Case Studies on Selected Companies’ Utilization of the IP System

3.1. Comparison of Selected Companies’ Data in Major Industrial Fields

The situation was worse when we looked at specific company cases. For the survey, we relied heavily on publicly available information and we made great efforts to arrange interviews with the relevant departments of several of the companies selected, but most of our attempts met with no response; and where an interview was granted, it failed to provide sufficient information to make a proper analysis.

Therefore, without unreasonably compromising our objective, we chose the successful companies where the relevant information was available to the public. Where patent information was needed, we searched publicly available databases. Where data on sales, net income and R&D input were required, we relied on corporate annual reports and other published data.

For the telecommunication industry, we chose Huawei Technologies, a leader in next-generation telecommunication networks, and ZTE Corporation, China's largest listed telecommunication manufacturer and wireless solution provider, both of which are international players. They have stepped up their patent filing activity since 2000: Huawei's filing surged from 206 in 1995 to 3508 in 2005, ZTE’s from 139 to 909. They have also strengthened their international patent-seeking efforts through the PCT over the years. Huawei and ZTE are committed to innovation: from 2000 to 2005, they were both among the top three in the scale of R&D in China’s electronics industry. However, despite expansion in sales over the same period, their profit margin diminished: Huawei suffered a decrease from about 18 per cent in 2000 to about 6.0 per cent in 2005, with wild fluctuations in between; ZTE continued to decline from about 8 per cent to 3.5 per cent (see Figs 9 and 10).

Fig. 9.Huawei Technologies: Patent Application and Grants in China 1995-2006 Authors’ Patent Search

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For the pharmaceutical industry, we selected North China Pharmaceutical Group Corporation (NCPC), a leading pharmaceutical manufacturer within China’s top 500 enterprises and one of the nominated best profit-makers in China. Like Huawei and ZTE, NCPC filed more patent applications with the State Intellectual Property Office (SIPO) after 2000, but even in the peak year 2005, it filed fewer than 20. Although NCPC claims to be China’s No.1 pharmaceutical exporter, it has so far filed only four PCT applications. Despite the company’s revenue growth, its share of net income in revenue decreased gradually from 1998 to 2003 and then plunged from 6.04 per cent in 2003 to 4.65 per cent below zero in 2005, the year when NCPC filed 17 patent applications. It is likely that the company is not strong enough to undertake innovation, considering that a slightly intensified patent application rate led to such a deep deficit (see Figs 11 and 12).

Fig.10.Huawei Technologies: Revenue and Net Income 2000-2006, Data Source: Annual Reports

Fig. 11.NCPC: Patent Application and Grants in China 1996-2006, Authors’ Patent Search

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For manufacturing, we choose Xuzhou Construction Machinery Group (XCMG), the largest company in China in developing, manufacturing and exporting construction machinery. XCMG filed even fewer patent applications than NCPC. These applications were mainly made after 2001, leading to a maximum of six in 2005. In the case of NCPC, the expansion of XCMG’s revenue was dogged by a continuously diminishing profit margin. The share of net income in revenue decreased from 6.97 per cent in 1999 to 0.98 per cent in 2004 and plunged sharply to -4.19 per cent in 2005, the year when XCMG filed the highest number of patent applications. It seems that XCMG is too weak to invest in R&D, as a slightly increased level led to a deep deficit. In fact, XCMG is subject to acquisition by the Carlyle Group, which agreed to acquire an 85 per cent stake in the company for 75 million US dollars in 2005. However, so far, the transaction has not been approved (see Figs 13 and 14).

Fig. 12.NCPC: Revenue and Net Income 1998-2006, Data Source: Annual Reports

Fig. 13.XCMG: Patent Application and Grant in China 1996-2006 Authors’ Patent Search

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For the automobile industry, we selected China First Automobile Works Group Corporation (FAW), a pioneer of China's automotive industry in collaboration with several leading international players, whose total assets were valued at 109.85 billion Yuan (14.27 billion US dollars) and with China's largest and most extensive automobile R&D facility. As in the case of NCPC, FAW increased invention patent applications after 2001, with a maximum filing of 17 items in 2005, the year when its profit margin fell sharply. Unlike the companies discussed earlier, FAW saw an expansion in sales with a widening of profit margins from 1996 to 2003. However, the share of net income in revenue slumped from 6.12 per cent in 2003 to 1.94 per cent in 2005. Unsurprisingly, the FAW 2005 Annual Report, blamed increases in management costs, complaining that it was extensive R&D that swallowed 12.78 per cent of the profits (see Figs 15 and 16).

Fig. 14.XCMG: Revenue and Net Income 1996-2006, Data Source: Annual Reports

Fig.15. FAW: Patent Application and Grants in China 1996-2006 Authors’ Patent Search

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3.2. Results of the Analysis

As shown, we selected China’s leading companies in four industries which are successful in one way or another. They all increased patent application filing after the 2000 patent law reform, which preceded China’s accession to the WTO in 2001. However, with the exception of those in IT, their annual filings never exceeded 20 items. We believe that increased openness in the national economy has played a more important role in driving up domestic patenting activity than the 2000 law reform strengthening patent protection. Notably, together with their more intensive patent application activities, most of the selected companies suffered decreased profit margins in varying degrees despite their expanded sales revenues:

some even made a loss. Our survey showed that, typically, Chinese companies are users of IP and seek patent protection for defensive purposes; and that even the successful companies selected have not yet grown strong enough to bear the cost and risk inherent in R&D, and this is even more relevant for SMEs.

Although expanded sales can result in R&D investment in order to defend earned market share, diminished profit margins may cripple intensified R&D efforts in the end. Intensified R&D entails intensified risk and higher costs. With an already limited net income and limited experience in managing R&D activity, questions are raised as to whether domestic companies could successfully make and commercialize innovations before being thrown out of the market or simply absorbed by foreign companies. Challenges remain for Chinese companies, most of which are still struggling to free themselves from low value added business.