China self driving cars As I outlined in my previous post, Self Driving Cars in China: The Roadmap and the Risks, the Chinese government is pushing hard for development of a Chinese based self driving car. In reviewing China’s proposed legislative framework and recent books from China, we can see how Chinese’s system offers unique advantages for developing fully autonomous vehicles.

China does not seem to have the atavistic fear of robots and AI common in the Western world. Recent surveys show that over 75% of Chinese car buyers have a favorable opinion of self driving vehicles, as opposed to only 50% in the U.S. More significant is that 60% of Chinese auto buyers believe developing self driving cars is a significant issue, as opposed to less than 20% in the U.S. and in Germany.

Fear of autonomous driving is not a factor in China. The issues in China are more direct. Is a self driving car available? Will it be available in a reasonable time frame? Will a self driving car work well? How much will it cost? Will the vehicle be owned by an individual or by a ride sharing entity or (in China) by some service owned or managed by the government? These are rational economic considerations, not gut level fear of robots and artificial intelligence.

A Chinese consumer may decide self driving cars are not an important issue because they rationally believe they will never happen. But they do not oppose self driving cars due to a fear of robot control. The Chinese are generally not in love with driving. Driving in China basically sucks, and if they can leave the driving to someone else, the Chinese are generally happy to do that. And if the someone else is a robot, they don’t care. The issue to the Chinese consumer is: how much will that robot cost? [Editor’s Note: Peter Hessler’s book, Country Driving: A Chinese Road Trip, makes for a great read on driving in China.]

The Chinese also do not generally make unreasonable requirements on the safety of a self driving car. In the U.S. and in Europe there is an unstated but very real demand that self driving cars must be perfect. Every accident involving a self driving car is head line news and endlessly reported online. At the same time the 40,000 U.S. deaths and the ~25,000 EU deaths per year from human controlled driving are taken as business as usual.

The Chinese regulators and public make no such unreasonable demands. One goal of the Chinese government is for self driving cars to reduce the current very high Chinese passenger vehicle accident rate (~260,000 people die on China’s roads a year). However, the goal is to reduce the accident rate by a reasonable percentage. No one in China demands self driving cars be accident free. It is assumed they will NOT be accident free. The issue in China is whether the rate of accidents will be at an acceptable level or not. In China, it is assumed that the accident rate will decrease due to autonomous vehicles, but no one expects that rate to be dramatically lower than the current rate. For that reason (and probably some others), accidents involving self driving cars simply are not news in China.

Finally, the Chinese are free of the Western (especially U.S.) need to assign blame for accidents involving self driving cars. U.S. legislation and discussion of self driving cars almost obsessively focuses on this issue. Who will pay if there is an accident? Will it be the software developer? The auto manufacturer? The vehicle owner? What if the accident is determined to have been caused by a flaw in the software? Or a flaw in the installation? Or a flaw in the smart transportation network? Or the result of hacking by a third party? Or by operator error? Or by circumstances beyond the control of any party? Or even something as relatively routine as failed brakes?

If you examine U.S. based discussions of self driving vehicles, you will see these issues are primary and this is certainly even more true among the lawyers. Self driving projects then focus on issues like the ethics of driving decisions, insurance coverage, liability and damage allocation. Though these are primary issues in the U.S., they hardly exist in China. I have 200 pages of Chinese government proposed rules and regulations for autonomous vehicles on my desk. I have five full length Chinese language textbooks on self-driving cars, all published in the last two years. The issue of liability and insurance is simply not discussed at all in these thousands of pages. It is a complete blank.

There are two reasons for this. First, the Chinese are generally far less concerned with assigning guilt than Westerners. In Chinese traditional morality, guilt is not the main focus of an enquiry of what to do when a person is harmed or injured. In China, the focus is on how the social equilibrium can be restored as quickly as possible. The damage is repaired and the parties move on. Guilt and the associated liability for guilt is usually not a fundamental issue. Second, the Chinese insurance system is a no fault system so there is no reason to assign guilt. Auto accidents do not give rise tot moral issues. The issues arising from auto accidents in China are usually clear: what was the damage and what sort of payment is required to restore the parties to their original situation. Lawyers are virtually never involved, the award is limited to economic compensation and there is no high value award for non-economic matters like pain and suffering.

From the U.S./Western side, the fear of robots, along with unreasonable safety demands and allocation of liability in a guilt based system create substantial barriers to developing self driving cars. In the U.S., these barriers are at least as significant as the considerable technical barriers. In China, these non-technical barriers do not exist. It’s not that they are reduced; they don’t exist at all.

China can therefore focus on the technical issues. It is the technical issues that will drive the development of the vehicle of the future. So thought Chinese companies are currently behind the West on the technical side, they can move forward free from so many of the non-technical barriers that will both slow down and increase the costs of autonomous vehicle development in the West. This means China will reign as the primary testing ground for new technical solutions in the self driving car field. So even if China is not the place where the technology is developed, China will be the place where the technology is applied in real world applications. This is already happening in the electric vehicle market and this same trend will continue in the self driving car market.

Autonomous VehiclesDevelopment of the self driving car is the centerpiece of the Chinese government’s plan to redesign its manufacturing and technology sector. The Chinese have coined the term Intelligent and Connected Vehicles (ICV) (智能网联汽车)as their own technical term for describing the China version of what is an international race towards a difficult technical goal. The ICV is an ideal goal for China because it combines elements of all three of its current key technology programs: Made in China 2025, Internet+ and the Artificial Intelligence Strategic Plan.

As is typical of the Chinese system, the central government seeks to place itself on the top of the system, providing guidance and control from the top down. In furtherance of this goal, the PRC Ministry of Industry and Information Technology together with a number of related PRC agencies just issued a comprehensive set of national guidelines (建设指南) to provide the framework for development of ICVs in China.

The full set of guidelines is as follows:

(i) the National Guidelines for Developing the Standards System of the Telematics Industry (Overall Requirements) (国家车联网产业标准体系建设指南 (总体要求)). (June 2018)

(ii) National Guidelines for Developing the Standards System of the Telematics Industry (Intelligent and Connected Vehicles) (国家车联网产业标准体系建设指南 (智能网联汽车) (December 27, 2017)

(iii) the National Guidelines for Developing the Standards System of the Telematics Industry (Information Communication) (国家车联网产业标准体系建设指南 (信息通信) (June 2018).

(iv) the National Guidelines for Developing the Standards System of the Telematics Industry (Electronic Products and Services) (国家车联网产业标准体 系建设指南 (电子产品和服务) (June 2018).

