To Win In China, Help China Win: How to Be a Friend to China

Every company anywhere – if large enough – must engage in China, whether because of the huge manufacturing capability, the best-in-class scientific minds, or the second largest sales market in the world. It is no secret that China takes a nationalist approach to most things. This includes its technology industry as well as intellectual property protection. Indeed, this nationalism has led to China making remarkable strides in growing its economy and international significance in a very short period of time. The key to leveraging the China experience lies in managing this nationalism to forge mutually beneficial solution, especially now that China is expanding enforcement of both patent law as well as its anti-monopoly laws. And yes, these are in conflict to a large degree.

In Chinese philosophy, yin and yang (阴 and 阳) describe how opposite or contrary forces are actually complementary, interconnected, and interdependent in the natural world, and how they give rise to each other as they interrelate to one another. The yin yang shows a balance between two opposites with a portion of the opposite element in each section. In modern China, foreigners should take note that to take the good, you must also input good. Otherwise if you only take the good, eventually you will receive the bad.

In China, you will often hear the the term “win-win” (双赢 or shuāng yíng) used. It denotes a desire to achieve resolution that provides for the collective good. For the purposes of foreign companies working with China or its industries, this means being a “friend of China.” Lu Wei, chief of the State Internet Information Office in Beijing, has explicitly warned that foreign companies should not expect to simply make money from China without being its “friend”. The penalty for not complying can be harsh. In the case of my former employer, Qualcomm, the penalty came in the form of a $975 million fine, plus a cap on certain royalty rates. The Chinese investigation into allegedly unfair royalty rates charged to Chinese companies subsequently led to similar investigations in South Korea, Europe, and even the US. Not being a friend to China can punish a company in other parts of the world as well.

In my opinion, and I certainly do not speak for Qualcomm, the company’s royalty rates have always been very fair. In the beginning, when they had virtually all patents on CDMA technology, Qualcomm could have taken a high-royalty, litigation-first attitude about protecting its patents. Instead, they decided to adopt a low-royalty, rarely-litigate strategy. This seemed to be the right move given that suing one’s customers is generally not a great idea for business. Nonetheless, and despite the fact that Qualcomm helped build the mobile industry in China, the company has lost over a third of its stock value largely due to the Chinese investigation and its progeny.

So, if a company does the right thing, and even helps build an industry, but then gets punished, how can a company ensure it does not run afoul of China’s anti-monopoly efforts? Quite simply, there is no guarantee. However, there are steps one can take to try to maintain a symbiotic relationship.

First, be humble. Don’t be a jerk. Chinese culture is one of humility and respect. Many American companies make the mistake of coming into China like a cowboy, and aggressively trying to grow the businesses, often at all costs. This is not going to work, and will, in time, backfire. My advice is to listen a lot, say little, and be respectful in all dealings, whether business or personal. Chinese culture does not permit development of business relationships at the same speed as in the West. In fact, your first meeting may not even discuss business, or at least very little.

Second, take time to build good relationships. As mentioned, these take longer, but China is built on “guan xi” (关系) or “relationships.” The good news is that after you have finally developed trust and true friendship, these relationships will last much longer than those in the West. In the world of law firms in the US and UK, clients now leave at the drop of a hat. Anything that goes wrong can be the cause of a client leaving. In China, this is not the case. Clients will usually take an interest in continuing to build the friendship after the initial bridge is built. This makes more business sense than the American way, as it takes much time and money to replace internal company knowledge and protocols with the new service provider. Keep in mind that although good lawyers will always “paper” the deal, in China, the actual meeting of the minds is more important than any contract. China is a culture of honor, and good businesspeople, will generally want to uphold the deal as they understood it. The job of the lawyer is to make sure the paper matches that understanding.

Third, always think about China. The people. The industry. The government. This must be an overarching concern in any major decision. The path to success is to create a win-win for China. That means making sure that the Chinese people, their businesses, and their government benefit. I am NOT talking about corruption of any kind. Rather, I am talking about making sure that anything negative that is created is countered by a positive.

For example, Chinese patent litigation is growing very quickly, so much so that foreign companies are using the court system in China to sue other foreign firms, and even Chinese firms. The statistics say that the win rates for foreigners, even against Chinese companies, are at least as good as for Chinese plaintiffs. But there are still relatively few foreign-brought cases. And even foreign defendants employ Chinese workers, so there has to be some “good” to equal the “bad” of putting Chinese employees out of work.

To ensure that foreign plaintiffs continue to receive fair treatment in Chinese court, they will need to “be a friend to China.” This could mean investing in Chinese tech startups, setting up technology incubators, working with universities, or anything that gives back to China. For instance, foreign companies can team up with Chinese companies to give them a business advantage. Contributions can be financial, or strategic, by providing much-needed advice on how to manage and leverage IP. China now has the minds and the money, but still lacks the experience from the West to commoditize and monetize patents. By building relationships with companies and schools that will foster the next stage of innovation in China, foreign companies can help China get to where it wants to be: an innovation-driven economy.

The ways of creating consortiums to benefit China are as many as the many business and other opportunities in China: limitless. But as China’s leaders readily admit, foreigners must be ready to contribute. And this is only fair. China has a lot to offer foreigners, but it should get something back. This is the duality or equilibrium that has been China since the beginning.

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