China from the outset to stop ‘knock-off’ products because China offers such high growth potential for New Zealand-branded products.

There are different levels of IP action in China, including the Chinese Trade mark Office (CTMO). It is similar to the Intellectual Property Office of New Zealand (IPONZ), which deals directly with trade mark rights – although neither deal with infringement.

Instead, China’s central government has specialist IP courts to deal with infringement and is particularly active when it comes to trade mark squatting. If a company can show bad faith, it would have a stronger case for retribution. However, early application for trade marks is still critical in avoiding such proceedings.

But even though enforcement is creating the right environment for entry in to the market, it’s still not an easy road for businesses looking to protect their IP in China’s growing market. China’s IP examination process is strict, bureaucratic and time consuming, with trade mark registration taking between 12-18 months, if not opposed or refused. This means it is extremely important to get it right the first time.

Although protecting IP can be a time-consuming exercise, the consequences of not doing it is not even worth considering. What’s more, thanks to the Chinese government’s provision of incentives to register IP rights, Chinese companies are increasingly recognising the value of IP.

Consequently, social change towards IP rights is occurring and Chinese companies are not only respecting the rights of others, but also developing their own IP at an unprecedented rate. China is now one of most prolific users of IP systems, both domestically and abroad.

This is reflected in the most recent WIPO report that shows China topped the world’s patent and trade mark filings in 2016.

IP protection –  your options

Intellectual property rights provide ownership over a broad range of creations including brands, products, ideas, innovations and designs. These rights help to ensure IP owners get the full economic benefit of their creations by stopping others from using or creating something similar. As with other countries, China offers both registered and unregistered rights.

Registered IP

Registered IP, as its name suggests, requires a formal process to register and secure the exclusive legal rights to something that is original and unique to a specific individual or company. This includes:

Trade marks: A trade mark protects a company’s brand or logo to ensure no other organisation can use it.

Patents: A patent protects ideas and concepts in products, formulations and processes by giving the holder exclusivity in making, using or selling their invention.

Design: A registered designs protect the shape, configuration, pattern and ornamentation of a product – essentially what it looks like and not what it does.

Copyright: A copyright provides the creator exclusive rights for the use and distribution of an original piece of work.

Unregistered IP

Trade secrets: Any confidential business information that provides your organisation with a competitive edge may be considered a trade secret.

Top tips for protecting your IP and succeeding in China

  • Do your due diligence! Kiwis wanting to do business in China need to first check whether their brand is already in use there – a surprising number leap in without doing this which creates issues. Having your brand registered in New Zealand doesn’t necessarily mean you own it elsewhere. China has a ‘first to file’ trade mark system which means businesses have no rights to their trade mark in China until they actually register it there. Until then, businesses risk someone else registering it and suing them for infringement, regardless of whether you’ve been using your brand for years or not.
  • Is China a viable market for your goods/services or is a China partner the best way to meet demands for goods/services in other countries? If China is a viable option, what are the best channels to use?
  • Seek advice from a specialist IP lawyer to secure the right IP protections in China for your brand, products or ideas at the earliest opportunity.
  • Register your trade mark(s) in China early – even if you don’t intend to enter the Chinese market in the near future. If someone registers your trade mark before you, then it’s likely you won’t be able to make or sell your branded product in China without a costly battle or change of brand
  • Own your IP in China and manage your IP portfolio with a specialised IP lawyer. Don’t entrust your distributor/supplier or an agent based in China with obtaining protection for your IP. This may seem helpful and an inviting prospect but there are too many instances, for example, where the agent ends up owning the trade mark. This makes it difficult, if not impossible, for companies to change agents or manufacturers without abandoning their brand.
  • If your business relies on trade secrets and is looking to manufacture and/or sell in China, don’t give away all the steps involved in making your product to a single supply chain partner. Don’t ever assume the ‘secret sauce’ to your product will be kept confidential by your manufacturer. IP theft is a worldwide problem and can happen to you.
  • Don’t rely on IP protection in New Zealand to safeguard you when entering the Chinese market. IP rights in New Zealand or other countries carry no weight in China and it certainly means nothing to China Customs. The only way to ensure China Customs seize infringing goods actively is to obtain registration for your IP in China, and then record your IP rights with China Customs.
  • Cost should not be a barrier to getting Chinese IP protection. The costs are relatively low compared to the cost of trying to win back your IP.
  • Make sure your brand fits the Chinese market and consider creating a Chinese-specific brand. What works in New Zealand doesn’t necessarily resonate in China. Many companies find they need to adapt their brand or change it completely to appeal to the Chinese market. We can work with you to develop a Chinese brand name, see here how we can help.
  • Be ready to adapt, scale and move fast. Chinese businesses operate at a faster pace than New Zealand and they expect you to do the same – otherwise you will get left behind.
  • Ensure your team of advisors has a strong track record of experience in the Chinese export market and in managing language and cultural differences.
  • Make sure expectations of you and your business partners are clear, that these are properly documented and written contracts are in place. Again, this needs to be done at an early stage, it is difficult to impose new conditions on a partner down the track.

This article was written by the team at Baldwins before it joined AJ Park to operate as one firm under the AJ Park brand in October 2020. Find out more here.