As many in U.S. remain skeptical of patents, China picks up the slack

By Steve Brachmann & Gene Quinn
October 18, 2017

Recently, the Hoover Institution Working Group on Intellectual Property, Innovation, and Productivity (Hoover IP2) issued a revised working paper providing an updated data set on mobile phone patent license royalties in a global context. The paper’s authors provide analysis of patent royalties in the entire mobile phone value chain in order to estimate the average cumulative royalty yield in the value chain for mobile phones. The paper concludes that, in 2016, original equipment manufacturers (OEMs) sold a total of 1.97 billion mobile phones for a total of $425.1 billion in revenue, indicating an average selling price of $215.50 per phone and an average cumulative royalty of $7.20 per phone.

One of the working paper’s notes on its data analysis indicates the difficulty of identifying licensing revenues for some firms, like Chinese privately owned collectives which aren’t subject to the same financial reporting standards of U.S. or European companies. One such firm is the Shenzhen-based networking and telecommunications firm Huawei Technologies, an entity which the paper notes as a relative newcomer to the mobile phone licensing sector. Going on the assumption that Huawei’s licensing revenues are similar to InterDigital, a U.S.-based counterpart, the paper’s authors determine that Huawei is earning approximately 30 percent of all patent revenues earned by all Chinese companies combined — an impressive share of all Chinese royalities just for that company’s portfolio of mobile phone patents alone.

An Excel workbook attached to the revised 2017 working paper includes further discussion on how the authors determined that Huawei was receiving such a large percentage of Chinese patent revenues. In the discussion, the authors cite to a fact sheet issued by Huawei which reflects that company’s belief that it holds more than 15 percent of all standard-essential patents (SEPs) in the area of 4G Long-Term Evolution (LTE) communications. This would put Huawei on the level of major SEP holders like Qualcomm, Ericsson and Nokia, entities which also have large and lucrative patent licensing divisions. The authors also note that recent Huawei patent suits filed against Samsung and ZTE indicate that Huawei is working towards developing a stronger licensing division.

Intellectual Asset Management has reported both on the paper’s conclusions, which indicate that arguments over unduly high licensing rates in the mobile phone sector are largely unfounded, as well as the implications of Huawei’s large licensing revenues. IAM further cites to comments from Jason Ding, head of IP for Huawei, which reflect the fact that, as U.S. companies continue to dislike patent protection, the strength of the patent system globally is leading Asian companies to amass more patents and more licensing opportunities than their American counterparts.

“Increasing numbers of US operating companies dislike patent protection,” Ding explained to IAM. “[T]he production and manufacture of products are increasingly located in Asia and Asian companies have more and more patents… opportunities are being transferred to the East just like manufacturing was.”

“I can tell you that my work in China and Japan and Korea tells me that the companies there are quite delighted to pick up the slack where American companies don’t have quite the protections that they do under their law,” former Federal Circuit Chief Judge Randall Rader recently told Eli Mazur in an interview.

Indeed, Huawei has rapidly become one of the most important players in the global mobile phone patent market in recent years, gladly accepting opportunities and copious amounts of licensing revenue that were once the domain of Silicon Valley innovators. How this happened is no fluke. Huawei’s meteoric rise can be explained by an aggressive patent acquisition strategy and an increasingly favorable patent, licensing and enforcement environment in China.

Huawei’s Patent Cooperation Treaty (PCT) patent application filings has seen remarkable growth, going from 456 filings in 2014 up to 3,898 filings in 2015. This has helped see the Chinese telecom firm overtake the likes of Qualcomm, Samsung and others to become the top filer of PCT patent applications in that year, according to statistics published by the World Intellectual Property Organization (WIPO). In 2016, Huawei’s 3,692 published PCT patent applications trailed ZTE, another Shenzhen-based entity, which took the top spot with 4,123 published PCT filings, but Huawei was still firmly in second place with 1,200 more of such filings in 2016 than third-place Qualcomm. Obviously, this aggressive patent strategy is paying real dividends for Huawei, as evidenced by the amount of licensing royalties incoming.