Though the Guidelines are detailed and complete, these are only guidelines. That is, this is a standard to be followed for the drafting of binding regulations and statutes. The Guidelines merely set out the path to be followed. The real work remains to be done.

To date, the most important regulation with substantive impact is the Intelligent and Connected Vehicle Test Management Practices (智能网联汽车测试管理规范) issued on April 12, 2018. Under this regulation, individual Chinese cities are permitted to develop standards that allow for on the road testing of autonomous driving vehicles on public roads. In response to this new regulation, Chinese cities that seek to host the development of ICVs are working with the players to host testing in their own city. The typical regional divisions that characterize Chinese technology development are already taking form:

a. Beijing has set up a licensing program for Baidu.

b. Shanghai has set a licensing program for Ali Baba.

c. Shenzhen has set up a licensing program for Tencent.

Each city is seeking to establish its own regional champion in this new area. To avoid being left behind, other Chinese cities are joining in to create their own ICV on road testing programs. For example, the city of Tianjin recently announced its own ICV testing program in collaboration with the Tianjin Intelligent Connected Vehicle Industry Research Institute. It is expected that other Chinese cities will follow suit, with all of them seeking to create a regional (not national) ICV champion.

This movement towards regional rather than national ICV champions is of course contrary to the MIIT goal. But the overall development of the Chinese vehicle market shows that regional rather than national development is the dominant trend. There is little prospect that the Beijing authorities will be able to do anything to stand in the way of these regional developments. Note that this move to city/regional based ICV fiefdoms is dramatically different from the experience in the United States. California recently opened its roads to self-driving car testing. In response, over 50 different manufacturers have chosen to conduct tests on California roads. Consistent with general U.S. policy, California makes no attempt to favor one company over the other. The market will choose the winner. The Chinese system is developing in exactly the opposite direction, where regional governments are picking their winner in advance. Developments over the next decade will show which system works best.

This then leads to my central theme in considering this issue. In the development of the ICV, technology is everything. The Chinese central and regional governments have plenty of money for developing this program. But that money will be used in classic Chinese fashion. It will be used to purchase land and to build factories. That is, the money will be used for hard infrastructure.

But the question for China is what will those factories actually do? Without the most advanced technology, the factories will do nothing more than build the sort of low standard electric vehicles that already clutter the roads of China’s second tier cities. For the second tier cities like Tianjin, the technology issue is even more acute because the players in Beijing/Shanghai/Shenzhen are not planning to share their technology. In this project, it is every region for itself. So each regional player is faced with a existential issue: after the factories are built, from where will the ICV technology come?

The search for technology will be intense. A huge company like AliBaba can perhaps develop the technology on its own. But that only works for the Shanghai fiefdom. What about everyone else? In response, Chinese regional governments, research centers and production companies will be scouring the world for the latest in ICV technology. Since China currently appears to be the major market for electric and ICV vehicles, foreign companies will need to decide whether or not they want to work in China. For those companies that decide to work in China, the real issue will come down to the issue we continuously raise on this blog. Will you retain control over the technology or will you give it away? Will you get paid for what you give away, or will you wrap it up as a gift?

This growing market for ICV technology is an opportunity for foreign companies. The demand will increase over time, making the market for the transfer of ICV technology to China a long term trend. The question for foreign companies is whether China is a market where a profit can be made or is it just a trap leading to bankruptcy?

Though U.S. companies continue to complain about IP theft and forced transfer of technology to Chinese companies, there are ways to avoid presenting your technology to the Chinese side as a gift. But avoiding this result requires two things. First, you have to accept that if you refuse to make the gift, the Chinese side may walk away and you will then be excluded from that market. Second, you have to do the work required to provide yourself with protection. That means entering into tough, enforceable contracts and making the required patentcopyright and trademark registrations in China. If greed blinds your eyes to the risk, then you will not do either and the result will be predictable.

International IP litigatorOur China IP lawyers get a steady stream of emails asking what can be done to stop Chinese companies from selling “knock-offs” of their products. This is really two questions. What can be done to prevent Chinese companies from knocking off your products and what can be done to stop a Chinese company that has already knocked off your product. This post will address both questions.

I.  The Basics For Preventing Counterfeiting. 

Back in the retail stone ages (five or so years ago), when companies would come to my law firm for China trademarks to protect their brand names from Chinese copycats, we would tell them that applying for such a trademark would take about a week, but actually getting the trademark officially registered in China would take more than a year. We would then tell them that until their trademark is registered in China, we would be almost powerless to stop companies in China from using their brand name. Few voiced any concerns with this.

Fast forward a few years and now when one of our China trademark lawyers tells a client that securing a China trademark will take a year, those who sell online (which these days is almost everybody) rightfully get all nervous and want to know what to do in the meantime to protect against copycats. See China and the First to Market Fallacy for how incredibly quickly China companies can and do copy products and get them to market.

Our typical response is to talk about “building IP walls outside China.” If you are selling your product in the United States and in Spain you should focus on protecting those two countries, by among other things, securing trademarks in those two countries as quickly as possible. Though a U.S. or a Spain trademark technically will not give you any trademark protection in China, it can still help in getting offending ads removed from Chinese websites like Alibaba. If “your” product shows up on Alibaba and you have no registered IP, your chances of getting Alibaba or some other Chinese website to take it down are slim. But if you have a registered Chinese trademark that is being infringed by something online your odds of getting that offending ad taken down are good. If you have a Spain trademark and an Alibaba ad clearly targeted at Spanish consumers infringes on your Spain trademark, your odds of getting that ad taken down are not bad, which is a whole lot better odds than if you did not have the Spain trademark at all. The same holds true for the United States.

Of equal importance though is that if you have a Spain trademark on your product you can use that trademark to try to keep the offending product from China from reaching Spain. You can do this by working with Spain’s Customs and Border Protection Bureau, which is authorized to block, detain and seize incoming products that violate Spain and EU intellectual property rights. The United States and virtually all other EU countries have similar procedures. In many countries it makes sense to register your trademark from that country with its Customs office.

Registering your trademarks with China’s Trademark Office is the essential first step for just about any company that is having its product made in China or that faces a counterfeiting threat from China.. See File Your Trademark In China. Now., China: Do Just One Thing. Trademarks, and China’s Changing Trademark Environment. Why You Need To Register Your Trademark Now. Because China is a first-to-file country, until you register a trademark you have no rights in that trademark. But a trademark registration alone will not limit the spread of counterfeit goods. A trademark registration merely gives you the legal capacity to enforce your rights to that mark, and should properly be seen as one of the pieces in an overall strategy.

