On a recent quarterly earnings call, RPX CEO Marty Roberts told analysts that the firm is looking to expand its presence in China in 2018. The exact dimensions of the aggregator’s planned investment aren’t known as of yet, but when you speak with senior IP executives inside Chinese companies one thing becomes clear very quickly: saying you want to be in China and actually being there are two very different things. If RPX really does want to take advantage of the opportunities the country presents it will need to be very serious about building a long-term project that may not immediately bear fruit.
We don’t yet know whether RPX plans to expand the coverage of its existing defensive aggregation model to China (perhaps by targeting more Chinese patents for acquisition), or whether it might seek to provide some different services designed specifically for Chinese clients. As a service provider with a defensive mission and a large portfolio, it could potentially provide a tailored service that helps Chinese entities gain freedom to operate in overseas markets and defends them against NPEs. However, the decrease of the NPE threat in the US, together with the emergence of the IPR system, have already brought down the costs of defence there – this is something that impacts Chinese companies as much as it does anyone else.
RPX was formed to help technology companies reduce US patent litigation costs and assertions initiated by NPEs, and its patents are heavily focused on the mobile, Internet search, telecommunications, consumer electronics and RFID sectors. Chinese mobile and telecommunications companies could benefit from this type of coverage, and they may be interested in a defensive aggregation model if they see severe enough threats from NPEs to their overseas expansion. But while China’s tech industry is large, the pool of companies that are focused on overseas business and have the patent nous to appreciate the value of a complex defensive offering is comparatively small.
Furthermore, while some foreign NPEs have recently filed cases in Chinese courts, none of them has yet sued a Chinese company. IP executives at local companies seem to agree that NPEs are not a threat to them in China at the moment. Some even indicate that the authorities would react to protect domestic companies if NPEs utilise Chinese courts to hurt local firms.
NPE activities in the US have been slowing down, which is the primary reason why RPX is looking to diversify its businesses, as well as to expand into foreign jurisdictions. While it appears that some NPE suits are moving to Europe and China, this does not necessarily create a market for defensive aggregation in the latter. Simply put, litigation costs are not that high in China - the lack of a discovery procedure further saves both time and cost. Pricing for any sort of defensive service, including simple consulting, would need to reflect that.
Moreover, it is hard to get Chinese companies to spend money on IP services when most are not used to doing so beyond basic external legal fees. Very few Chinese companies have been negatively affected by NPE activity in the US so far, so they may be reluctant and even unwilling to spend money on the NPE threat unless it becomes more immediate.
As Roberts correctly noted, the Chinese government has a vision to transform the nation from a manufacturing to an innovation-based economy, and it continues to take steps to improve the IP creation, utilisation and protection environment. With a booming litigation market and a remarkable increase in patent filings, China clearly has potential. Operating companies, service providers and even NPEs all say they need to be in the country and see it as an expanding market that they can’t afford to ignore. On occasions, an impression is even given that some see China as the Promised Land.
No doubt there are opportunities to be had, but to make the most of them businesses need to see beyond the litigation boom and filing numbers, and to really understand the dynamics and difficulties of a local market that’s unlike any other. This does not apply just to a defensive aggregation model like RPX’s; there are hurdles that any type of foreign patent business will need to clear in order to succeed in China:
Chinese patent quality needs to improve substantially. Without that it will be difficult to build meaningful business models around defensive aggregation, patent transactions, licensing and litigation.
Succeeding in China means having an on-the-ground presence. Whether your clients are foreign or local, you need to provide high quality local patent expertise, and patent-savvy technology experts. But the pool of such individuals is actually fairly small, and luring the top minds away from the major Chinese companies where most of them currently work will be difficult and expensive. If not handled properly it could well create major problems with entities that you will want as your clients and which have significant influence.
China is a transforming market, so it requires long term vision and consistent investment. Investors these days like to hear about China opportunities, but it’s also necessary for them to understand what that means in terms of allocating time and money, as well as the fact that China is inherently a risky place in which to operate. You cannot do China on the cheap.
Doing any kind of business in China, you had better expect constant price negotiations, and ultimately had better be prepared to be flexible on what you ask for. Many Chinese companies operate on super-thin margins, so do not have spare cash floating around – just ask licensors.
If you enjoy success in China, you can be certain that a local competitor will emerge. Can your business model in China be efficiently carried out by a firm with deep local roots or an established and well-resourced Chinese entity? If the answer is yes, prepare for it to happen.
Of course, none of this is to say that you cannot make a success of developing a China-facing business. RPX has been around for a while and none of the above should come as a surprise to any of its senior management. For the firm’s investors, though, it might. As Roberts and his colleagues develop their China strategy, shareholders – not always the most patient of people – will need to accept that quick wins are unlikely. Like all foreign companies entering the Chinese IP market, the only way that RPX will sustain success is if it spends a fair amount of money and commits to the long-term.