Although strong patent licensing activities are surely welcome news to Huawei and the many people employed by that firm, stakeholders in the U.S. patent system likely can’t help but see this as a further harbinger that China’s innovation economy will overtake ours in the coming years. In direct contrast to the United States, innovators are finding that China is increasingly welcoming to business method and software innovations after it relaxed patent examination guidelines in those sectors earlier this year. This July, China’s State Intellectual Property Office (SIPO) issued new regulations to streamline the examination process for patent applications in Internet, big data, cloud computing, information technology and other areas of technology.

As a result, patent application filings in China have been up overall, not just with large domestic entities like Huawei and ZTE. In 2015, more than one million patent applications were filed with SIPO, more than one third of global patent application filings that year according to WIPO statistics. Incredibly, 96 percent of those patent applications are filed in the domestic office only, indicating that many intellectual property owners are only interested in their market position in China.

President Xi Jinping’s remarks at a Chinese state economic forum held this July, in which he said that “IP infringers will pay a heavy price,” appear to be supported by action in Chinese courts and federal agencies. This August, American athletic shoe and apparel company New Balance won the largest trademark infringement verdict that a Chinese court has ever handed out, garnering a total of $1.5 million USD. Then in September, China’s National Copyright Administration (NCAC) informed both domestic and foreign music companies that they must adhere to international practices to improve licensing. Stronger protections for IP rights may well be one reason why the 2017 Beijing International Book Fair saw a 5 percent increase in copyright deals over the 2016 event, including both export and import agreements.

Some critical of China will undoubtedly point out that many Chinese patent applications are of low quality, with large numbers of Chinese patents acquired due to various incentives provided by the Chinese government. While that may be true, the real story is that China is successfully laying the groundwork for a familiarity with the Chinese patent system that will pay dividends in years to come. Indeed, if China wanted to plant a patent seed for the future it is hard to imagine a better strategy than incentivizing patent filings. Of course, whether you want to criticize Chinese patent filings or not, Huawei is enjoying great revenues themselves pursuing an aggressive patent acquisition strategy, which will only further incentivize other Chinese companies that want to be like Huawei or the next Huwawei.

China’s system of patent rights will overtake the United States’ system if both continue upon their current trajectory, and it may happen sooner rather than later. The 2017 Global IP Index published by the U.S. Chamber of Commerce showed that the United States’ system of patent rights dropped to tenth from its first-place ranking it had held since the IP index was established. China was 20th in patent rights in that index but the way either nation has been handling the key areas of weakness identified in the index is very telling. China’s overall score in the IP index has increased slightly in each consecutive edition of the index, and it appears the country is working to tamp down historic levels of IP infringement, bring the interpretation of IP laws in sync with international standards, enable infringed parties to seek adequate remedy and lower hurdles to market access for IP commercialization among foreign entities. Each of these are identified as key weaknesses for China, and China seems to be addressing them.

Conversely, the United States seems to be doing nothing to address the downward trajectory of the U.S. patent system. Therefore, it wouldn’t be shocking to see China’s patent system to see further gains and the U.S. patent system to see further weakening when the 2018 edition of the Chamber of Commerce’s IP index is released.

The Author

Steve Brachmann

Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He has become a regular contributor to IPWatchdog.com, writing about technology, innovation and is the primary author of the Companies We Follow series. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients.

Steve Brachmann

Gene Quinn is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 24 Comments comments. Join the discussion.

  1. Greg DeLassus October 18, 2017 10:52 am

    “China’s system of patent rights will overtake the United States’ system…”

    What does this even mean? It is not as if the U.S. patent system is in any sort of *competition* with the Chinese patent system. The two systems do not provide a competing set of goods. The U.S. patent system provides exclusivity in the U.S. market, while the Chinese patent system provides exclusivity in the Chinese market. If Chinese patent filings are up, presumably that reflects the fact that the Chinese market continues to grow in value, but that growth does not come at any sort of *expense* to the value of the U.S. market (which also continues to grow).

    “[T]he United States seems to be doing nothing to address the downward trajectory of the U.S. patent system.”

    No argument here. Our courts are doing their level best to throw ever spanner they have into the gears of the U.S. patent system. I just do not see what this has to do with China. The negative impacts of recent court decisions would be every bit as deleterious even if China were still in the throws of the “Cultural Revolution.”