For any company concerned about counterfeit goods coming from China, the next step should be registering your trademark with Chinese Customs. This is not a legal requirement but a practical one: though China Customs officials have discretion to check every outgoing shipment for trademark infringement against the Trademark Office database, in reality they only check against the Customs database. No separate registration with China Customs means no enforcement by China Customs. See How To Register Your China Trademark With China Customs and China Trademarks: Customs Helps Those Who Help Themselves.

If you register your mark with Customs, they will contact you any time they discover a shipment of possibly infringing goods. At that point you have three working days to request seizure of the goods. Assuming you request seizure (and post a bond), Customs will inspect the goods. If Customs subsequently concludes the goods are infringing, they will invariably either donate the goods to charity (if the infringing mark can be removed) or destroy them entirely. The cost of destruction, and of storing the goods during the inspection process, will be deducted from your bond. Registration with China Customs generally takes three to five months and can only be done after China’s Trademark Office has issued a trademark certificate.

We cannot stress enough the importance of China trademarks and China NNN Agreements for any counterfeit prevention strategy. China patents and China copyrights should be an important part of your counterfeit prevention strategy as well, but in our experience, getting offending goods taken off websites is fastest, easiest and most likely if you have a China trademark. See China and Worldwide: Trademarks Good, Patents Bad. Or as one of our China IP lawyers is always saying: “You can probably survive a Chinese company selling a duplicate of your product and selling it for half of what you charge, but if that duplicate product also can legally use your company and/or brand name on it, you may never recover. A China-centric NNN Agreement works to ensure that your own supplier will not sell your products out its back door. Note that a Western-style NDA Agreement for China will probably decrease your IP protection, not increase it.

II.  The Basics for Stopping China Counterfeiting

I apologize in advance for this portion being U.S. focused. This is somewhat necessary for this portion of this post because so much of it deals with litigation and my law firm has litigators in only the United States and in Spain. And since I am not a licensed Spain lawyer, I will confine my discussion regarding IP litigation against Chinese companies to just the United States. Nonetheless, almost all of what I say below is applicable to varying degrees to most countries outside China, not just the United States.
You just discovered a Chinese company is knocking off your product. What do you do? If you are like most companies, you go to your regular lawyer and ask her what to do and if she is like most U.S. lawyers she probably does not know. So then what? At that point, you or your regular legal counsel should reach out to a lawyer experienced in fighting Chinese counterfeiters and experienced in cross-border litigation. There are a lot of options for going after Chinese counterfeiters and the key is usually choosing the right option or the right combination of options.
The right option is usually going to depend largely on your own individual situation. When one of our international IP litigators gets an email asking us to take on a China counterfeiting matter, we usually fire back with a slew of questions to try to learn more. Below are some of the more common questions we ask.
  • What IP registrations do you have and where?
  • Do you have any trademarks registered in China? Do you have any trademarks registered in any other country? Are these knock off products using your brand name or your company name or your logo? Do you have trademarks on any of these in China? Elsewhere?
  • Please describe your registered trademarks. Is the counterfeiter using any of these?
  • Do you believe you have any common law trademarks anywhere? Is the counterfeiter using any of these?
  • Do you have any copyrights? Are any of these copyrights registered in China? Are any of these copyrights registered anywhere else?
  • Please describe your registered copyrights. Is the counterfeiter using any of these?
  • Do you believe you hold any copyrights that are not registered anywhere? Is the counterfeiter using any of these?
  • Do you have any patents registered in China? Do you have any patents registered in any other country?
  • Please describe your patents. Is the counterfeiter infringing on any of these? If so, how?
  • Have you registered your IP with any customs offices in any country? If yes, please describe.
  • Do you know anything about the Chinese company you believe to be knocking off your products? Please describe any prior dealings you have had with this company. Do you have any contracts with this company?
Answers to the above questions (and many more) help our international IP litigators figure out how best to proceed.
The below are some of the options you might have for pursuing your China-based counterfeiters.
1. Pursuing administrative or litigation relief in China. This might be done administratively, via civil litigation in a Chinese court, or even criminally. If you have a contract with the Chinese company that is counterfeiting your products and that contract calls for arbitration of all disputes, arbitration will be another option for you.
2. Figure out who is importing the counterfeit products. Oftentimes the US importer is closely connected to the company in China that is knocking off your products — like a son or a daughter or a spouse so pressuring or suing the importer often can be effective with the Chinese company as well.
3. Suing Chinese companies in US court usually takes a long time because Hague service of process on Chinese companies is taking a long time, and with the trade war heating up, it’s likely to start taking even longer. It is already at the point where if you do not have a Chinese attorney constantly calling all the right people in China all the time to check on the progress of your Hague service, it probably will never happen. There are though sometimes creative ways to get around Hague Service of Process.
On top of this, getting a Chinese court to enforce a US judgment is going to be difficult, if not impossible and the US-China trade war likely will hurt you on this front as well. See China Enforces United States Judgment: This Changes Pretty Much Nothing. This means your suing for damages in a US court will oftentimes not be the right tactic for you to take against a Chinese counterfeiter. But a Chinese counterfeiter in a US court might allow you to seize funds or other assets belonging to the counterfeiter or get an injunction blocking its sales.
4. Official Chinese company records can be goldmines of information that you may be able to use to impress upon the Chinese company the need for it to stop copying your products. This is especially true if those records help you show US connections
of the company or its owners or officers or directors.
5. Section 337 cases filed with the International Trade Commission in Washington D.C. can be a great way to stop counterfeit products from entering the United States. See Stopping Infringing Products From China: Section 337 Cases. These cases can be pursued without having to serve the Chinese defendant under the Hague Convention service of process rules.
6. Serving takedown notices on the online sites that are selling the counterfeits of your products can oftentimes be fast and easy and effective, mostly depending on the existence and quality of your IP registrations. See e.g.,
How To Remove Counterfeits From Alibaba Register Your China IP.
Bottom Line: It’s never too early to take action to prevent Chinese companies from counterfeiting your products. And if you are hit with a counterfeiter, it is critical that you explore and weigh your options carefully.
For more on counterfeit products from China, check out China Counterfeiting: 8 Common Myths
China trademark subclasses.
China trademark subclasses. It’s complicated.

Our China trademark lawyers are often asked about the difference between the Nice Classification system for trademarks and China’s trademark subclass system. They are related, but quite different.

