Asian portfolios in flux

Asia has long boasted an impressive share of the world’s largest patent portfolios, thanks to the intensive filing programmes of electronics giants in Japan and Korea. Six of the 10 biggest owners of in-force US patents hail from the region, according to a study reported in the last issue of this magazine. More recently, thanks to prodigious patenting activity among Chinese corporates, the region is also home to many of the fastest-growing arsenals. The patent development gap between China and its East Asian neighbours has created the conditions for a thriving market, as upstarts seek to grow their holdings and older incumbents to slim them in pursuit of cost efficiency. What Asian corporates have in common is that they are attempting to optimise their portfolios at a time of relative uncertainty. The future of the Unified Patent Court (UPC) is in limbo following the UK vote to leave the European Union; reforms that have weakened patent rights in the United States look here to stay, but a new administration is coming in; China and India seem poised to become important litigation venues, which may raise more questions than answers; and regulators and lawmakers across Asia may yet weigh in decisively on a range of IP matters, with unforeseeable results. Portfolio management, then, calls for patience, balance and flexibility.

Growth areas

The most obvious jurisdiction in which we are seeing extraordinary portfolio growth is China. By now, the biggest individual drivers of this trend are well known – large legacy telcos from the mainland such as Huawei and ZTE have topped the tables for Patent Cooperation Treaty (PCT) patent filings for several years. By and large, this stemmed primarily from a torrent of filings to China’s State IP Office (SIPO) that were heavily incentivised by government tax inducements, but also from significant investment in R&D. For the most mature and globalised Chinese companies, US patents too are now major components of their holdings and they are still growing at astonishing rates. Among the entities which own at least 1,000 US patents, compiled in the last issue of this magazine by MDB Capital Group’s Michael Chernoff, half of the top 15 fastest-growing portfolios belong to Asian companies (see Table 1). China Star Optoelectronics Technology – a Shenzhen-based joint venture between TCL and Samsung Display – was the runaway winner by that measure, increasing its US filings at a 114% compound annual growth rate (CAGR) over the past three years. Starting from a higher baseline, Huawei and ZTE were not far behind, each growing by the same measure at more than 25%.

But these players do not come close to telling the full story. There are many more in their wake with heavily China-skewed portfolios that are now looking to develop patent portfolios that are commensurate with their market size and financial resources. One example is Mindray, China’s largest manufacturer of medical devices. Some of the Shenzhen-based company’s flagship products include patient monitoring and life support systems, as well as imaging equipment – markets in which it competes globally with global titans such as General Electric and Philips. Right now, says head of IP Jianguang Du, the company owns about 2,300 patents (including pending applications). Around 15% are US issued and two dozen or so are in European markets. The order of the day is growth and the team has worked out an approximate target based on the size of the business. “When we reach a steady state, we’ll have 4,000 to 5,000 patents in our portfolio,” says Du. “I would say that is about the right size for a company with $1.3 billion in annual revenue.”

There are areas of significant filing growth in Korea and Japan as well, despite the fact that they are already home to many of the largest IP owners worldwide. Some of this has been spurred by technological shifts; Toyota and Hyundai stand out in their respective markets as automakers that are ramping up patenting activity despite their impressive existing asset bases. Much of this is down to advances in fuel cell, electric and other alternative powered vehicles; increased convergence of cars and computing is also doubtless a contributor. Others, such as Korea’s LG Chem, are boosting R&D in an effort to break into new product markets. The company reports that its overall IP holdings grew last year by 19%, and that one objective of this expansion is “cutting the company’s heavy reliance on the conventionally strong businesses by reaching out to new businesses with more investment in related patents”.

“We are increasing our portfolio because R&D expenditure and output is rising,” explains LG Chem’s head of IP Kyung Hwa Min. Press reports indicate that the company intends to boost its research headcount by nearly 30% over the next two years. “We have not set any special goal for our portfolio size,” he continues, adding that benchmarking against competing companies is only one part of the right-sizing process. Acquiring patents from third parties is not part of the current game plan either. “I think our management, including myself, is somewhat hesitant to obtain patents from an outside source,” Min elaborates. “We try to design around our competitors’ patents in the early stages of R&D if possible.” For IP protection needs that cannot be addressed internally, the company tends to rely on licensing to secure freedom to operate. And while the group occasionally picks up some patents as part of an M&A transaction, this is very much regarded as a secondary benefit.