  2. CW5 October 18, 2017 11:50 am

    Greg:

    The US and China do compete for talent and capital. Talent follows capital, and capital follows strong patent protection. Where will the US be when all the talent and capital have moved to China?

    Agreed, the courts, particularly the Supreme Court, have done serious damage to the patent system over the last 10 years. I’m hoping that Oil States will be a first step in the right direction.

  3. Patent Prophet October 18, 2017 1:09 pm

    The Financial Times just came out with a very interesting read on patent reform and some of the history behind the trend toward patent devaluation.

    https://www.ft.com/content/6c5b2cca-ae8b-11e7-beba-5521c713abf4

  4. Anon October 18, 2017 1:32 pm

    Greg,

    There is competition based on patenting between different patent regimes.

    This is an historical fact, as witness biotech and (yes) software when comparing the European and US sovereigns and early views in each “art” as to what would be permitted to be patented (and protected).

    Nascent industries (read that as those outside of the Infringers Rights cabal) will thrive differently in different sovereign settings. Your “globalist” views are simply not in accord with reality.

  5. SE2 October 18, 2017 1:51 pm

    CW5:

    Are you suggesting that talented U.S. workers are going to move to China to find jobs? Perhaps some native Chinese might do so, but that is hardly a credible suggestion for the rest of us.

  6. Greg DeLassus October 18, 2017 2:05 pm

    “There is competition based on patenting between different patent regimes… Nascent industries… will thrive differently in different sovereign settings.”

    How? Perhaps you are correct, but I am not following you. Could you unpack your understanding of *how* two patent regimes might be in competition with each other (neither can supply what the other supplies), and how a given industry might thrive in a different legal regime (this I understand) specifically because of the *patent law* of that regime (this I do not understand)?

    “This is an historical fact, as witness biotech and (yes) software when comparing the European and US sovereigns and early views in each “art” as to what would be permitted to be patented (and protected).”

    Once again, could you unpack this please? What historical examples (with regard to either biotech or software) have you in mind? I really have no idea to what you are referring here.

  7. Night Writer October 18, 2017 2:52 pm

    @5 They are in competition because the companies and innovation that is formed in one will compete with the technologies in the other. So, the competition is for an innovative economy. And–guess what–money. And–guess what–capital flows out of the US and into Chinese start-ups.

    One of the big reasons China is pushing for strong patents is their goal is to become like S. Korea with lots of innovation.

  8. Anon October 18, 2017 3:00 pm

    Greg,

    I am not aware of how to “unpack” what are direct and rather simple statements.

    Why is it that certain (new) industries will flourish in one sovereign as opposed to another?

    That is does happen – and does happen because of each sovereign’s differing patent policies – is something that you need to accept.

    You are, I believe, still trying to see “innovation” as some zero-sum global benefit as opposed to how reality works. In reality, it does matter where innovation first occurs because innovation is not just a “here are the results” type of thing.

    Your lack of ability to understand is directly tied to your “world view.” Unless you are recognize that factor, nothing anyone says will help you to understand.

  9. Greg DeLassus October 18, 2017 3:17 pm

    @6 “They are in competition because the companies and innovation that is formed in one will compete with the technologies in the other.”

    This a non-sequitur. Just because *companies* compete with each other does not mean that *patent systems* compete with each other. Dell and Apple are in competition, but Dell uses both the Chinese and U.S. patent systems, and so does Apple. Nothing about the Dell/Apple competition puts the USPTO in competition with the SIPO, because the USPTO is selling something (market exclusivity in the US) that SIPO cannot sell, and vice versa.

    @7 “Why is it that certain (new) industries will flourish in one sovereign as opposed to another?”

    Lots of reasons. Tax regimes. Regulatory prohibitions. Functioning infrastructure. The list goes on. You cannot infer that *patent law* is the cause for different observed outcomes, simply on the basis that different countries show different outcomes and different countries have different patent regimes. That is mere correlation, not causation.

    @7 “That [th]is does happen [i.e., industries flourish in one sovereign as opposed to another]… because of each sovereign’s differing patent policies… is something that you need to accept.”

    I definitely accept that different industries flourish under different legal regimes. However, there is a *lot* of difference between these various legal regimes, not limited to merely differences in patent law, so I am not clear why I should be expected to ascribe all of the observed difference to patent law as the cause.

