CHICAGO, Sept. 25 (UPI) -- China's potentially huge domestic technology market might more competitive and not as lucrative as western companies once imagined.
For several years, major international computer and consumer electronics concerns, such as Philips Electronics -- now of Hong Kong but formerly of The Netherlands -- and U.S. giants IBM and Microsoft, have increasingly targeted China's burgeoning middle class, in particular in Shanghai and Beijing, with wireless phones and other high-tech products.
Now, however, Chinese companies and the government's science ministry are working to set their own, exclusive standards for DVDs, high-definition television and wireless telephones, so many western technology firms are worried they might even be excluded from that market.
"The fact is that China will become the largest market in the world at some point," Ray Wood, senior patent counsel with Warner, Norcross & Judd, a law firm in Grand Rapids, Mich., told United Press International. "They are doing this probably to protect their technology companies."
Just 20 years ago, China did not even have intellectual property protection in the form of patents, trademarks and copyrights, said Wood, formerly an in-house patent lawyer for Motorola Corp., another global technology player. The market was something of a free-for-all. Then, working with western companies, the Chinese developed a system of protections for inventions that would reduce the risk of doing business in China, and tamp down on pirating activities.
"There are some encouraging signs," David McCombs, an intellectual property partner with Haynes & Boone LLP, a Dallas law firm, told UPI. "They're doing things to strengthen their intellectual property rights, and making a better showing of enforcement for piracy."
Since 1985, about 1.5 million patent applications been filed in China, 20 percent of them by foreign companies, said McCombs, whose firm deals with Chinese technology issues.
Local investment laws have regulated the profit potential of western companies as soon as they begin operations in the market, requiring that they partner with Chinese firms, Kevin O'Connell, a senior partner in the Washington D.C. law firm of O'Connell & Co., told UPI.
"Unless you have the right relationship, things don't move," Susan Lee, president and CEO of PointRed Technologies Inc., a San Jose, Calif., tech firm with interests in China, told UPI.
Now China's own technology players apparently think they can compete with the best of the West.
"The Chinese technology industry is maturing," said O'Connell. "Legend Computers is the IBM of China. They make good products. Chinese companies have gone past making Mickey Mouse dolls and Christmas ornaments."
By setting their own unique standards for technologies, the Chinese accomplish several strategic objectives, Wood commented.
Simply put, a standard is an agreement among companies and regulators on how to accomplish a technical task using several patented technologies. Right now, Chinese companies pay up to $5 per DVD machine they make in patent licensing fees to American companies, and they pay similar fees for other technologies.
"They do not want to pay exorbitant ... licensing fees, like they're doing now," said Wood. "One way to recoup that is if they have their own standards in that area, they could exact a fee for licensing there."
The standards would differ just a bit from American or European technical standards, but would change the technology playing field.
"They're doing this for a lot of manufactured products," said O'Connell. "The standards might vary ever so slightly from what is done in Southern California or Taiwan. But there is a saying ... that there is a Chinese way of doing things. So this is leading to changes in how manufacturing processes are conducted and how the finishing of a product is done."
From a certain perspective, Wood said, such moves could be viewed as protectionist. But, he added, the Chinese see this differently. "Being the largest country, they have the right to have input into their own standards," he said. "To say China is bad and protectionist is going too far. The United States has its own technical standards. So does Europe."
Indeed, O'Connell said persuasive lobbying from the World Trade Organization could have led to some of the new standard setting. "There's a lot of pressure from the WTO on China to get out of this 'We're a poor Third World country' mindset," he said. "So if they're going to be a member of the world trade club, there are benefits and burdens. Being world class is a benefit and a burden for their companies."
The new standards, though, are causing temporary headaches for many American and European companies trying to do business in China.
"Most of our law practice focuses on U.S. and U.K. companies doing foreign direct investment in China," O'Connell explained. "And we're scrambling with some of our manufacturing clients to make sure they are in compliance with whatever wave of regulation is coming along."
One big concern is to whom, exactly, certain technical standards apply.
"A lot of the manufacturing companies -- particularly middle market companies -- are working through joint ventures or foreign-owned enterprises," O'Connell said. "They import parts from Baltimore and Burlingame. The question is, 'Do the parts have to be in compliance?' There are discussions going on with the government on this. And the answers are sometimes frustrating, such as 'Maybe,' or 'Yes,' or 'Next year.'"
There have been other confusing developments. For example, the Chinese have delayed implementation of some new technical standards -- approved last year -- due to the SARS epidemic scare earlier this year, Steve Margis, manager of knowledge solutions at Underwriters Laboratories Inc., in Northbrook, Ill., told UPI.
"The Chinese now have a system of testing for product safety, as well as of testing for electromagnetic compatibility," Margis said. "This is in addition to testing for individual product standards, and is called the compulsory product certification system."
The system requires products to be certified for safety exclusively through a nationally recognized body.
"Chinese organizations affix a mark to the products, assuring that the product meets safety requirements," Margis said. "It is somewhat similar to the UL mark. The difference is that the UL mark is owned by UL, and in China there are a number of different certifiers."
Margis noted there are only two primary certifiers in electrical and electronics products for all of China, but these organizations perform their investigations according to international product safety standards. Certification for safety for some products just started on Aug. 1 of this year, he said.
"If you have a regulated product, on the regulated product list, you are obligated to show compliance to the standards," said Margis, whose organization is working with foreign firms and trying to pass through the standards thicket in China. "Because it is so new, there is a lot of backlog, and there are so few certifiers, so this is perceived as a trade barrier. But, their customs officials are confused as to what documents are needed."
In the end, having their own technical standards might make Chinese companies, such as Skyworth Digital Holdings Ltd., and China Telecom, more competitive globally. They might even be able to sell into the U.S. and European markets in a big way in the future, said McCombs, just as Chinese basketball phenomenon Yao Ming has made himself a major brand name in the National Basketball Association.
"The good thing is that they do want to protect their intellectual property," Wood said. "Any moves should be viewed positively. They want to play the capitalistic intellectual property game, but this may be disconcerting for some who are not going to get revenues there they expected."