The Nice Classification system is an international classification of goods and services that separates all possible goods and services into 45 classes: 34 classes for goods and 11 classes for services. The classification was first established in 1957 by the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks, and is administered by the World Intellectual Property Organization (WIPO). A large number of Western and industrialized countries use this system, including the US, Mexico, the EU, the post-Soviet Republics, China, Japan, Korea, Australia, and New Zealand. (But not Canada!) In theory, and mostly in practice, the common classification system makes it much easier to file the same trademark in multiple countries, either through the Paris Convention or Madrid System. The Nice Classification also underpins the trademark fee structure; in most countries, the cost of a trademark application is determined in large part by the number of classes.

China’s subclass system is an overlay of the Nice Classification system. As we wrote in China Trademark Classes and Orange Crush(ed),

One of the more distinctive aspects of China’s trademark system is its unique interpretation of the Nice Classification system. China divides each Nice class into subclasses, and treats each subclass as a discrete unit. A trademark registration gives the owner rights in the covered subclasses, but virtually no rights in any other subclasses. (For further discussion of this feature, see China Trademarks. Register Them in China not Madrid.)

The Nice Classification system includes a list of specific goods and service for each of the 45 classes. Each one of those goods and services has a six-digit “Basic Number” which begins with the two-digit Class number. For instance, Class 15 covers musical instruments, and the list of goods in Class 15 includes accordions (Basic Number 150001), pianos (Basic Number 150008), and tuning forks (Basic Number 150033).

China took the Basic Numbers and produced its own list, identifying for each Class the subclasses and the Basic Numbers in each subclass. For instance, Class 15 has 2 subclasses: subclass 1501 includes musical instruments, and subclass 1502 includes accessories and parts for musical instruments. As you might imagine, pianos and accordions are in subclass 1501, and tuning forks are in subclass 1502.

But Class 15 is a fairly straightforward example. Class 09 is a bear. The summary description from WIPO is “Scientific, nautical, surveying, photographic, cinematographic, optical, weighing, measuring, signalling, checking (supervision), life-saving and teaching apparatus and instruments; apparatus and instruments for conducting, switching, transforming, accumulating, regulating or controlling electricity; apparatus for recording, transmission or reproduction of sound or images; magnetic data carriers, recording discs; compact discs, DVDs and other digital recording media; mechanisms for coin-operated apparatus; cash registers, calculating machines, data processing equipment, computers; computer software; fire-extinguishing apparatus.”

China has divided Class 09 into 24 subclasses, as follows:

0901   Computers and external devices

0902   Recording and counting machines

0903   Other office machines not considered printers or copiers

0904   Weighing machines

0905   Measuring instruments

0906   Signaling instruments

0907   Electrommunication and navigational instruments

0908   Audio equipment

0909   Machines and instruments for photography and films

0910   Measuring instruments, lab instruments, electronic measuring instruments, scientific instruments

0911   Optical instruments

0912   Material used for the transmission of electricity

0913   Crystal, electric and carbon materials, electronics and electronic components

0914   Electrical appliances and controlling devices

0915   Electroplating apparatus

0916   Extinguishers

0917   Electric arc cutting and welding devices

0918   Industrial X-ray machines and devices

0919   Safety/rescue instruments

0920   Alarm devices, electronic bells

0921   Glasses and accessories

0922   Batteries and chargers

0923   Cinematographic film and exposed material

0924   Other items not included in the above sub-classes

Yeah, it’s complicated. Most of the classes fall somewhere in between the simplicity of Class 15 and the complexity of Class 09. But the main point to understand is that Basic Numbers refer to specific goods or services, whereas subclasses refer to a subset of goods or services in each Class that is (in theory) a discrete subset of goods or services that is defined by the Basic Numbers for the goods/services in that subclass.

China NNN attorneyBy a wide margin, the most popular China contract my law firm writes is the China NNN Agreement. These are basic and important agreements no matter what your industry. We write these to protect against disclosure, competition, and circumvention. For more on what goes into our China NNN Agreements, check out our most read post, imaginatively entitled China NNN Agreements.

Unfortunately, not everyone uses my law firm’s China lawyers for their NNN Agreements and I say this for reasons beyond our not capturing the fees for those. I say this because our China attorneys receive a steady stream of emails from Western companies that want to retain us to sue on their existing NDA or NNN Agreement and after we review those agreements, we decline to take their case because their agreements are just not good enough. In fact, our firm has never taken on a breach of an NDA or breach of an NNN because we have yet to see such an agreement written by someone else that was strong enough to warrant litigation and because nobody has ever sought to sue on any of those we wrote.

Note. I am not saying that no other law firm can write a proper NNN Agreement for China. I am not saying that at all. I am merely saying — not surprisingly — that in situations where a Chinese company has signed an NDA or an NNN Agreement and then someone wants to sue on it, we have not liked the agreement on which they want to sue. Get it?

What then is so wrong with the NDAs and the NNNs my law firm sees and does not like? All sorts of things. The most common problem is that the agreement was not written for China at all. It is just a Western-style NDA used either as-is or cobbled together to try to look like it is for China. For why this does not work, check out Why Your NDA is WORSE Than Nothing for China. Probably the second most common problem we see is the situation where the Western company has an NNN that is 98 percent good, but then has a bad provision through which its Chinese counter-party can drive a truck. In these situations, I ask the Western company how the horrible provision came about and invariably their response is that the Chinese company would not sign the NNN Agreement without it and nobody told them how bad it would be for them to put that provision into the NNN Agreement.

WARNING. There are all sorts of ways a Chinese company can quickly and efficiently eviscerate a perfectly fine NNN Agreement with what can appear to be a minor change. For this reason alone, it is always a bad idea to get an NNN Agreement from your lawyer and then not go back to him or her with any proposed changes. When any of my firm’s lawyers draft NNN Agreements we make very clear that we see our role as handling the NNN transaction from beginning to end. See e.g., China NNN Agreements: How to Get Them Properly Signed and Executed.

I thought of all of the above recently when communicating with one of the best and most experienced attorneys I know. We were discussing “the old days” in China legal and how different they were and then we started talking about how in so many ways little as changed. On that front, this lawyer wrote me the following regarding NNN Agreements and IP theft [stripped of any identifiers and cleaned up substantially]:

Back in the 90’s I worked on a deal with a Chinese company that was entering the cellular phone business. The other side was ___________[Company X] from the United States. Company X insisted on a well-crafted, highly effective NNN Agreement. The Chinese side refused to sign this though, so Company X went home and said it would not come back until the agreement was executed. I asked the Chinese side why it would not sign the agreement. They said: “We won’t sign because we are doing this project to acquire the technology for ourselves. We are not going to disclose to someone else.” That is when I learned that non-use is more important than non-disclosure in these agreements. I told the Chinese side that if they didn’t sign Company X will not be back. The Chinese company eventually signed, but I also was sure to tell Company X that from the moment the paper document was signed, it would need to monitor what its Chinese counter-party was doing with its IP. Nothing really much has changed since those days except Chinese companies have become far more clever and they no longer  make it clear from the start what they are planning to do. But as you and I both know, that does not mean anything else about these deals and what is needed in these agreements has changed.

