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China Technology Licensing. Sometimes It Makes Perfect Sense.

Posted in Legal News

The Globe and Mail did a story the other day, entitled, “Bombardier to share railway technology with Chinese.”  The story is on how Bombardier has granted a ten year license of its tram technology to “a subsidiary of China South Locomotive & Rolling Stock Corp. Ltd., the biggest player in the railway manufacturing sector.”  Under the deal, “Bombardier will supply documentation, training and other assistance in manufacturing and selling the streetcars to South China unit CSR Puzhen.”

The article raises IP concerns about such a deal:

This type of licensing-only agreement and other partnerships, however, raise concerns in some quarters that Bombardier is simply helping China develop its rail expertise so as to eventually become a major global rival in manufacturing trains and subway cars.

“I don’t think Bombardier is going to get much of a bump on this. Bombardier will regret it in 10 years when China starts mass producing their own versions,” said Malcolm Johnston, a transit advocate based in British Columbia.

Bombardier seeks to refute such worries by stating that “the key to these types of partnerships or joint ventures is to stay ahead of the innovation curve.”  The Facebook buzz, among people I greatly respect, is decidedly negative about Bombardier’s deal, and I note the following comments:

  • It’s the maglev technology transfer all over again.
  • Canadians
  • GE is the American version of Bombardier. They’ve been trading away entire industries.
  • If history is a good predictor of things to come, then I look forward to seeing their partner “innovate” upon the technology transferred and export “their” technology to markets around the world.

I eventually chimed in with the following and got the following responses:

Me: May turn out to be a brilliant move. Not kidding.

Response: How do you figure this will turn out any different from any other foreign company that has placed their technology in Chinese hands, Dan? The goals of the Chinese haven’t changed.  I don’t blame the Chinese for copying as much as I blame gullible foreigners for making it so easy.

Me:  You-all are making all sorts of conclusions. I will do a post on this, asserting that this sort of deal MAY be the wave of the future. Of course the goals of the Chinese haven’t changed and of course they do and will do whatever they can to steal technology. That isn’t the issue.

Response: I look forward to your post on this, Dan. From what I can tell “this sort of deal” looks like most of the others that have come before. It seems reasonable to expect a similar outcome.

Okay, here goes.

First off, let me say that I have represented hundreds of businesses in my legal career, ranging from one person operations all the way up to the largest company in the world (at the time) and, generally, I have found that nobody knows their business better than the people whose job it is to know the business. That alone makes me reluctant to criticize a company for a prospective move, especially when I no doubt lack many of the relevant facts.

The facts in the press are not enough to know whether Bombardier’s China technology licensing deal makes sense for Bombardier or not.  What if Bombardier is being paid $10 billion a year?  It’s a great deal, right?  What if Bombardier is licensing out an existing technology and it knows it is only a year or two away from a next generation technology that will put the existing one to shame?  What if this is an industry where the product is only one small aspect of a buyer’s decision, and Bombardier is rightly confident that no Chinese company will ever be able to compete on the more important aspects of installation of product, maintenance of product, and/or repair of product?  Or what if Bombardier knows that the product it is licensing is going to be surpassed by various competitors’ products within the next year or so and this deal is a profitable way to unload it? I do not know if any of these things are true, but isn’t it more likely that Bombardier knows what is best for Bombardier than my friends on Facebook? And anyway, what were Bombardier’s alternatives if it was going to make money in China?  I don’t know, do you?

This is not a comment about my friends on Facebook (who were participating in a relatively private discussion), but it has always bothered me how there are some China pundits out there who are always quick to criticize how certain companies are doing in China (usually noting how they are not moving fast enough), while ignoring all of the China factors that make doing what the pundit suggests so difficult.

I actually like what Bombardier is doing and it is something that we are seeing with increasing frequency among our SME clients. Licensing a technology to a Chinese company for a fee and then charging that Chinese company even more money to teach it about the technology oftentimes makes sense for SMEs without the capital or the desire to go into China on their own. I hate to equivocate like a lawyer, but the bottom line is that sometimes licensing makes sense and sometimes it doesn’t, and it is hard for us to judge from afar those companies that do it.

For more on licensing to China, check out the following:

  • China Intellectual Property (IP). I Hate Cats, in which we give the following advice to help assure payment from those to whom you license your IP:
    • Base your pricing on the assumption that you will not get full payment on your final payments.
    • Do whatever you can to make sure the Chinese company still needs you at the end of the deal so that the Chinese company has no choice but to keep paying you.
    • Put in some killer provisions in your contract that deal with a situation where the Chinese company stops paying at the end.

What do you think?

  • http://designateddrivers.co/ G. E. Anderson

     ”Isn’t it more likely that Bombardier knows what is best for Bombardier than my friends on Facebook?”

