Let’s Compete on Innovation Rather Than Patents
“Most U.S. patents are commercially frivolous and irrelevant. The Chinese patents will be even more so. As The Economist reported, Chinese patent examiners are paid more if they approve more patents, and so routinely approve even the most dubious filings. Chinese academics, companies, and individuals have strong incentives to patent worthless ideas: with more patent grants, professors gain tenure, workers and students gain residence permits to live in a desirable cities, corporate income tax is reduced from 25% to 15%, and companies win lucrative government contracts. The reward doesn’t come from innovation, but from the act of filing a patent application.”
The next generations of telecom technologies are called “LTE” or “4G”. China’s Huawei believes that by 2015, it will hold 15–20% of the worldwide patents in these technologies, and that these will earn it at least 1.5% of the sales price of every device—every cell phone, laptop, and tablet—that uses them. Huawei is on track to achieve its goals: in 2007, it held just 152 patents; by the end of 2009, it had applied for 42,543 patents, of which 11,339 had been granted in China, 215 in the United States, and 1282 in Europe. Huawei’s rival, ZTE, claims to hold 7% of the world’s LTE patents and plans to increase this to 10% by 2012.
Emboldened by these successes, the Chinese government has initiated a nationwide program to make China the world leader in patents in every important industry. The New York Times reported that the government is offering cash bonuses, better housing, and tax breaks to individuals and companies filing the most patent applications. According to the Times, China’s goal is to increase the number of its yearly “invention” patent filings from this year’s 300,000 to one million by 2015. And it wants another one million “utility-model patents”, which typically cover items like engineering features in a product. In comparison, there are 500,000 invention patents granted every year in the U.S. The requirements for “utility-model patents” are so mundane that they are not even recognized in the U.S. as a legitimate criterion for the existence of intellectual property.
In the tech world, patents don’t foster innovation; they inhibit it. They are like nuclear weapons in an arms race, in that companies use them to hold competitors back or to extort license fees from companies that can’t afford the time and cost of litigation. These battles play out every week in Silicon Valley: among the behemoths—Microsoft, Hewlett-Packard, IBM, Oracle, and SAP—and between behemoths, startups, patent trolls, and large corporations. Startup entrepreneurs live in constant fear that behemoths or patent trolls will bankrupt them with frivolous lawsuits.
So in the years ahead, China will have lots of patents—far more than the U.S. You can’t fault China; it is simply taking a page from Silicon Valley’s playbook. Its leaders have figured out how the American patent system works and how to master it.
This is a battle we can’t win. The Chinese economy will be littered with millions of stumbling blocks for foreign business. These companies will have to offer up their intellectual property in exchange for Chinese intellectual property—in the same way that IBM and Microsoft trade patents. Or they will have to pay license fees to enter the Chinese market. And China may challenge the U.S. globally with its new patents as it plans to do with 4G.