Yup. What are you seeing out there?

china attorneys
Love is a many splintered thing.

Our China attorneys often hear something like the following from our clients:

“I am not worried about this deal/contract/transaction with this Chinese company because” [choose one or more]:

  • The owner and I are great friends.
  • I trust the owner implicitly.
  • There is no way they [the Chinese company] would do this because it would destroy their business.

I start one of my “how to protect your IP from China” speeches with the following:

“Big companies in China want to steal your IP. Small companies in China want to steal your IP. Private companies in China want to steal your IP. Public companies (and SOEs) s in China want to steal your IP. Oh, and that company whose owner you like so much and whose son’s or daughter’s wedding you attended, that company also wants to steal your IP.”

So how then do our China lawyers respond to the client who insists “it’s all good” with their China counter-party and there’s no need for protection [choose one]?

  1. You are wrong about your friendship with the owner. He is a liar and a thief.
  2. You are wrong to trust the owner. He is a liar and a thief.
  3. You are wrong about the economics. They will . . . because they only think short term?
  4. None of the above.

None of the above is the correct answer because our China lawyers do not have any special knowledge about the Chinese counter-party or its owner(s) and so we have no way to refute what our clients are telling us about them. On top of this, we have seen plenty of instances where an American or a European company has had a fantastic relationship with its Chinese counter-party for decades.

No, what we say is that even if all they are saying about their Chinese counter-party is true, there are still substantial risks. And then we tell them about the countless instances where we have seen things go badly wrong even when the American or European company was entirely right in trusting their Chinese counter-party or the economics of the situation.

But how can that be?

Because the foreign company that believes trust or economics solves all when doing business with a Chinese company is ignoring the following:

Just because you are friends with the owner or just because the owner can be trusted or just because it would not make economic sense for the company to cross you, this does not apply to 1) the company’s employees, 2) the company’s vendors/suppliers; 3) the company’s subsequent owners, or to a 4) changed economic situation.

The risk is often not the owner of the company, but everyone else who gets access to your IP or your trade secrets. These are the sort of things our China lawyers see all the time:

  1. Everything is going great with the Chinese company and then the son or someone else takes over for and everything completely changes. Our China lawyers must have dealt with this at least a dozen times.
  2. Everything is going great with the Chinese company and then the General Manager of the Chinese company or someone else goes off and starts a competitor of the Chinese company and this new competitor steals our client’s IP or trade secrets and starts competing with our client. Our China lawyers must have seen this at least two dozen times. See Inside a Heist of American Chip Designs, as China Bids for Tech Power.
  3. Everything is going great with the Chinese company and then a vendor or a supplier of the Chinese company starts competing with the Chinese company by using our client’s IP or trade secret.
  4. Everything is going great with the Chinese company but then the economics of the industry change and the Chinese company can now make a lot more money by stealing our client’s IP or trade secrets and so it does.

For these four reasons (and more), my firm’s China lawyers (and pretty much every other China attorney we know) virtually always insist on our clients having enforceable contracts with the Chinese companies with which they are doing business. We draft these contracts to cover ownership changes and to cover employees and vendors and suppliers and changing economic situations. For more on what is needed to have an enforceable China contract, check out China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts That Work.

Because this only makes sense.

And of course there is more. Beyond the contract, you need the registrations required to protect your product/technology/IP. This often means registering your trademark in China in English and in Chinese, registering the copyright in your software and anything else that applies in the PRC and maybe Taiwan elsewhere and registering a design patent in China. These will give you protection against those beyond just the Chinese company with which you are doing business. I will write more on these things in my next post.

Your thoughts?

China attorneysThis is part 5 in our series on what we have dubbed “China free look schemes.” Essentially, China free look schemes are methods employed by Chinese companies to get a “free look” at the intellectual property and trade secrets of foreign companies. In part 1 of this series, we looked at how Chinese companies use their purported interest in investing in a foreign company to convince the foreign company to give the Chinese company access to the foreign company’s IP. In part 2, we explained how Chinese companies use Memoranda of Understanding (MOUs) to get free looks at foreign technology. In part 3, we explained how Chinese companies use Joint Ventures (real, fake and non-existent) to get at foreign technology without paying for it. In part 4, we noted how there are plenty of legitimate Chinese companies seeking legitimate deals with foreign companies and then explained how to determine whether the Chinese company with which you are dealing is serious about doing a real deal or is just trying to get a free look at your IP.

In this, part 5, we address how best to deal with the risk of a China company free look scheme.

The Chinese money looks good, but you don’t want to give away the technology base of your company and then never see the cash. So how do you spot the schemer? The first step is to get clear about the motive of the potential investor from China. Is the Chinese investor focused on financial return or on the technology?

It is possible the investor from China is what we can call standard financial investors. These are venture capital or private equity funds focused on financial return. It is relatively easy to identify a financial investor. Their interests are not focused on the content of technology; they are interested in making money. Negotiations with a financial investor will focus on business terms: price, payment schedules, control, board representation, exit strategy and related. Negotiations on these critical issues with Chinese investors is usually quite difficult. In particular, Chinese investors like to make a last minute bid for a reduced price.

But their motivation remains clearly financial. Such an investor will not seek to investigate the technology. Such an investor will not propose joint ventures and tie ups in China. Discussion will be limited to hard nosed business terms. U.S. companies and their advisors are used to this type of investor. The approach is the same all over the world. So the standard deal techniques and documentation generally will apply.

Note, however, that just because the Chinese investor bills itself as a private equity or VC fund does not mean it is not focused on technology. In fact, in today’s China, the opposite is most likely to the be the case. Beneath its indigenous innovation rhetoric, the Chinese government understands that Chinese companies and academic institutions do not have the capability to develop modern technology quickly enough for Chinese government plans. For example, the deadline for a program like Made in China 2025 is already drawing quite near and to jump start development the Chinese government has made acquiring foreign technology a primary goal.

To implement this acquisition program, the Chinese government has taken two approaches. First, it has pressed Chinese companies to make acquisitions in their areas of business that are not focused on financial benefit but rather are focused on acquisition of technology. Second, the Chinese government has instructed private investment funds and banks to quit investing in non-essential sectors such as foreign real estate and media and instead to concentrate on the acquisition of technology. Existing Chinese funds have changed their focus. New funds are being created that are focused solely on acquiring foreign technologies in government mandated key sectors.

