Paul Adams: Innovative firms must target China

Special report: Shift in focus by Chinese companies represents huge opportunities for creative NZ businesses.

Although most New Zealand businesses recognise China is critical to our economic future, many see China simply as "the factory of the world" or focus on its enormous, emerging middle class market. Few appreciate that China is also rapidly becoming a world leader in innovation, research and development and intellectual property (IP).This shift presents huge opportunities for innovative New Zealand businesses.

China now employs more research and development staff than all countries in Europe combined. In 1985, China granted its first patent, barely 20 years later it reached a million patents; the same milestone took the United States 121 years.

Despite China being better known for IP piracy than IP propriety, it is actually following a similar path to the United States. In the late 19th century, the US was the world's largest IP pirate and its merchants brazenly shipped tens of thousands of British books home, where US publishers copied them with impunity. Patents were similarly violated. The US only began to recognise other's rights once it developed its own valuable base of IP rights in inventions, copyright and brands. The same process is happening in China, only much faster.

Although IP piracy remains wide-spread in China this situation won't last long. China's huge and burgeoning R&D capacity is producing more and more of the world's IP. This is evidenced by Chinese giant Huawei. Founded in 1988 as a contract manufacturer, it is now the world's largest patent holder. Its IP growth is fuelled by 76,000 R&D personnel out of a total staff of 150,000 - the proportion of R&D to operational head count alone says much about China's focus.

China is rapidly becoming IP savvy. It has already migrated from: "Sourced in China" (as a sub-component supplier) to "Made in China" (as a generic manufacturer). It is now rapidly moving to "Developed in China" (R&D conducted in China) with its eye on the prize: "Designed in China". This presents literally enormous opportunities for New Zealand companies.

However, few understand that in many cases the key to unlocking these opportunities lies in knowing how to leverage IP with Chinese partners, something companies such as Apple have made a core focus. "IP" in this context does not just mean patents, but all forms of intellectual property including copyright (for content, code, designs), trademarks (for branded products and services) and (frequently overlooked but extremely important) confidential information (for process, systems and knowledge) as well as lesser rights such as plant variety rights and design rights.

Chinese manufacturers and domestic distributors are hungry for IP, be it in innovative technology, advanced processes, cutting edge products or attractive brands.

Western companies that have engaged with China by supplying their advantage (high value IP) while leveraging China's inherent advantages (low cost manufacturing, emerging technical capability, massive market) have been extremely successful. Examples include Apple, KFC and Buick (General Motors). Not all succeed, however, as Google can attest.

This is great news for New Zealand companies who often develop highly innovative technology but struggle to gain traction in markets such as the US where well-resourced competitors enjoy a home field advantage. In China the huge size, early evolution and rapid growth of its markets creates strong opportunities for the deployment of Kiwi created technology. Several of our New Zealand clients are deploying innovative IP via Chinese partners into Chinese and global distribution channels. Often these deals result in production costs that are up to two thirds lower, and distribution reach that is 50-100 times larger than would be the case in New Zealand. Others are selling or licensing IP directly into China for multiples far exceeding what can be achieved here.

A second less appreciated function of China's rise as an IP super power are Chinese companies looking for distribution partners for Chinese developed technology - in other words China is rapidly become an IP exporter.

Often these companies are highly technically advanced and also capital rich. This presents substantial opportunities for New Zealand companies to co-operate locally in Australasian markets or co-develop and partner to enter foreign markets (such as the US or Europe). Lanzatech is an excellent example.

Yes there are dangers, but the same can be said of any market: the US is known for hard ball business tactics and is extremely litigious. Australia has spat out more than its fair share of Kiwi entrants (consider the risk / return - the Chinese market by GDP is 1230 times bigger than Australia).

New Zealand innovators wanting to do business in China are best advised to engage in a way whereby Chinese businesses need what you have and they need you for "more than a night". A key part of this is having a full bundle of IP assets (not just a single right) that is constantly being enhanced so that your partner continues to see and compensate you for value, creating a long term relationship. It is also essential to spend time gaining a strong grasp of the rules, regulations, cultural nuances and formalities associated with leveraging technology and IP into or out of China.

Paul Adams is CEO of EverEdge IP.