    Given that logic, should we assume that Danone knew what was best for it? Siemens? Alstom? Fuji Heavy? GE (on any number of deals)?

    Foreign companies go into China with the deck firmly stacked against them.  They compete in a market often dominated by state-owned firms, and by extension, the CCP whose single-minded purpose is its own continued rule.

    Perhaps you take comfort in structuring a good contract, and maybe that can often be helpful, but in the end, the judiciary works for the Party, as is stated plainly in China’s constitution.  

    This isn’t to say Bombardier can’t be successful in China, just that the system works so that Bombardier’s partner, not Bombardier, is the ultimate beneficiary from this deal.

    And you can’t blame Bombardier for trying.  First, their shareholders will have been demanding it, and their leaders didn’t want to keep explaining why they weren’t doing more in the world’s fastest growing market (if indeed it is actually growing, which is another topic).

    Secondly, Bombardier knew that if they didn’t cut a deal with the Chinese, someone else would have.  In fact, it is highly likely that the Chinese successfully played “barbarians” against each other as this deal was being negotiated.  That alone almost certainly rules out your speculation that Bombardier may have negotiated an insanely high price for what they’re giving up.

    China is in a unique position.  The rest of the world is suffering from self-inflicted economic wounds, yet China (thus far) appears to have emerged relatively unscathed.  They are in a position to dictate the terms of any deal because every company in the world wants desperately to be a part of their market.

    That won’t always be the case, but for now, it is safe to assume that no one is going into China getting exactly what they want, nor does history tell us they can be assured of getting what little the Chinese have agreed to under their contracts.

  • Twofish

    One of my previous employers did their China operations under the assumption that within a decade or two, Chinese companies would be in possession of all of our technology and that they would be competing with us.  However, the logic was that we could either sell our technology now, and make some money and develop business networks in China, or else we could put our heads in the sand, at which point Chinese companies would have all of our technology anyway and we’d end up with nothing. If China was going to take our technology and start competing businesses, then we’d really prefer it if they take our technology rather than our competitors so we get some money out of it in the short run.

    At another company that I worked for, it was assumed that we would always be getting crumbs from China.  The state owned enterprises would get most of the business.  Well connected private local companies would be second in line.  Companies from Taiwan and Hong Kong would be next, and if we behaved ourselves and didn’t rock the boat, then maybe we might get some crumbs from what’s left.  But even then it was worth it to be in China, because it’s better to get 1% or even 0.1% of a big pie, than 100% of nothing.

    Something that non-technical people get wrong is that they assume that you can protect technology with legal agreements when in the long term you can’t.  The technology is in people’s brains, and unless you can force someone to work for you for the rest of their life (and even the managers don’t want that), you can’t keep know-how from leaving the company.

    • Dan (another Dan)

      I think the other thing that many non-technical people have a hard time fathoming is how complex these projects really are. 

      Giving the blueprints of the main goal isn’t enough. Once you do that, the other side has to figure out a bunch of other issues such as the logistics and whether or not the infrastructure will support that main goal. So like, behind the main blueprint, there’s probably a dozen or so other blueprints to support that. The dozen or so sub-blueprints are something the other party has to do on their own. If necessary, they might have to play around with the main design to accomplish their tasks. 

  • http://lalawyersjournal.blogspot.com/ Anne Roberts

    China’s complex constitution, especially the one concerning having foreign partners is a tough sell. No one can guarantee the success of this partnership. But it is a risk for Bombardier’s part. Who knows? It might work. But then again, I wouldn’t hope. Only time will tell I guess.

  • Dan (another Dan)

    Dan has a point. 

    It’s very hard to know or even speculate on the true reasons of why a company would transfer their designs without actively being involved in the said transaction or the same industry. Some of the reasons I’ve heard of why some companies do this is because the other side is doing much more sophisticated work and the people with the original blueprints are withholding back certain features and other necessary components. Sometimes the most efficient thing to do, regardless of the legality of it all, is to let the other side see the entire work rather then sending bits and pieces of it. Sometimes the people with the original work will occasionally send their own engineers/designers to check on the other party, but sometimes it maybe more worth it to just let the other party’s engineers/designers do their job if given the right tools and objective. 

    Another reason is that the original blueprints may not work in another environment. The other side will have to know what the entire picture is before they can get started on modifying the project to suit their situation. They might have to tweak the designs a little bit if necessary. 

    These are some of the issues many people will have when transferring technology, whether it be between different countries or within the same one. 

    In Bombardier’s case, who knows. Maybe it’s just about the money, or not. 

  • Pam

    We are seeing this with our SME clients as well.  With the economic downturn in the US, resources for business expansion in the US have dried up.  For many high tech SMEs wishing to grow (and for some, to remain in business), partnerships with or licensing to Chinese companies may be the only viable options.   Chinese companies offer cash and connections.