In the old days, the way you spotted a technology focused investor was to simply ask whether the Chinese company directly competes with your company? Now though far more research is required. If the investment comes from a Chinese based fund, you have to ask whether the goal of this fund is limited to financial return or is its goal to acquire advanced technology for the benefit of China as a whole, rather than for the financial gain of the holders of the fund.

Once you determine the potential investor is focused primarily on technology you then have another set of decisions to make.

Our China attorneys typically see three types of investor that should be rejected because they are only planning on a free look:

1. The investor has no intention of investing. They only want a free look. This type of investor should be rejected as soon as possible.

2. A more clever Chinese investor strategy is to seek to access to the technology of the target company in exchange for a modest investment. It is common for Chinese investors to take this position. Their position will go even beyond the standard free look. They will say: “We are now part owners of the company so the company should provide us with free access to all the technology information owned by the company and it should follow our direction in doing business in China. Joint ventures, distributors and business partners should be selected by us.” This is a violation of basic company law. A minority investor usually does not have a right to access confidential information or to direct the operations of the company. This is particularly true when that minority investor directly competes with the company. When Chinese investors make this kind of demand, this usually shows they are just planning on following the free look strategy. When they reveal their real intention, they should be shown the door.

3. The more difficult type of investor is the investor who at least claims it intends to purchase a majority interest in the company. As is generally known, acquisitions by Chinese investors face a number of obstacles: a) agreement on the business terms, b) approval by the Chinese government, and c) approval by the U.S. government. So even when the Chinese investor is sincere in its intent, an acquisition from China can take a lot of time and may never happen at all. The risk here is that the investment from the Chinese side will turn into a free look scheme. This is a very common result and must be resisted.

The conversion into free look centers on the due diligence period and the content of due diligence demanded by the Chinese side. The sequence generally works like this:

The Chinese side starts the negotiation agreeing to a very high price. Then, just before the initial closing date, the Chinese side pushes for a substantially lower price and give one of three reasons: a) It no longer has faith in the technology, b) The Chinese government will not allow the investment, or c) The ultimate backers of the Chinese side (banks and funds) will not agree. In each case, the solution proposed by the Chinese side is that the investment target provide inside data about the technology or it enter into a cooperative project in China to demonstrate and prove the technology.

The process continues, as the Chinese side pushes for more and more technical information. In the end, if the U.S. side finally agrees to substantially reduced prices, the Chinese side will close on the deal since it has acquired the technology at a bargain price. Sometimes the deal simply fails, with this failure never attributed to the decision of the Chinese investor. Instead, the Chinese company usually blames the failure of the deal on a decision of the Chinese government or the unknown Chinese “backers” of the deal.

In the end, the Chinese investor either acquires the technology at a bargain price or converts the deal into a free look scheme. So what looks like a legitimate investment proposal turns into a free look scheme or an absurdly cheap one. This common situation, where a failed Chinese acquisition turns into technology theft, is often reported in the financial press. See, for example this weeks New York Times story, Inside a Heist of American Chip Designs, as China Bids for Tech Power. 

But you are a start-up and you need the cash. So what do you do to weed out the genuine Chinese investors from the free look schemers. We will set out the basic plan in our next and last post in this free look scheme series.

China IP lawyerHow do you know when a copyright has been infringed? For years, this wasn’t even a question people asked in China because it was so obvious. The guys on the corner with carts full of bootleg CDs and DVDs, the illegal BitTorrents and download sites – all of them were wantonly and flagrantly engaging in copyright infringement. Indeed, infringement was their business model. If they weren’t offering copies of copyrighted works, nobody would be interested.

Slowly but surely, though, China’s enforcement of copyright infringement has improved – in large part because large Chinese companies like Baidu and Alibaba and Tencent now control the rights to a great deal of content and their business models are based on people not getting such content for free somewhere else. The BAT companies have turned to Chinese agencies and courts to enforce their rights, evidenced by a concomitant surge in copyright-related litigation. We wrote about this last year in Copyright Protection in China– It’s Real, and It’s Spectacular:

The point is not that Chinese courts are establishing new rights, but that they are enforcing the rights that already exist for copyright owners – and doing so in a meaningful way. Both Chinese and foreign copyright owners are turning to Chinese courts to enforce their rights, and are prevailing. At least with the easy cases.

China still has work to do on the easy cases before it gets to the level of the US or the EU, but the concept (and value) of copyright has taken hold in China. Bring on the not-so-easy cases! Like the ongoing “Blurred Lines” case in the US, in which Marvin Gaye’s estate sued Robin Thicke and Pharrell Williams for allegedly copying the musical style of “Got to Give It Up.”

Where is the line between plagiarism and inspiration? American courts have grappled with this question for years; lawsuits are filed every day by songwriters and screenwriters who hear a hit song or see a hit movie or tv show and think that the creators stole their work. Many of these cases are spurious and easily dismissed on summary judgment, but not always.

Robin Thicke and Pharrell Williams lost at trial and on appeal, but still deny that they copied Marvin Gaye. Led Zeppelin prevailed in a lawsuit over “Stairway to Heaven,” but the plaintiff (the songwriter for 70s band Spirit) has appealed. Sam Smith quietly settled with Tom Petty before a lawsuit was even filed – perhaps because he feared he would lose the battle of forensic musicologists.

It’s more common to see a music-related case alleging infringement go to trial than a film or tv-related case – probably because musicology offers at least a semblance of objectivity when comparing the original and the allegedly infringing work. But that doesn’t stop online fans from crying foul when they see uncanny echoes of their favorite works in a new program. That’s what happened last week when the Chinese tv show Legend of Fu Yao was taken to task for allegedly ripping off numerous plot points from J.K. Rowling’s Harry Potter and the Goblet of Fire (book four in the seven-book Harry Potter cycle).

This is hardly the first time the Potterverse has been ill-used in the Middle Kingdom. Back when new Harry Potter books were still coming out, Chinese publishers did a brisk business in fake Harry Potter books. Who can forget “Harry Potter and the Hiking Dragon,” “Harry Potter and the Chinese Empire,” or “Harry Potter and the Big Funnel”? Laugh if you want, but these books sold millions of copies. You can understand why loyalists would be unhappy about the latest affront to the Hogwarts canon. The difference is, these days J.K. Rowling can do something about it.

I haven’t seen Legend of Fu Yao and can’t comment on the extent and depth of the alleged similarities. But if the producers of that  show really did steal from J. K. Rowling she could sue in China under the Copyright Law and the Law Against Unfair Competition. That was Disney’s successful strategy against the Chinese filmmakers who made The Autobots, a film whose anthropomorphic cars looked almost the same as Lightning McQueen et al. from Cars.

