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IPR: Technology Transfer to China (Part One) - Why Worry?
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any European companies are keen to enter the Chinese market and develop long‐term partnerships in China.  In order to achieve this, they are often willing to transfer their latest technology to Chinese subsidiaries of European firms and joint‐venture partners. Such technology transfers may unwittingly result in a loss of competitiveness and market share in the mid to long term. European companies should pay particular attention to the following common situations.

Compulsory joint ventures in exchange for market access

For access to the Chinese market in some designated sectors, such as car manufacturing or the manufacture of railway locomotives and rolling stock, foreign companies must enter into joint ventures with Chinese companies. Approval to form a joint venture or to operate may depend on the supply of specific technology, including future improvements of this technology. In some cases, the partner cannot be freely chosen and may be a competitor or concurrent joint venture partner of another competitor.

In other cases, the enlargement of a pre‐existing investment may require the set‐up of a local R&D Centre or other forms of transferring know‐how.

Public contracts/procurement 

In order to take part in public tenders, foreign companies must ensure that part of their production is local  (in some cases this can be up to 80%). Production by foreign subsidiaries in China is often not considered to be local. Instead, foreign firms have to work with a Chinese general contractor, to which their technology has to be transferred in full.

In addition to specific rules about bidding requirements of technology transfer, China's market size is often used as a justification in the bidding process to give the contract to whichever company promises the greatest transfer of know‐how.

The Chinese Government specifically selects certain industrial sectors in which technology transfer strategies, localisation and reduction of reliance on imports are to be implemented.

Design institutes 

For many projects, in particular the manufacture of machinery and equipment, wide‐ranging reviews of industrial drawings and designs by Chinese design institutes are mandatory. These drawings and know‐how may later be used by other Chinese projects which wish to duplicate and use the design in other locations of China. In addition to transferring detailed technical documentation, foreign companies often have to train Chinese staff so that, in future, they can design the machinery/equipment independently.

Certification and licenses for market access 

Many products have to be certified by a Chinese certification institution or are subject to a license by a Chinese ministry before they are allowed on the Chinese market. Some certification procedures require inspections of production plants in right holders' home countries. In some cases, the Chinese inspectors may come from competitor companies and they may ask technical questions which are not strictly necessary for certification.

The challenge for European industry 

For European industry, this situation presents a threat to its competitiveness as Europe's competitive advantage lies in its innovations, creativeness, brands and know‐how. However, European firms are not used to operating in environments where IPR is not protected.

Key policies in China stress the need for technology transfer and innovation within China. Chinese companies urgently need to develop know‐how and obtain access to new high‐value markets to reach this objective. As a result former Chinese partners of European firms are already or will be soon operating as competitors within China and in other countries.

What can companies do to protect themselves?

Step 1: Analyse your strengths.  What is it that makes your company competitive? What measures and IPRs are used or can be used to defend your competitiveness (e.g. trade secrets, patents, new applications for technology requiring know‐how)? What can be transferred to third parties without losing competitiveness or market share in the mid to long term?

Step 2: Analyse your competitors and the Chinese market in which you wish to operate . Do you know who your competitors in China are? What is their strength? What is their strategy?

This analysis should also include your potential and existing partners in China: Are you aware of their specific objectives? Are they in a special situation which influences your cooperation? State Owned Enterprises may be obliged to abide by local and State industry policy which requires them to gain more know‐how transfer and R&D investment rather than maximising short term profits.

Step 3: Design your own procedures when dealing with China . They need to be practical, but also indicate where you will draw the line. Define your limits and vigorously defend your position. 
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