Inside Shenzhen – China’s high-tech heartland

It is the ultimate DIY challenge: to build an iPhone from scratch. Search online and you can find videos of people doing just that using only components sourced from the world-renowned Huaqiangbei electronics market in Shenzhen.

No place epitomises Shenzhen’s culture of electronic tinkering better than this massive complex. It is not so much a market as an entire neighbourhood – a collection of buildings stretching over several city blocks, each honeycombed with small-time vendors selling smartphone guts and every other conceivable category of electronic gadget.

The wide range and cheap price of components on offer here demonstrate why Shenzhen has been – and probably still is – the copycat capital of China when it comes to electronics, with what is believed to be the largest amount of patent infringement per square kilometre in the world. Some sources go so far as to suggest that the Chinese term shanzhai (literally ‘mountain stronghold’), which is often applied to imitation goods, is an outgrowth of the city’s name.

However, today, what first catches your eye as you approach the market is the flashy branding for a triumvirate of locally based Apple competitors: Huawei, Oppo and Vivo. The success of these firms and many others like them is flipping the Shenzhen script. Last year, for the first time Huawei sold more phones than Apple. The city, and the broader region surrounding the Pearl River Delta, now has a genuine claim to be one of the world’s top innovation centres – an identity that both local and national government figures are keen to promote, in part by showing that the IP enforcement regime here has teeth.

Why Shenzhen matters

For licensing executives in the mobile space, one number sums up why Shenzhen should be a frequent destination for business travel: 365 million. That is the combined amount of mobile shipments in 2016 by Huawei, ZTE, Oppo and Vivo – though the latter two are officially headquartered in nearby Dongguan, all have key IP decision makers based in Shenzhen. In a global smartphone market, which contracted for the first time ever last year, this figure represents a huge share of available mobile licensing revenues.

However, Shenzhen’s importance to the global technology and IP businesses goes far beyond even that. The city’s culture of tinkering has made it a natural world leader for new applications in the Internet of Things (IoT) sector. From upstart drone maker DJI to long-established appliance manufacturers Midea and Gree, this is opening up some exciting opportunities. It is a good bet that the world’s next IoT superpower will emerge from this region.

More broadly, Shenzhen matters a tremendous amount to China’s efforts to become what policymakers there term “not only a big IP nation, but a strong IP nation”. Shenzhen firms lead the way in domestic patent filings – doubtless enticed by generous government incentives. According to the local government, there were estimated to be 107,000 effective Chinese invention patents owned in Shenzhen in 2017, with the patent ownership per 10,000 people making it number one among China’s cities.

That is partly because Shenzhen is a leading site of private sector innovation – a development that the government is keen to encourage. The city boasts of meeting a criterion known as “the four 90%s”: more than 90% of R&D labs, 90% of R&D personnel, 90% of R&D funding and 90% of invention patents are within private companies.

Shenzhen is also pivotal in terms of China’s efforts to emphasise IP quality – moving from big to strong. One common metric for this is how many patent firms are filing overseas, for example through the Patent Cooperation Treaty (PCT).

Shenzhen telecom firms Huawei and ZTE lead the way by a significant margin in this count – in 2017 they filed 7,000 PCT rights between them. Filling out China’s top 10 are four other South China notables – China Star Optoelectronics Technology, Tencent, Oppo and Coolpad. In all, the top 15 on this list (see Figure 1) contains 10 companies based in Shenzhen or nearby cities such as Huizhou and Dongguan, which can be considered part of the greater Pearl River Delta tech ecosystem.

Who’s who in Shenzhen

The list of top PCT filers gives a good idea as to who Shenzhen’s biggest players are in the fields that tend to generate the greatest level of IP protection and enforcement work. However, these firms only scratch the surface of a truly staggering amount of commercial activity. Consultants, lawyers and IP executives say that the tech firms of Shenzhen and its surrounds can be classified into a few major groups.

Huawei

It is no surprise that Huawei is in a category all its own. It is not a simple matter of scale, but a consequence of at least a decade of concerted effort to build a business that is international in many respects – particularly in its approach to patent strategy. Head of intellectual property Jason Ding leads a Shenzhen-headquartered IP team with hundreds of members.

According to professionals who have worked with Huawei, one example of its unique approach is that in addition to traditional functions (eg, prosecution, litigation and transactions), the company has a dedicated in-house research centre to study international IP legislative and case law developments, delivering reports on these to internal customers.

Delegates listen to a panel at IPBC Shenzhen, held on April 20 2018

Huawei has also invested a great deal in standards development and is expected to play an even greater role in the 5G space. Already, it is obvious that the company is one of just a handful of Chinese companies with a significant stake in both sides of the licensor/licensee equation. The most significant manifestation of this is Huawei’s ongoing dispute with Samsung, which is occurring partly on home turf.