Suing over Legend of Fu Yao would likely be tougher sledding, but figuring out whether you have a case is what lawyers do for a living. If I were J.K. Rowling, I’d ask my lawyer to engage a China IP lawyer, stat.

This is part 4 in our series on what we have dubbed “China free look schemes.” Essentially, China free look schemes are methods employed by Chinese companies to get a “free look” at the intellectual property and trade secrets of foreign companies. In part 1 of this series, we looked at how Chinese companies use their purported interest in investing in a foreign company to convince the foreign company to give the Chinese company access to the foreign company’s IP. In part 2, we explained how Chinese companies use Memoranda of Understanding (MOUs) to get free looks at foreign technology. In part 3, we explained how Chinese companies use Joint Ventures (real, fake and non-existent) to get at foreign technology without paying for it.

In this, part 4, we note how there are plenty of legitimate Chinese companies seeking legitimate deals with foreign companies and explain how to determine whether the Chinese company with which you are dealing is serious about doing a real deal with you or just trying to get a free look at your IP. There is no doubt that there are a large number of Chinese companies, fund managers and investors who see the potential in bringing Western technology and know-how to China and are willing to pay Western companies for that and/or share the profits from that with Western companies.

The core of the free look scheme is the proposal of a Chinese company to make an investment in a foreign technology focused entity. To prevent the Chinese side from playing out a free look scheme, it is essential to work out a “clean” investment agreement. The basic features of a clean agreement are as follows:

1. U.S. and European style investment agreements are normally too vague to be effective in working with Chinese investors. For Chinese investors the investment agreement should include at least the following:

a. An exact date when funds must be paid.

b. Funds must be paid free and clear, in cash, to the company bank account on the closing date. Any claim that funds have been or will be wired from China or Hong Kong or wherever should be ignored. Only cash actually in your bank account, free and clear, counts as an investment.

c. Require the Chinese side to agree that no approval from the Chinese government or any other foreign government is required to make the investment and that no decision of a foreign government or foreign bank will excuse the Chinese side’s obligation to make the payment by the closing date.

d. To give teeth to these provisions, you should require your Chinese counter-party to make a substantial good faith escrow deposit on the date the investment agreement is executed. Provide that the escrow deposit will be forfeited if the investor does not make payment on the closing date. Absent this hard deadline with a substantial penalty, the Chinese investor is almost always late in paying, even when payment is made from a Hong Kong or a U.S. or a Canadian account.

Using the above approach will usually prevent the Chinese side from making use of the free look approach and tell you whether they are free real or not. This is because no Chinese company planning to use the free look approach will agree to the above terms. In refusing to agree, the free look schemer will argue that you need have to prove the viability of your technology before it (or its so-called outside investors) can make any payment or investment. At this point, the best thing to do is usually to walk away.

But most U.S. and European companies choose to continue working with the Chinese side, attracted by the potential of  substantial investment and developing the massive PRC/Asia market for their product. The U.S. or European side will at this point agree to a due diligence period before the final investment is made. This due diligence period is where the free look scheme is executed. The U.S. or European side should enter into an agreement with its Chinese counter-party that is specifically designed to prevent the free look scheme from succeeding.

Some of the following issues arise from this:

1. Who will be the actual investor in your company or your technology? Many Chinese companies find it difficult to transmit funds from China for making an investment. Even for good faith investors, it is often impossible to to make the investment directly from the PRC. To get around this problem, Chinese investors often provide that “their” funds will be paid by some other entity located outside China. This raises a number of issues. First, under U.S. and European know your investor and anti-money laundering rules, it is critical you know from exactly where this funding is coming. Second, payment from a different party is a common source of delay and delay must be avoided in this kind of transaction.

2. Most investment agreements prohibit ownership of stock by nominees. This follows on the know your investor and anti-money laundering rules discussed above. But when the actual PRC investor proposes to use funds provided from another entity, they often then request that this other funding entity own the stock in your company on behalf of the PRC entity as some sort of nominee. This kind of nominee ownership is common in the PRC, but the practice should generally be avoided in the West.

3. If the Western company is working with other potential investors, it is usually important it make sure any special terms provided to the Chinese side do not conflict with agreements with other investors. For example, it is often provided that for a single round of investment, the round will not close until after all investments have been made. If the Chinese side is given a substantial due diligence period prior to being required to invest, this may conflict with the basic requirement imposed on other investors.

5. In this setting, the standard Western style investment agreement is not adequate. You need a separate and specialized escrow/due diligence agreement with the proposed PRC investor.

The following are some of the key points for these due diligence agreements:

a. Who will be the final owner of your company’s stock? Will it be the PRC entity with which you are negotiating or will it be some Hong Kong or Canadian or Cayman Island or Isle of Man or Luxembourg company you have never heard of nor ever dealt with? Even if your due diligence agreement is with a PRC entity, it is not unusual for that PRC entity to demand provisions giving rights to some third party you do not know. Are you willing to issue stock in your company to an entity of which you know nothing?

b. Even riskier is the situation where the PRC entity requires the investment/due diligence agreement be done directly with their non-PRC nominee. Since these nominees are usually mere shells with no assets it is judgment proof. This renders meaningless the entire due diligence agreement.

c. The U.S. side must describe with reasonable clarity what access and information will be provided to the putative investor during the due diligence period. First, the information disclosed should be strictly limited. The Chinese side will nearly always demand more and it is important you set and maintain your disclosure limits. Second, the participants in the due diligence process must be carefully controlled. The Chinese side usually works with a group of related companies. A standard technique is for the Chinese side to negotiate a provision that allows them to disclose your information to one of its related companies. When an infringement of your IP later occurs, it is done by that related but independent company with which you have no contractual relationship. This means you have no contractual basis for making a claim against the actual infringer and your Chinese counter-party thus can walk away with a free look.

d. If you are going to require other investment conditions you must list those with hard deadlines. For example, if PRC government approval of the deal is going to be required, you should put in your contract that such approval must be received by the end of the due diligence period. If a license is required, drafting must be complete at least one month before the end of the due diligence period. If a JV company will be formed, the Joint Venture’s registration must be complete by the end of the due diligence period, with only capitalization remaining — this means the JV registration process must start immediately after execution of the due diligence agreement.