Buying time

By contrast, for many Chinese corporates, patent acquisitions have become a major part of their portfolio growth strategy. Xiaomi inked one of the most notable deals of the year so far when it picked up 1,500 patent assets from Microsoft as part of a broad licensing tie-up in May. Taiwan Semiconductor Manufacturing Company (TSMC) similarly acquired “up to” 400 patents as part of a licence deal in April; but interestingly, the seller was WiLAN. These agreements suggest that assisting Chinese and Taiwanese corporates with portfolio-building efforts can help to close licence deals, even for NPEs, in an otherwise tough environment. Assignment records also show that Xiaomi bought US assets from the likes of Intel and Broadcom in the past year. Beijing-based semiconductor display maker BOE has done the same, transacting with a range of operating companies.

Du confirms that Mindray is also looking to purchase, but to fill specific strategic gaps rather than to pad out its quantitative position. “I would like to buy something in the order of tens or hundreds of patents for reasons related to potential disputes with major competitors,” he states. A targeted approach to acquisitions is a prudent one, according to Roger Tu, senior vice president of MiiCs & Partners, the patent monetisation company under Foxconn Technology Group which provides services to a range of corporates. “Many Chinese companies grow so fast that their patent portfolios can’t keep up”, he says. Companies should aim for a healthy rate of organic growth, as “too much inorganic growth can cause problems”, particularly in the costs department.

Straight M&A transactions are another way to build up an IP position and acquiring entire businesses rather than just patents has its own benefits – not least of which is the know-how that comes along with the portfolio. After all, says Tu: “The patent team and the commercial team need to work together.” Foxconn itself made one of the biggest tech deals in recent memory when it agreed to a $3.5 billion takeover of electronics giant Sharp in late March. Once finalised, the transaction could see the merger of two titanic portfolios, with the Taiwanese company owning over 14,000 grants in the United States alone and the Japanese company over 13,000. Big or small, suggests Tu, the key to managing an acquisition is thorough analysis of the target assets: “Of course you will have done due diligence work beforehand, so you have some basic understanding of the portfolios.” When the deal closes, the deep dive into both portfolio and business units begins; only after that can you decide on the best way to utilise patent assets, including possible monetisation. “Some rights may overlap,” Tu continues, “some may be useless, but some may be very valuable.” As it stands now, determining how best to exploit patents is looking like a big part of Foxconn’s planned pivot for Sharp, with chairman Terry Gou saying that a key early step is to “speed up the transformation of Sharp’s patents into technologies that yield commercially viable products”.

It is still very much early days in this marriage and Tu did not go into much detail about any plans that Foxconn might have for the Sharp portfolio. But Tatsuo Nakamura – CEO of Valuenex, a big data analytics platform which provides services predominantly to Japanese patent owners – can see the logic behind the deal. Pointing to a patent scatter chart (Figure 1), he observes that Sharp has a very strong portfolio and its core technology is optical technologies, while Foxconn is concentrated on less high-tech areas. “The reason why Terry Gou wanted to have Sharp technology is that Foxconn has been moving toward Sharp’s areas in the last four years,” says Nakamura. In other words, adding the Sharp patents will cement Foxconn’s position in spaces that its own R&D has already been pushing towards.

Figure 1. A slide prepared by Valuenex maps the Hon Hai and Sharp patent portfolios

In the case of Mindray, Du says that it has bought two US companies and one of those deals – for ultrasound producer Zonare – was “primarily based on the company’s patents, technology and IP itself”. Like several other US-traded Chinese players, Mindray is in the process of going private and then re-listing on a mainland Chinese stock exchange, where richer valuations could give it a bigger war chest for acquisitions. One of the more notable sectors for outbound Chinese acquisitions has been home appliances. Following Haier’s $5.4 billion purchase of GE’s appliance business in January, Guangdong-based rival Midea responded with a takeover of Toshiba’s white goods division, which reportedly netted it 5,000 patents. The same company recently took a stake in high-end German robotics firm Kuka, in an indication that acquisition efforts are increasingly focused on higher-tech industries and European targets. All indications are that a lot more patent portfolios will come under the control of mainland Chinese companies through M&A transactions in the years to come.