Huawei’s significant investment in its internal IP department has made it something of a training ground for corporate patent professionals in China. It is common to meet Huawei veterans leading IP functions at smaller Chinese companies.

In this same category, it is also worth mentioning a company that is not from Shenzhen but which has a large footprint there – Foxconn. Once best known for its iPhone assembly plants in the city, the technology giant from Taiwan has a significant IP presence in Shenzhen, which is helping to drive its transition to an innovation-based company. It, too, is a common career launcher for Chinese IP professionals.

China’s high-tech heartland, Shenzhen is home to 10 of China’s 15 top PCT filers

Global IP operators

While Huawei may be the 800-pound gorilla in the room, there are plenty of other firms with dedicated and sophisticated IP functions, which are also major players in the global patent market. At the higher end, some of these have internal IP teams with between 30 and 40 members, and many creatively manage outside expertise including lawyers, strategic consultants and brokers.

In the mobile and telecoms space, firms such as ZTE, Oppo and Coolpad file plenty of patents and have also been active in making third-party acquisitions as they seek to catch up with both Huawei and international competitors.

These firms have embraced a variety of aggressive tactics to reach that goal. ZTE is a rare Chinese major, which deals openly with foreign non-practising entities (NPEs). Oppo has demonstrated a wide acquisitive streak, while Coolpad launched a significant domestic mobile competitor dispute against Xiaomi early in 2018.

In the internet and software industry – which has seen less open conflict than the telecoms space – tech giant Tencent, Asia’s most valuable company by market cap, has also devoted significant resources to intellectual property. It recently joined the patent licensing world in a big way, concluding a cross-licence with Google which is significant for being one of the search giant’s first big IP transactions in mainland China, where its business is severely restricted.

Numerous other companies in the region all have dedicated IP teams recognised by peers for their quality. They too have found themselves either entangled in cross-border disputes or taking advantage of transaction opportunities. Big names include drone maker DJI, automaker BYD, display maker China Star Optoelectronics Technology and duelling appliance companies Midea and Gree. The key priority for many of the companies in these categories is using patents to protect and facilitate their global expansion outside of China.

Shenzhen prospered under economic reforms ushered in by former Chinese leader Deng Xiaoping

The masses

What distinguishes the global operators from the mass of other tech companies in Shenzhen is the presence of a dedicated IP function with a reasonable headcount. The majority of firms – guesses range from between 60% and 70% – have no such team, or perhaps just one or two individuals looking after IP issues.

For businesses focused on China or developing markets, much IP activity is driven by government policy, including tax incentives given to patent filers. There are a number of efforts – mostly sponsored by the government – to increase the IP know-how inside organisations such as these. While it is hard to say whether these will produce companies with commercially focused IP value creation strategies, greater pressure from firms above them with significant IP arsenals might prove a key catalyst.

Interview with Dylan Lee, deputy director, licensing and transactions, Huawei

Dylan Lee leads a team in Huawei’s IP investment and transactions department. His work includes patent purchases, sales, investment, forging patent alliances and consortium activities. He is also heavily involved in Huawei’s IP strategy, licensing, litigation, disputes, structuring and policy matters.

Lee’s team provides legal and IP advice to all capital investment projects at Huawei, including M&A, joint ventures, venture capital and divestures, making him a key member of the company’s legal team.

Why is Shenzhen an innovation capital?

Shenzhen is an emerging city with an inherently open and win-win urban character. It continues to attract dynamic capital and talent from across the country and around the world. With a complete hardware and software industry chain, it has become possible within a short time to pool capital, talent, hardware and software to create innovative products and build a complete industry here.

The development of products and industries will further feed back into innovation; if innovation can in turn be protected by a strict IP protection system, a virtuous circle will be formed. In the past, there was a perception that intellectual property was a tool for Western countries to restrict developing countries. However, today we recognise that intellectual property is important and necessary. If we truly implement IP protection we will have more and more original ideas and continued innovation will be possible.

What factors have allowed Shenzhen companies to grow so quickly?

Strong competitiveness with advanced international companies, continuous investment in and protection of innovation, recognition and reward of talent and a good industrial environment have all encouraged growth. In addition, Shenzhen’s development model is dominated by the private sector. Shenzhen’s famous local companies – such as Huawei, Tencent and DJI – are all private companies. They are more flexible and efficient in their commercial and R&D strategies.

How did Shenzhen transform from a manufacturing centre to an innovation hub?