    @7 “You are, I believe, still trying to see ‘innovation’ as some zero-sum global benefit…”

    I am afraid that I do not understand what you mean by “zero-sum” here. My view of the benefits of innovation is definitely not “zero-sum.” I can benefit from innovation without taking anything away from the benefits that *you* derive from the same innovation. That is the *opposite* of a zero-sum understanding.

    @7 “[I]t does matter where innovation first occurs because innovation is not just a ‘here are the results’ type of thing.”

    Sure. I do not disagree. I can certainly agree that there are first-mover advantages to different jurisdictions and different industries. I am less clear, however, why you are attributing those first mover effects specifically to *patent law* differences, as opposed to tax law difference, or employment law differences, etc.

  10. Gene Quinn October 18, 2017 3:32 pm

    SE2-

    I don’t know exactly what CW5 was saying, but I’ll chime in to say that I’m hearing more and more foreign students who come to the U.S. for education are leaving the U.S. to return home. Once upon a time they would stay here, but now see better opportunities back in their home countries. That should be at least somewhat alarming given the relatively low number of Americans who pursue STEM careers.

    -Gene

  11. Night Writer October 18, 2017 4:18 pm

    @8 Of course they are in competition. They are in competition to create a market place that will encourage capital to invest in innovation and for people to spend their time innovating.

    They are as much in a competition as the US legal system competes with the Chinese legal system to try to create efficient markets where business can be conducted.

  12. Greg DeLassus October 18, 2017 4:44 pm

    @11 “They are in competition to create a market place that will encourage capital to invest in innovation and for people to spend their time innovating.”

    How? How are they in competition? I can get both a Chinese patent and a U.S. patent even if I did all of my work of invention in Israel. How, then, are these two patent systems *competing* with each other to “encourage capital to invest in innovation”? For all the world, it would appear that these two patent systems are *cooperating* with each other to encourage investment in innovation. Neither loses anything if the other gains. There is no *competition* here.

  13. Ternary October 18, 2017 8:43 pm

    Of course there is a competition going on, at least between China and the USA. There is a clear political competition that has innovation as a component. The innovation aspect translates into economic and military capabilities. I am not sure that the Chinese and US patent systems compete directly, but politically we certainly do.

    It seems clear that even the Chinese were surprised about the extent to which its manufacturing capabilities were unleashed by allowing private enterprise. And how it enhanced its stature on the world stage in actually a very short time. This was not a result of central planning, the classical communist way, but by giving freedom and protection to private enterprise. They learned that lesson very well.

    The Chinese patent system appears to want to further unleash Chines corporate and independent inventors by protecting Intellectual Property rights. The Chinese are, in that sense, trying to copy the US economic engine (innovation) that still dominates much of the world economy. And, like many of us, they are baffled why we in the US are squeezing the life out of it and handing it over to large, organizations and corporations and to our competitors, it seems.

  14. Anon October 18, 2017 9:13 pm

    Greg,

    I reject the “cause or correlation” gambit.

    There may be more than one factor involved, and no one is saying otherwise, but clearly innovation, protection of innovation, and patent systems all go hand in hand.

    And while one may certainly “file anywhere,” one usually DOES file within one’s base of operations. And for nascent innovators, that is more likely to be NOT “file everywhere.”

  15. Mark Cohen October 18, 2017 10:37 pm

    One significant difference between the US and Chinese systems with regard to patents, is that the US licensors to China have to provide mandatory ownership of improvements and indemnities against third party infringement or other liabilities, which do not attach when a Chinese licensor licenses to the United States. These obligations are codified in the Administration of Technology Import/Export Regulations. It thus theoretically makes it easier for a Chinese company to negotiate terms of a license agreement for its patents than visa versa.

  16. Benny October 19, 2017 5:36 am

    Anon,
    “And while one may certainly “file anywhere,” one usually DOES file within one’s base of operations”. If you have any sense at all you file within your competitor’s base of operations. What good to me is an Elbonian patent if my market and competition is in the US?
    There is a statistic missing from the article – how many of the 1M SIPO filings are from foreign – possibly US – applicants?

