Asia IP

China’s Ministry of Industry and Information Technology (MIIT) and the Shanghai Municipal People’s Government have jointly issued the Opinions on Further Opening Up Value- Added Telecommunication Services to Foreign Investors in China (Shanghai) Pilot Free Trade Zone.

The opinion stipulated an increase of foreign investment share in the business of information services, storage transfer services, online data process and transaction process. Foreign shareholdings in the first two kinds of services can exceed the current limit of 50% while the limit is expanded to 55% for the latter.

The opinion states that there will be no share limit for businesses of the newlyopened call centre services, domestic multiparty telecommunications services and internet access services for foreign companies. Only holdings in domestic internet virtual private network services are subject to a 50% cap.

The State Council of China also issued a decision on adjusting relevant administrative regulations and administrative approval on foreign investment access regarding the free trade zone. The decision stipulated that on the premise of ensuring the security of network information, foreign investment is allowed to operate in particular valueadded telecommunication service areas.

Gradually opening up the valueadded telecommunication service was a commitment made when China joined the World Trade Organization, says Zhang Jinghua, senior attorney at C&I Partners in Shanghai. He says that MIIT insisted on tight control for foreign investment, especially with regards to foreign participation; only joint ventures with less than 49% of foreign ownership were allowed. “The opinion sparks broader liberalization that has been stalled for a decade,” Zhang says.

“The administrative and judiciary function of IP protection is basically ready in the area. If intellectual property is infringed, there are measures available for protection,” says Shen Li, a partner at DLF Lawyer in Shanghai.

The free trade zone does not have extraterritoriality, so foreign companies having telecommunication businesses won’t have any apparent judiciary advantage, says Gong Li’er, a partner at DeBund Law Offices in Shanghai.

Such a policy would definitely attract overseas high-tech telecommunication companies to the free trade zone, says Shen. “By concentrating telecommunication services in the free trade zone, there will be much progress and improvement in the industry under such environment.”

Once foreign investors are permitted to be major shareholders of such telecom services companies, more technology innovations are expected as foreign investors should be more incentivized economically and strategically to bring in technology and know-how in the telecom sector to the free trade zone (FTZ) and invest money to development more IP, says Wendy Pan, a partner at O'Melveny & Myers in Shanghai. 

Chen Shenjun, deputy manager of the legal department at Shanghai Patent & Trademark Law Office, says that foreign telecommunication investors can enter local telecommunication markets with a controlling share or even a whollyforeign owned enterprise with the policy change. With an anticipated increase in IP rights applications, the number of rights being licensed-in and licensedout might also increase, he says.

“The IP rights will not only include telecommunication technology patents, but also copyright registration, such as the content parts in the app store industry,” Chen says.

Loosening the limit of foreign holding creates more opportunities for local enterprises to cooperate with foreign companies. It could also help enhance the technological innovation level of domestic companies as well, Shen says.

Chen says that not only will the change encourage local IP innovation and development, it is also an impetus for foreign-invested R&D centres to develop more IP for local Chinese markets.

Bringing in more foreign investment is not the opinion’s only benefit. R&D cooperation with foreign operators can help domestic companies innovate, raise telecommunication production standards, and cut down on the cost of IP licensing, says Zhang.

Under the current legal framework for the FTZ other than the opinion, research and development is not among the areas that are particularly highlighted for liberalization or government support, according to Pan. She says the FTZ is primarily aimed to open up service sectors, such as financial, shipping, cultural, social and professional business services, while industrial or manufacturing sectors are relatively less emphasized.  

“While current policies of the FTZ do not seem to be most directly enhancing foreign-invested R&D activities, R&D centers can definitely enjoy the benefits from the overall environment, such as more efficient government approval process, relaxed foreign exchange control, beneficial tax treatment in equipment/facilities import, as well as more convenient access to global research funding,” says Pan.  

Constant innovation and creation is the key to value-added telecommunication services. To support the development of such services, “fair and reasonable protection of copyright is of utmost importance.”

“Compared to the western countries, the awareness of IP among Chinese local enterprises is relatively low. Having foreign owned companies in the free trade zone would raise the awareness of IP application, protection and strategy management,” Gong tells Asia IP.

In the short run, local telecommunication companies might be at a disadvantaged position as they lack experience in real market competition, Gong says. However, in the long-run, the situation will change along with the increase of IP awareness.

“Under the technical background of the cloud and big data, innovation and cooperation will be the tide,” Zhang says.

Talent is the most important asset for R&D organizations, especially as local talent is more familiar with the local market, Shen says. When employees leave the organization, their knowledge can be a threat to the former employers; therefore, “foreign organizations should protect their IP rights at the beginning, to avoid disputes or possible infringement when employees leave.”

In practice, American and Japanese companies are doing very well protecting their IP, Shen says, while companies from other countries did not manage their IP assets properly at the beginning. “It is not an issue of whether China has proper legislation for IP protection, but rather an issue of whether foreign companies can properly use the available legislation,” Shen says.

The opinion limits the foreign holding of online data process and transaction process services in e-commerce to 55%, which Gong says might be loosened in the future. “Such policies might be extended to the whole country in the coming several years. It is just a beginning of the competition between local and foreign telecommunication companies regarding IP,” Gong says.

The ultimate purpose of the policy reforms is to help the domestic market to be active, creative and innovative and eventually to own its own core patents, says Zhang. In order to clear the challenges of high licensing fees or patent weapons brought from foreign companies, having a fair market and efficient legal protection mechanism will be the first step.