Moving up the chain to make more advanced hardware and software products is an innovation in itself and innovation has always been a part of manufacturing. From the perspective of Shenzhen’s development, the manufacturing industry has deep experience in hardware, software and the Internet (including the traditional Internet, mobile Internet and IoT). The future is in the upgrading of artificial intelligence. From this perspective, Shenzhen has always been learning through manufacturing and innovating through learning. Of course, as the industry grows and develops, Shenzhen is increasingly focusing on R&D and design, the products of which are protected through the IP system. This will make Shenzhen’s innovation environment better and better, attracting more innovative talent and creativity.

According to statistics, the number of patent applications originating from Shenzhen leads not only China but also the world. Huawei’s patents are up among the best in the United States and Europe. Other companies such as Tencent and ZTE are also at the forefront of their industries. Moreover, the level of IP protection in Shenzhen and the judicial practice and philosophy of the courts are also coming to the fore. In recent years, some famous judicial cases have come from Shenzhen courts and involved companies based here.

How do Shenzhen companies attract and retain talent in the IP, legal and innovation domains?

As mentioned earlier, Shenzhen’s enterprises have grown very fast, so new challenges will continue to emerge. This gives the team the opportunity to continuously learn and enhance itself. Huawei also invests a lot of resources in R&D and innovation each year to provide talent with a better platform and environment to ensure continuous innovation.

What level of commercialisation activity are you seeing among Shenzhen companies?

Many companies in Shenzhen have been facing the international market and the open innovation environment from the very beginning. On the one hand, they need to contribute their own innovation and technology to the industry. On the other hand, they also need to adopt industry innovation. Standardisation is the most typical example of inter-enterprise cooperation, openness and shared use of intellectual property.

What do you see ahead for Shenzhen’s innovation and IP environments?

As you know, IAM recently presented IPBC Shenzhen – it is the third different locale in mainland China to hold an IPBC conference after Beijing and Shanghai, but this was the only one to be branded with the city name rather than the country name. This in itself is recognition of the role of technological innovation in the history of Shenzhen and also heralds the special status of Shenzhen as a city of innovation in China.

Service providers

Perhaps surprisingly, the market for IP service provision in Shenzhen remains relatively embryonic.

A fair number of consultants and advisers carrying out high-level IP strategy work with companies in Shenzhen do so through frequent travel to the city rather than from a fixed base there. This echoes the practice of several major global licensors, who have offices in Hong Kong, from which Shenzhen is an easy day trip.

Most of the major Chinese law firms are of course headquartered in Beijing, which is home not just to China’s patent office and the most consequential courts, but also a fair number of established and start-up tech companies. Nevertheless, some of the major local law firms have begun to open up offices in Shenzhen. Borsam IP is one of the few decent-sized IP legal firms founded and headquartered in the city; it opened in 2006.

Storefronts near the Huaqiangbei electronics market in Shenzhen

In late 2017, Chicago-based IP boutique Brinks, Gilson & Lione claimed to become the first foreign IP firm to have opened a permanent office in Shenzhen. The firm stated that it made the move in order to serve longstanding clients including Huawei, ZTE and Tencent, and that it hoped to advise more Chinese companies on the US IP environment.

The IP Office of Singapore is another entity that has apparently noticed a demand for IP services outstripping supply. In early 2017 it opened up its first overseas representative office – the Sino-Singapore Guangzhou Knowledge City – about an hour north of Shenzhen. Chief executive Daren Tang said that it was part of a plan to “help Singapore’s IP service providers connect with innovative companies in China, and also promote Singapore’s suite of IP products and services to Chinese companies”.

As local practitioners develop more in-house experience, homegrown consultancies are beginning to take root as well. TECHVISUM is a good example. The firm was set up by former IP executives from Skyworth, ZTE, BYD and Huawei, and now has around 70 employees in its bustling office in the Nanshan district. These types of local players deeply embedded in the unique tech scene here will pose a powerful challenge to outside advisers in the years to come.

NPEs

Some of the very earliest examples of domestic Chinese NPEs have emerged in Guangdong Province. Standards developer Iwncomm from the western Chinese city of Xi’an is famous for its pioneering standard-essential patent (SEP) cases against Sony and Apple – but it was followed not long after by Guangzhou-based Digital Rise. Founded with backing from the provincial and city governments, Digital Rise asserted SEPs related to Chinese audio coding standards against not just Samsung but also local television maker Skyworth.

Then there is licensing company Dunjun, which was founded in Shenzhen by former employees of Huawei and Foxconn in 2014. This apparent NPE has also gone after both foreign and local tech companies with patent infringement suits. Public records show that it has acquired a number of patents from Huawei and subsequently asserted them against companies including Microsoft, Samsung and Tencent.