  17. Night Writer October 19, 2017 5:46 am

    @12 Greg: Actually, at this point I think you are being a troll. You have not conceded that at least they are in competition in the sense of a tool to create an innovative economy.

    Plus, let’s think about your Israel example. Of course, the USA and China are in competition for the Israel money not only to file the patent, but the company to market/build/develop its products in the USA or China. In fact, I do a lot of foreign filing and have prosecuted patents in pretty much every country. If a patent system is really weak the client will not file in that country. Not only that I have been a product manager and been involved in selling consumer products to like 100 countries. What it can mean if a country has a weak patent system is the company may be less interested in the country. The country may be seen as a dumping ground, i.e., we’ll go there but probably going to have to deal with cheap TW ripoffs. So, we treat the country where we dump. We don’t invest. We get what we can from them.

    Seriously, you have no idea what you are talking about. Also, I happen to know some people that are connected at the top level of China and know that what they are doing is trying to create innovation in China by making the patent system strong. It is an experiment. They want to be more like KR.

  18. Amnon Michael Cohen October 19, 2017 5:51 am

    Again I see that overlooking my proposed improvement to the USA PTO has and is costing our economies to loose the Innovations Advantage.

    Yes, I know the wisdom of my proposal is not simple to capture by the USAPTO hardheadedness but as it is itself an innovation, its trade-secrets were not shared in my original, now old proposal.
    I am successfully employing it, and am in a winning position!
    There are 2 websites where I am sharing the overview, one is still the http://prepatent.org website the other is http://www.surfins.ca/worldwide/

  19. Night Writer October 19, 2017 6:06 am

    Actually, it would be a good study to see how product companies change their behavior depending the strength of the patent system in the country.

  20. weibin,shi October 19, 2017 6:41 am

    “In direct contrast to the United States, innovators are finding that China is increasingly welcoming to business method and software innovations after it relaxed patent examination guidelines in those sectors earlier this year.”
    It’s true that China has relaxed restrictions on business method and software innovations, since through current five years in China; technology around mobile terminals had been developed at a rocket speed. Five years ago, when I went out somewhere for lunch, I will take at least a wallet and bus card and mobile phone, nowadays one mobile phone is enough. With a mobile phone, you can unlock and ride a public bike or car easily, and order food, service, travel, shopping by your mobile phone.
    Thousands of APP relate to the technology of business method and software innovations needs to be protected as an IP, so I think these kind of Chinese companies impact a lot during the amendment of patent examination guideline. For example, the Chinese biggest search engine company Baidu, have lots of business kind of technology patents, so they have strongly desire that this kind of technology can be admitted in patent law.
    Huawei is a very special case of IP application among Chinese company, its IP strategy affect the whole IP society of China. But Huawei can’t represent the whole IP average level of China. The discussion about patent quality, NPE, and patent monetize are still top three topics, from the theme of recent three years of CPAC(China Patent Annual Conference, which is currently the biggest national seminar of patent in China, http://www.piac-china.com/).

  21. Benny October 19, 2017 6:46 am

    Rather than make any observations on the Chinese approach to innovation, I suggest you look it up for yourselves here –
    http://english.gov.cn/2016special/madeinchina2025/
    You’ll get an idea of which way the wind is blowing.

  22. Anon October 19, 2017 8:18 am

    Benny,

    Your point at 15 is a good one – and actually MORE points out that native US innovation has been declining (in step with the dismantling of the US gold standard of having the best patent system).

    Thank you.

  23. Confused Pharmacist October 20, 2017 7:45 pm

    I still think China isn’t all it’s cracked up to be. They couldn’t even make ballpoint pens until recently: https://youtu.be/RrPlOM5MTSM

  24. Anon October 21, 2017 10:05 am

    Confused Pharmacist,

    What is your point?

    All that I get out of your post is an attempt to “weaken” the argument here that China is grabbing the lead in innovation by moving in the opposite direction of the US and making their patent laws stringer while we make outs weaker.

    But your point misses – and misses badly.

    The link actually shows an increase in that country’s innovation efforts.

    “Correlating” with the same-timing as the increase in patent protection makes the opposite point of what I think that you were trying to make.

Post a Comment

Respectfully add to the discussion.

Name *
Email *
Website