Prudent pruning

That said, there are broad swathes of industry in East Asia where patent filing is on a clear downward trend; and even where portfolios are growing, there is a heightened focus on streamlining them in pursuit of greater cost efficiencies. Domestic patenting has dwindled in Japan over the last decade – local corporates filed nearly 30% fewer applications in 2015 than they did in 2005. A major reason is the financial pressure that some of the largest businesses have come under, coupled with the eye-watering cost of maintaining the huge portfolios they amassed over the years. “Among Japan’s major companies, some are focused on saving money on application costs,” notes Nakamura. He also observes that “innovation power is decreasing”, with companies gradually focusing more on basic technologies and scientific fields where the products of R&D may not be patentable.

The cheapest and easiest way to trim down an expensive portfolio is to stop paying maintenance fees on a portion of it. In a study of patent renewal rates at both the US Patent and Trademark Office and European Patent Office (EPO) in issue 73 of IAM, authors found that abandonments in both jurisdictions had grown by 35% over 10 years and Asian corporates were at the forefront of this trend. Seven of the 10 companies that abandoned the most US patents on average between 2005 and 2014 came from Japan, with Korea’s Samsung Electronics also making the list (see Figure 2). In Europe, five of the top 10 were Japanese corporates (see Figure 3). “When you have more than 10,000 patents, maintenance is a big issue,” remarks Tu. “Oftentimes, the patent portfolio has accumulated to a certain level and usually you don’t fully understand what’s inside it. You either trim down or monetise the assets.” This is part and parcel of good portfolio stewardship, Nokia Technologies’ Ilkka Rahnasto told delegates at IPBC Global in June. “Trimming can always be done; mature companies do it continuously,” Rahnasto said, adding that many companies could probably save 30% on costs in one bite.

Figure 2. USPTO 10-year average abandonment volume by company, 2005-2014

Source: IAM issue 73

Figure 3. EPO 10-year average abandonment volume, top 10 companies

Source: IAM issue 73

Min reports that LG Chem tends to revisit these decisions annually and that, rather than assessing the whole portfolio, decisions are broken up between the three core business units: “As part of our patent strategy, the IP centre and business units decide on how many patents they need. We sort out all our patents according to the business units and we discuss with them whether we need to maintain or whether we need to abandon some patents almost every year.”

Although streamlining may be a more pressing matter for the largest patent owners, it can be a vital part of small companies’ strategies as well. Abandoning or divesting patents that are not being exploited can free up funds to allow companies with more limited resources to continue growing their stock of IP assets. As Alyssa Harvey Dawson of Harman put it at IPBC Global: “If you think you don’t have any weak assets to prune, you’re wrong.” Mindray takes a business unit-centred approach similar to that favoured by LG Chem, according to Du. Some of the factors considered by committees formed to assess renewal decisions include whether the technology is being implemented, the scope of the protection, the market size and the year. “If it has been close to 10 years and the technology is not core and nobody has copied us, we have to balance whether or not we should pay,” Du says.

Decisions on abandonment are tough, partly because they come with risks. Nakamura shares an example of a missed opportunity he detected while analysing a certain technical field: “We looked at core patents that Panasonic had in the area of robotic vacuum cleaners.” Panasonic had patents in this area long before iRobot introduced its iconic Roomba; but the Japanese company had abandoned them before the product debuted. “Panasonic didn’t see a trend occurring around that particular technology and figured it wasn’t important,” suggests Nakamura. “Had they done the analysis before abandonment, they might have seen that they had a lead in the area and maintained the patents.”

Of course, there are alternatives to outright abandonment. Du says that Mindray always attempts to sell patents, gauging interest through a broker, before abandoning them. Min too says that divestment is always a possibility, but the same factors that make patents ripe for abandonment sometimes make them inherently difficult to sell. The privateering model is another option, allowing companies to retain some interest in the results of any licensing deals produced by the patents; Japanese companies including Panasonic, Rohm and Renesas have taken this road in recent years. But for every company exploring those options, there are several others missing out on opportunities to realise value from unutilised patents, says Tu: “When a company abandons patents, I’m sure there’s some process to make that decision. But most companies don’t have a good connection to the patent market.” Companies with small or medium-sized portfolios, in particular, might not have access to resources or information that might reveal how certain of their patents might be able to generate returns.

