The draft regulation includes several interesting proposals that are bound to have substantial consequences. The negative impact on innovators could be severe. This proposal fuels the conflicts of interests between China, on the one hand, and the European Union and the USA, on the other. This development is worrying and could easily spill-over to trade- and investment policy.

A Chinese Approach to Standardization

Notably, the draft stipulates that any relevant intellectual property involved in the process of Chinese national standardization should be disclosed by participants as well as non-participants to the standardization body in charge. Patents that are not disclosed in accordance with the requirements are considered license free. Moreover, patent holders may be held liable for concealing patent information, if this has a negative effect on the development or implementation of a national standard.

The draft explicitly states (NB! This is an unofficial translation to English):

Article 8: “That patentees and their affiliates participating in the drafting of the standards fail to disclose in accordance with the above requirements shall be regarded as licensing for free and where they conceal the patent information, which bring losses to the setting and implementation of the national standards, they shall bear corresponding legal liabilities.”

Article 9: “When the setting and revision of national standards involve patents, [Professional Standardization Technical Commission or Body in Charge] shall obtain promptly the irrevocable licensing statements in writing issued by the patentees on implementing the patents.”

Also, national standards can only incorporate proprietary IP which is made available at royalty fees that are considerably lower than (F)RAND. Standards that are found to contain patents without licensing statements are to be revised unless licensing statements are promptly obtained by the (Chinese) National Administrative Department of Standardization.

For mandatory national standards, the draft regulation proposes that no patents should be incorporated in principle. When it is absolutely necessary to involve patents, the IPR holder is to grant licensing for free or the standard should be revised.

Diminishing the Value of Intellectual Property

The draft regulation will effectively force IPR holders to accept licensing terms deemed fair by the National Administrative Department of Standardization. This may result in patentees receiving licensing fees significantly lower than market level (i.e. “nominal fees”).

Consequently this implies that the Chinese are attempting to reduce the rewards to foreign IPR holders. The draft Chinese regulation not only demands disclosure of patents but forces the owners to accept low royalty rates. This will have a negative impact on innovators in OECD countries as well as in China.

After the public consultation has now ended one can hope that the Chinese authorities revise the regulation to be more coherent with basic IPR principles in the rest of the world. This would not only benefit innovators but would also reduce the risk of international policy conflicts considerably.

See also “How much politics in web standardization?”  http://www.talkstandards.com/?p=1288

Chinese development has been exceptional over the last two decades, largely due to governmental export promoting policies driving the country down a fast track of modern development. A Gartner report states the rapid growth of Chinese ICT has resulted in the world’s most extensive telecom networks. China can also boast with the second largest number of Internet users, despite penetration below 25 percent (http://www.gartner.com/DisplayDocument?doc_cd=138280). Clearly, China will be an increasingly important market for ICT technologies.

ICT is a strategic sector for China. Policy is designed to meet various goals. Several technical committees are driving the standardization process. The common objective is to develop standards based on domestic innovations and intellectual property.

The Chinese government has formulated two key needs for the ICT sector. The first is to reduce the cost of foreign technology, particularly by reducing the burdened of royalty payments to foreign IPR holders by Chinese businesses, for example in the DVD industry. Second, some areas within the ICT industry suffer from dependency on foreign standards not adapted to Chinese interests. The idea is to increase the development and use of domestic standards (see newsletter on www.china-eu-standards.org).

So what effects can be expected from this level of political involvement? First and foremost the classification of ICT as a strategic sector is implies continued governmental and political interest. This could politicize standardization to the point where it risks creating conflicts of interest on the global political stage.

This would be in stark contrast to the globally accepted process today. There is an obvious risk of market distortion and technological fragmentation in the global ICT industry, if foreign innovators and firms meet barriers to entry in Chinese markets. Foreign ICT companies may find it too costly to adapt their products to Chinese standards, which would impede international trade and global specialization. Extensive political involvement and strategic use of standardization in China could also have political implications. “Strategic policies” relating to trade and investment can easily spread to other countries, including Europe and the USA, with very undesirable consequences.

International collaboration and competition is imperative for the future development of the global ICT sector. Thus, integrating China in the market based standardization process predominant in OECD countries should be a political priority for the governments in USA and EU.