e. At the end of the due diligence period, the Chinese side must be required to “go hard,” meaning all of the conditions to closing the investment must be met or waived by the end of the due diligence period. That is, the Chinese company either walks away or enters into a formal investment agreement that provides for either payment in full in five days or payment of a non-refundable escrow deposit with closing to occur within thirty days. Chinese companies that are working the free look scheme will usually not agree to this quick close. They will instead seek a process where negotiating and drafting the investment agreement and other collateral agreements begins only after due diligence is completed. To avoid the free look scheme, you should insist the investment be made immediately after completion of due diligence. It is not uncommon for Chinese companies to stretch the approvals/documentation period out for several years with no investment in the end.

f. As noted above, the investment and due diligence agreements should provide that no action of the Chinese government or of any Chinese bank or any other Chinese agency will be a defense to the requirement that the Chinese investor perform and if the investor does not perform, its escrow deposit or advance payment will be forfeited. Chinese companies often will insist on including a long force majeure provision in an otherwise simple investment agreement. If you allow for this sort of provision, you are all but guaranteeing there will never be any Chinese government approval. It is actually a good idea to include the exact opposite provision whereby the Chinese side warrants that its investment has already been or will be approved by the Chinese government and that no action of the Chinese government can used by them as a defense.

There are a number of ways to neutralize the free look scheme, even in cases where you agree to prove your technology to the Chinese side. Legitimate Chinese companies will work with you to resolve the issues, but Chinese companies that are in it for the free look will not. It is important you determine where they stand as soon as possible. You do that by providing clear and reasonable terms to the Chinese side along the lines discussed above.

If the Chinese side has problems with the straightforward terms outlined above, you should ask them to outline their specific concerns in writing. If their concerns are legitimate, you probably can deal with them. If the Chinese side does not respond or if its concerns are not legitimate you know where you stand. Chinese companies can run you around for a very long time — years in some cases. You cannot afford that. You need to quickly get to a reasonable arrangement with the Chinese side or move on.

China technology IPThe standard story is that the Chinese government has decided to “corner” the world market for electric vehicles. The most expensive and important component for an electric vehicle (“EV”) is the battery pack. So the the logic goes that the first step in this plan is for Chinese companies to dominate production of EV batteries.

The recent Shenzhen stock exchange IPO of Ningde, Fujian based Contemporary Amperex Technology Ltd (CATL) has been seen as a key phase of this process. According to the press reports, CATL raised USD $830 million in its IPO completed on June 10. Though far less than the $2.0 billion CATL had originally planned to raise, this is nonetheless a substantial sum.

CATL plans to use the proceeds from its IPO to buildd new production capacity for 24Gwh of batteries focused on the EV market. CATL plans for its Ningde facility to become the largest EV battery maker in the world, with a final projected capacity of 50 Gwh scheduled to come on line by 2020. This can be compared with the Tesla Nevada Gigafactory 1 which is projected for 34Gwh capacity.

Though this is a considerable achievement for a company located in the isolated country town of Ningde, its significance is not as reported. The real issue here is not the Chinese government’s decision to promote high volume manufacturing of a basic industrial product. The issue is rather with the technology behind the product and the control of that technology. Production within China may become controlled by Chinese owned companies, just the way so many other basic industrial commodities are under such control today. But it is unlikely China will develop new EV technology through indigenous innovation. That is where the real challenge rests.

Consider the basic issues:

  1. CATL’s advantage rests almost entirely on China’s preferential policies. First, the Chinese government is providing substantial subsidies to EVs for domestic transport. Second, the Chinese government has set the rules so that only EVs using product from Chinese battery makers (CATL and BYD) qualify for these subsidies. This is not a market phenomenon, it is simply an artifact of Chinese government subsidies. This means CATL is entirely dependent on the subsidy program. If the subsidies end, the CATL market advantage disappears
  2. Production of EV batteries in China is largely irrelevant to U.S. EV manufacturers. Batteries are heavy and dangerous and so battery manufacturers seek to locate as close to vehicle manufacturers as possible because long distance shipping is not practical. China is currently the largest market in the world for EVs so the big battery manufacturers are moving as much production capacity to China as possible. Panasonic, LG Chem and Samsung are major players that have invested heavily in China production. Even Tesla has announced plans for a battery gigafactory in China. But the key is that the production for those factories is limited to China EVs. Regardless of the capacity built in China, it will have little impact on the market for EV batteries in the United States or in Europe.
  3. What CATL is doing is just old fashioned Chinese industrial policy. It is manufacturing a product that has mostly become a commodity. Its strategy is to make an “adequate” product in high volume, competing almost solely on price. In 2017, CATL reduced its product price by 30%. As it expands production, further price reductions are expected. Usually this policy leads to overproduction and value/market destruction and this could happen in China as CATL and BYD and others engage in a race to the bottom. However, unlike what Chinese industry has done in steel and electronics, this race to the bottom will not have a major impact on world markets because the product cannot be readily exported. The situation is more like that of cement in China: the destructive industrial policy has no impact on the rest of the world because the product cannot be exported.

The real issue here is that CATL is investing huge sums in manufacturing a product with a less than rosy future. CATL makes old generation versions of lithium cobalt oxide batteries. Though lithium is readily available, cobalt is rare and expensive. More importantly, it is well known in the EV world that lithium cobalt batteries do not have the energy density to compete with petroleum based engine systems and other battery types are already being developed to replace lithium cobalt. Though lithium remains a constant, other metals such as manganese, nickel and even iron are being developed as alternatives to cobalt.

Though CATL appears to have a large R&D department, it does not seem to engage in its own cutting edge research related to developing the new generation of EV batteries. R&D for CATL is confined to two areas: a) additional cost cutting and b) assimilating existing battery technology developed outside China. As CATL continues cutting its prices, its ability to do cutting edge research and development will likely be further constrained.

So what’s the real take away here? CATL and other Chinese EV battery makers do not need help on the investment and production side. They have that covered. But they need access to evolving battery technologies to achieve increased energy density, reduced material costs, reduced weight and increased safety. In other words, we should expect them to fall back on another standard Chinese industrial policy strategy: assimilation of foreign developed technology.

What I expect to see in the next decade of electric vehicles in China is an avid interest in foreign technology in all related fields, centering on power supply (batteries/rechargers) and on vehicle technology. Chinese companies will use all the standard techniques that we have discussed on this blog to try to acquire foreign technologies that are already rampant in the auto tech and other high tech industries: The question is not so much what the Chinese companies will attempt to achieve; the question is whether foreign developers of these critical technologies will give them away or demand adequate compensation.

For more on the “giving away” intellectual property to China versus getting adequately compensated for it, check out the following:

And for more on China IP issues directly related to the automative industry, check out China IP Challenges for Automotive Suppliers.