What seems clear is that the Chinese companies that are feverishly expanding their portfolios may eventually find themselves in the same position as many Japanese corporates today. They might do well to learn from Tata Consultancy Services (TCS), which – although its patent-building efforts began in earnest only five or so years ago – has already put a structure in place aimed at monitoring the portfolio’s cost efficiency. The head of the company’s corporate IP group, Ganapathy Narayanan, tells IAM: “We are tracking patents that come up for renewal and asking whether they are still mappable to an existing product and whether that product is making money”. But given that TCS is an upstart in patent terms and doesn’t face a massive maintenance burden, the group is cautious about letting assets go. “If it’s outdated, we may still be able to leverage it now or in the future, so we keep watching for a couple of years rather than dropping it immediately,” says Narayanan. Even at the earliest stages of IP growth, attention to monitoring and trimming portfolios with all available tools could save, or potentially earn, companies a lot of money down the road.

Keeping an eye on quality

Judging the relative quality of assets is a crucial part of making the hard choices necessary to down-size a portfolio. But quality considerations are also becoming more important in China as patent disputes become increasingly common, displacing portfolio size as the issue at the front of IP executives’ minds. Observers have long cast doubt on the state of Chinese patent quality due to the sheer number of applications being filed. Even in the more mature Japanese market, the traditional practice of companies incentivising inventors based on the number of patents they file has led to many patents that cover relatively incremental innovations. IAM’s recent study of the 383 entities that own more than 1,000 US patents gave one perspective on quality through ‘tech score’ – a measure of how often patents were cited relative to a cohort of similarly aged rights. This is only one measure, but not one Asian company appeared among the top 15% of major patent owners.

A quality portfolio begins with quality drafting, says Du. By maintaining a rate of about 200 filings per year, the team at Mindray can closely monitor the process from beginning to end. Language is a key issue, particularly for Chinese companies seeking effective protection overseas. While most patents are drafted in Chinese and translated for overseas filings, companies want to avoid translation issues when it comes to their crown jewels. “For extremely important inventions, we draft them directly in English to avoid translation problems,” says Du. Patent quality is also a key consideration in the early stages of a third-party acquisition: “I want to acquire patents that have good evidence of use and strong validity, so that if we get into a dispute with our competitors, we have some bargaining power.”

In Min’s view, there is not necessarily a trade-off to be made between quantity and quality. In fact, the former can reinforce the latter, contrary to some people’s perceptions. “Our main purpose for increasing our portfolio’s quantity is to make sure we have good quality,” he maintains. “Increasing the number of patents we have means that we are increasing the number of good patent candidates.” It is often repeated that only a small percentage of any given portfolio contains truly valuable patents, whether because they might someday be enforced to exclude a competitor or generate a return in the market. And many practitioners agree that it takes years after filing before you can accurately assess what their value will be. “It is almost impossible to design a patent from scratch that you know can exclude competitors or trade in the market,” says Min. “So we think the best option is to encourage our R&D team to file as many as possible and from those patents in our pool, we discover those which may be valuable.”

Companies across the region generally report that they do much of the quality analysis of their portfolio in-house, using software tools and measures such as citations by other patents, number of countries in which there is coverage, lifespan and how they map to their own and competitors’ products. Visualisation tools offered by service providers can be helpful, particularly when it comes to explaining things to upper management. Tu suggests that there are two key aspects to a quality analysis. The first is to “look at your own business and talk to your people about their future business and product plans so that you can secure your freedom to operate”. Companies obviously are best placed to do this themselves. The second is to “research industrial trends and what competitors are doing; if you are lucky and with the right input, you might foresee certain areas of opportunity”. Tu believes that only the very biggest companies with large and experienced teams are equipped to do this latter task effectively.

Questions about validity increasingly inform both filing and renewal decisions, as they play a larger part in patent disputes around the globe. At TCS, validity has always been a primary consideration, given India’s strict rules on software patenting. Narayanan says that despite the heightened scrutiny of software-related inventions in the United States, TCS has always focused exclusively on patents that would pass muster in the strictest of jurisdictions where it does business. “If someone is thinking of invalidation, it means the invention is not strong enough. I would be very confident of validity before filing a patent. If you have a very strong technical subject matter, it’s not an issue at all.”

