Innovation insights and doing business in China

China represents a major opportunity for New Zealand businesses, and Facteon Group’s Managing Director, John Cochrane, has first-hand experience of connecting New Zealand firms to drive trade outcomes there.

As part of Callaghan Innovation’s Beyond IP program, on 7 March AJ Park and Callaghan co-hosted a webinar Q&A, during which AJ Park Special Counsel Tim Jackson spoke with John about market entry into China through an IP lens, touching on IP strategy and business models, as well as general observations on how firms can position themselves to succeed there.

What resulted was a fascinating discussion, full of insights and advice which any aspiring New Zealand firm trading in China would do well to heed. A summary of the session and key takeaways, along with a recording of the webinar, follows.

China in the intellectual property sphere

With a GDP of USD18.6 trillion, the Chinese economy is the second largest globally. Since the free trade agreement between New Zealand and China entered into force in 2008, NZ goods exports to China have quadrupled, and China is now our largest trading partner, with two-way trade valued at around NZD40 billion annually.

From an IP perspective, China is one of the top IP filing countries in the world. During 2023, the Chinese National Intellectual Property Agency or their patent office granted:

• 921,000 invention patents;

• over 2 million utility model patents;

• 638,000 design patents; and

• 4 million registered trademarks.

Internationally, Chinese applicants filed:

• almost 74,000 international patent applications via the PCT;

• 1,166 design applications through the Hague Agreement for the International Registration of Industrial Designs; and

• over 6,000 international trademark applications through the Madrid system.

IP in China post-COVID

Pre-COVID, foreign was everything; the more foreign, the better. Being able to flaunt foreign items equated to success and affluence, and in some cases, the more off the beaten track, the better. Nowadays, consumers are more discerning; they're better researched and less inclined to buy foreign just because it's foreign.

China used to be known as a great imitator and copier, capable of mass production at low cost and maybe questionable quality. But now it has genuine innovation, very much referenced by the very vibrant activity going on in the IP space.

Chinese customers are more discerning, and many local brands have moved from imitation to innovation, meaning the copy market is not nearly as prominent as it once was, largely because there are now very reliable and credible local alternatives. Quality standards have also risen sharply and are driven by intense competition, which means substandard providers simply won't survive.

Similarly, whereas once many people would consider China as the "wild west" of IP, with IP rights disregarded in an overloaded bureaucracy, the statistics quoted above show that this is no longer the case, and the system that grants IP rights is a well-oiled machine turning out millions of IP right documents and rulings every year.

Chinese attitudes to IP rights have changed and there is now more competition between local companies. There has been a shift from being the third party subcontracted manufacturer to the world, to China now producing its own brands, resulting in a much sharper focus on IP. For overseas companies coming into China, it’s advisable to make sure your IP is properly protected so that Chinese competitors, or international competitors, can't sneak into the market around you.

Preconceptions around doing business in China – fact or fiction?

Relationships, while important, are overemphasised. Personal trust is vitally important, but it's not the sole criteria for success, and shouldn’t outweigh good business common sense.

Related to IP in general, the notion that anything on paper doesn't matter is a dangerous one. While the interpretation or implementation of contracts, rights on paper documents, etc., may be more fluid than in other markets, it doesn't mean they're worthless. It’s essential people understand the importance of properly registering their IP rights and of obtaining suitable contracts covering business relationships that comply with local laws and related requirements.

In China there are different "tiers" of cities. When coming in from the outside or looking for a venture partner and considering locations where there might be a more natural fit or affinity to the New Zealand values or lifestyle, going to the tier two or three or even lower cities can be valuable. Similarly, if looking to market products to consumers in those cities, you may have to adjust to their way of thinking.

From a trade secret perspective, not having NDAs, confidentiality agreements and the like in place in Chinese language will make it very hard to enforce any kind of trade secret breach, primarily on the basis that, in the absence of such a Chinese language agreement, a person can't reasonably be expected to have known that it was a trade secret. Similarly, not having Chinese language contracts covering other business relationships can have implications for enforcement in China. At the very minimum, agreements, contracts etc. should be bilingual, to ensure nothing can be misunderstood or misconstrued.

Finally, the influence of the state on business dealings and doing business in China while a real fact, is somewhat overplayed by commercial media. In the Chinese culture, involvement from government is seen as an element of security, that they're being taken care of, rather than an intrusion. There is an element of government influence into policies and practices but not so much so that it feels that it contradicts good business sense or that it somehow stops or slows down normal business momentum. Nonetheless, it’s important to build relationships with the right people and understand who you need to talk to.

Strategies for market entry into China

It’s important to do the preliminary work in advance, particularly if selling a branded product or a product with unique IP embedded in it in some way. This enables you to establish whether you have an open path to market or if any changes will be required, before investing huge amounts of time.

China from a market entry perspective is certainly unique, but generally speaking is no more difficult than the United States or Europe. However, even if a person or company has enjoyed credible success in other western markets before attempting China, this would not in itself make that person/company prepared for China without additional China-specific guidance and advice. Just as in any other market, follow good business practice, engage with reasonable advisory partners, and seek your own qualified advice.

When it comes to a choice of putting local staff or expats on the ground there are pros and cons of each approach, but at times there is an over-reliance on what the person from head office needs to oversee. While in the very early days that might have been required, often businesses that fail do so because foreigners or staff from head office overseas don't adapt; they don't understand the culture, and haven't grown up and there absorbed all the innate intelligence that comes from being from that country.