Global rebalancing

Meanwhile, a couple of big-picture trends are affecting the composition of Asian patent portfolios in terms of geographical coverage. One is a relatively reduced emphasis on the US market as it has become tougher for patent plaintiffs. Despite the United Kingdom’s recent vote for ‘Brexit’, many still feel that Europe is set to gain importance in the future. Then there is the need to secure freedom to operate in China, which is increasingly playing host to patent disputes between major competitors. The China-Europe nexus is one of the most interesting in the patent world right now. EPO figures show that Chinese applications for European patents grew faster than US patent filings in 2015, jumping 22% compared to 2014 (see Figure 4). Several fund managers have also signalled that Europe is a promising potential destination for outbound Chinese tech M&A, due to more reasonable valuations and the presence of fewer national security-related regulatory hurdles than the United States.

Figure 4. USPTO 10-year average abandonment volume by company, 2005-2014

Source: IAM issue 73

Small and medium-sized enterprises from China in particular have been hesitant to file patents through the EPO – not least because it is more expensive than the United States and orders of magnitude more expensive than China. Additionally, many companies traditionally “do not perceive Europe as a high-risk IP market”, explains Du, “because if our competitors want to enforce their IP, they must go after us in each and every country. That is pretty costly to our competitors and not very efficient for them”. The possible launch of the unitary patent and the UPC in Europe could change this calculus significantly. Accordingly, Mindray is now paying closer attention to Europe, partly because it sees IP risk there increasing. “It looks like the IP landscape is changing in Europe, so we are trying to ramp up our IP filings and also looking for acquisition opportunities,” confirms Du. “The unitary patent and UPC are a big factor in this decision.”

While the UK vote to leave the European Union means that the launch of the UPC will be delayed by several years, for Chinese companies that may well be a good thing in general. In a market where their IP portfolios are underdeveloped compared to those of their peers, they will have several years to prepare for what could become one of their biggest areas of litigation risk – if, that is, they see it coming. Japanese companies, by contrast, are unlikely to regard this as a positive development. “The UPC would benefit Japanese companies,” points out Nakamura. “Automotive and chemical companies are very strong and their big market is Europe” – but the current situation makes it more difficult for them to enforce their patents there.

With the US Supreme Court’s recent Cuozzo decision leaving in place the basic features of the inter partes review system, many have suggested that – regardless of what happens in Europe – patent litigation may gradually become less US-centric. But most Asian companies remain sceptical of that idea. For Chinese and Taiwanese companies, the financial burden of US litigation, including potential damages, is regarded as the greatest threat. While NPE assertions have caused major headaches for all Asian corporates, those based in the more emerging jurisdictions are just as worried about litigation from competitors potentially excluding them through International Trade Commission proceedings. “I don’t think US risk has decreased,” remarks Du. “If we were to lose a case, the damages may be high and there’s always the risk of an injunction for the entire US market.”

But companies everywhere are watching China closely, expecting more litigation there. Several high-profile disputes in recent months have put this threat into focus: Huawei has sued Samsung in Shenzhen, Apple is fighting an injunction covering iPhone 6 models in Beijing and Qualcomm launched its first patent suit against smartphone maker Meizu in the Beijing IP Court. Nakamura says that Japanese companies are very mindful of the risks, of which one of the biggest is uncertainty: “The Chinese market is kind of special because there is a huge number of patents and it is incredibly difficult to analyse and search.” Moreover, he notes that most rely on local patent agencies for filing patents there: “Many Japanese companies don’t apply directly to SIPO and that may be a weak point.”

Min reports that when LG Chem decides to file a patent overseas, it typically files in all regions considered strategically important – the United States, Europe, China and Japan – rather than picking and choosing based on the technology being protected. As a result, its portfolio is fairly balanced. “It may be more expensive, but I think our expenditure should be controlled in other ways, like managing our outside law firms,” he says. Min does note, however, that Japan is now factored into the equation less often.

“I think for the time being, the US is definitely still the most important market,” says Tu; but he agrees that India and China are both becoming more important, while the relative efficiency of the German courts makes that country attractive regardless of what comes to pass with the UPC. What is clear is that the prevailing uncertainty about future litigation risks means that companies cannot afford to focus on just a handful of jurisdictions. This potentially makes portfolio management more expensive and efficient management techniques more important.

Figure 5. LG Chem’s patent holdings by business unit

As of October 2014, LG Chem held approximately 25,000 intellectual property rights. A significant portion were in new business sectors for the company.

Source: www.lgchem.com