That’s not to advocate a full abdication of responsibility or authority to a local team; for example, you might want to employ a local New Zealand representative who is responsible for that market. But while previously businesses would have had a team of expats there, that is no longer the case, accelerated perhaps in part by COVID.

Many of us will be influenced by peer reviews, be it reviews on sites like Amazon or social media, but China has taken that a step further with real live demonstrations and selling of items. The proliferation of TikTok and other social media platforms where you have influencers whose opinions on whether to buy an item many people learn to trust, is an important factor to take into consideration.

There are multiple successful points of entry into China, not just cities like Shanghai, Shenzhen, and Guangzhou. Put simply, it depends on what product you’re selling and which demographic (which could mean age group, income bracket etc.) you're looking to serve. It could also depend on whether it's a perishable good that requires certain levels of supporting infrastructure for example.

When considering entering through Hong Kong SAR, undoubtedly there is a "Southern Chinese commonality" between Southern China and Guangdong province and what's happening in the SAR, and there are definite cultural nuances and cultural and consumer differences in Southern China versus other parts of the country. Consequently, Hong Kong can make an ideal test market, and there are many corporations even in the retail space that work in both areas. However, relying solely on a Hong Kong partner to get you into the mainland, while once a very valid practice because of the ability to be an intermediary of sorts, no longer has the same value, albeit not valueless.

Risks and mitigation on entering China

Up until a few years ago, the biggest risk in China around IP would have been IP abuse or misappropriation, whether through mimicry or some other practice. Today, the biggest risk is being beaten in an IP race, not just because of local Chinese activity, but because the entire outside world has woken up and realised that IP is being taken seriously there.

In previous years there was a tendency for "trade mark trolling"; people could come through a supermarket in New Zealand and video with their smartphone all the brands on a supermarket shelf, and then go back to China and start filing trade mark registrations on these brands because of the 'first to file" rule.

There would then be an arbitration or negotiation (not always successful) to release the trade mark. While less of an issue than it once was, the risk isn’t to be ignored, especially when launching a new brand. Best practice is to take the steps, as soon as practicable, to ensure that any trade marks are properly registered.

Another way to mitigate risk is to ensure company registrations, IP registrations etc. tie a business back to New Zealand ownership.

Transliteration of English brands into Chinese characters is still important. When launching a brand or product it is worth investing in a phonetic, transliteration, a character transliteration for the Chinese market. Leaving this up to the market can have unfortunate, if amusing, consequences.

If looking to employ local staff, Chinese labour law is complicated, but not intrusive. For example, there is a very straightforward process if you wish to dismiss an employee. In terms of hiring employees, in China the cost of onboarding a new team member is quite high, particularly compared to in New Zealand. There are many additional benefits, social costs, social taxes, that get layered into the employment agreement and that add a significant amount onto the base salary.

To help overseas companies, China has adopted a model whereby you can employ through third party agencies, enabling you to employ in China without having a registered company there. While there would be other considerations down the track regarding taxation etc., for those companies that are looking for an entry path, which might take several months, it’s possible to get a slight head start by bringing employees on board before a formal entity is established.

When manufacturing (OEM) a product, depending on the complexity of the product, it's wise to spread out the manufacturing, so that no one company is doing it all for you. This in turn spreads the IP risk around. If it must be a one source OEM, make sure your agreements are ironclad and make regular visits to the manufacturer, if possible.

When manufacturing but not selling in China, IP pitfalls will vary depending on the nature of the product. But it’s essential to get good legal advice, have the necessary contracts in place, and to do your due diligence on the company that you're using to manufacture. Failing to do so could result in you engaging someone who's somewhat unscrupulous, or even if not unscrupulous, someone who might register your rights for you because you haven't done it.

Key takeaways to succeeding and protecting your products and innovations in China

• Do a lot of research and do it quickly; the research and the insights gained can have an expiry date due to the speed at which the landscape changes. Invest in real-time, quick research, combined with exploring firsthand.

• Engage local employees but send key local team members on regular trips to the China operations; invest in the "hotel nights". Firsthand experiences are vitally important.

• Expect disruptions. There's a stop start cadence at times to doing business in China which may seem frustrating, but it’s important to learn to "go with the flow". Move at "China speed", but move intelligently.

• Don’t try and do it alone. Partner with other government agencies, like Callaghan Innovation, NZTE and others, and with good firms, legal firms, accounting firms, and so on.

 Watch the webinar here: 

 John Cochrane

John Cochrane is the Managing Director of Facteon Group, a wholly owned Haier subsidiary, designing and building factory automation solutions. John is also Chairman of the New Zealand China Trade Association and has spent twenty years observing China’s growth, and how its innovation has changed over the years.

Active in China since 2002, in both the private and public sectors, John was resident in Beijing for several months each year between 2005 and 2011, and then lived full-time in Guangzhou for a number of years. In 2011, John became the NZTE Trade Commissioner and Deputy Consul-General in Guangzhou, where he had the opportunity to work closely in an advisory capacity with over 100 New Zealand businesses. Upon his return to New Zealand in 2017, John joined ATEED (now Tataki Auckland Unlimited), the City Council’s economic development agency, where he continued to focus on China-related matters. In December 2018 John joined Facteon, where he remains today.

Tim Jackson

Tim Jackson has more than 25 years’ experience working in New Zealand and Australia as a patent attorney and IP lawyer; primarily in the patent area. He also spent time in Shanghai as a principal at an international IP consultancy, working predominantly with international companies and SMEs looking to enter the China market. Tim’s clients have spanned a variety of technology areas, from manufacturing to veterinary medicines, medical devices, and pharmaceuticals.