Interview with Hugo Wang, former IP director of Tencent and founder of TECHVISUM

Hugo Wang is CEO of Shenzhen-based TECHVISUM, a member of Shenzhen’s fast-growing IP service provider ecosystem. The ex-head of intellectual property at Tencent, Wang now leads a team which includes Fushan Li (former IP director of Skyworth); Jianfeng Shen (former IP director of ZTE); Zhanghui Huang (former general manager of intellectual property and legal at BYD); and Shizhan Guo (former director of global law, IP and information security affairs at Huawei).

With such a team of senior operators, TECHVISUM is well placed to offer services at the highest corporate level – with the contacts, experience and the knowledge to talk to corporate heads of intellectual property and the C-suite. As intellectual property grows ever-more important in China, this level of expertise is only going to become more in demand.

Why start an IP consultancy in Shenzhen?

First of all, Shenzhen’s enterprises mainly focus on private high-tech companies, especially in communications, electronics, internet, biology, medical devices and new energy. It is home to world-class companies such as Huawei, Tencent, DJI, BYD and Mindray. There are also other significant companies such as Huada Gene, Rouyu and Guangqi in emerging technologies.

Second, in respect of innovation, the number of Shenzhen PCT international patent applications is about 20,000. By 2017, the city was ranked first in the country for 13 consecutive years. In the list of corporate invention patents, Tencent, a benchmarking company in Shenzhen, filed 4,933 patents in the past year, ranking first nationally in the internet industry.

In recent years, Shenzhen has not only demonstrated to the world the concept of ‘Shenzhen speed’ but also become a model for innovation and development within China.

How did the city become a hotbed of innovation?

Shenzhen’s relaxed policy environment, liberal market environment, attractive talent policy and change of government functions from management to service concepts have all helped firms there to advance rapidly. It has attracted a large number of bold and brave talents and given them free rein to blaze new trails.

From a science and technology desert 30 years ago to today’s innovation capital, the city has gone from early efforts to develop high-tech industries to its status today as a model innovative industrial cluster.

How is Shenzhen’s business environment different from cities like Beijing and Shanghai?

Compared to Beijing and Shanghai, Shenzhen is a city of migrants – the ‘Come to Shenzhen’ campaign highlights how unique this attitude is compared to the distrust of ‘Beijing floaters’ and ‘out of towners’. Shenzhen tends to take the view that time is life, efficiency is money.

Also unlike Beijing and Shanghai, Shenzhen is not based on state-owned enterprises and joint ventures, but relies instead on the rise of local private enterprises. As early as 2017, Shenzhen has won several national firsts – including when its entire R&D investment accounted for the largest proportion of gross domestic product in the country; while numbers of PCT applications from Shenzhen have ranked first in the country for 13 consecutive years.

Setting up an IP-focused firm in Shenzhen, was it hard to find experienced professionals?

There are a large number of innovative companies in Shenzhen, which makes it fertile soil for attracting and retaining IP, legal and innovative talent. In addition, the government has a relatively good talent attraction policy.

At the societal level, we have also formed an IP rights ecosystem, which includes industry associations, salons for private enterprise practitioners and IP-focused research institutes. All contribute to training and nurturing IP talent.

How mature are Shenzhen companies when it comes to IP commercialisation?

There is certainly still a gap with companies in Europe and the United States. But when it comes to IP commercialisation, Shenzhen is the best city in the country.

What do you see ahead for Shenzhen’s IP and innovation environment?

By 2020, Shenzhen will become a city with a high level of global innovation, patent applications, IP protection and management. The city’s IP literacy is greatly increasing and it will also develop rapidly in the patent service provision industry. Patent services capabilities will basically meet the needs of economic and social development.

IP business culture in Shenzhen

Not all those involved in patent licensing and other IP transactions agree that Shenzhen has a distinct business culture compared with other parts of China. However, there are a few common characteristics shared by many firms here that point the way towards getting deals done.

Some will tell you that Shenzhen companies, with their very commercial focus, have a way of looking at intellectual property as an asset that is closer to the traditional US approach. “They think IP is a real weapon, which can be used not just to protect them in a dispute, but also to strengthen their position in commercial negotiations,” one external adviser observes.

The emergence of NPE activity driven by Shenzhen firms seems to confirm this. Both Huawei and ZTE have transferred Chinese patents to NPEs (domestic and foreign, respectively) which have subsequently asserted them.

While patent filings in China remain on an upward trend, at some point many companies will face tough decisions on how much of a growing portfolio to hold on to. There will be a large number of patent professionals with litigation experience poised to take advantage of that.

As is the case anywhere in China, a foreign licensor faces a tough task trying to convince a company to conclude a patent licence agreement. One of the few levers they are likely to have is the possibility of finding a broader commercial arrangement that can be interpreted as a win-win.

Interview with Feng Ying, head of intellectual property, Oppo

Oppo is a Dongguan-based smartphone vendor, which ranked fifth in worldwide smartphone market share for the last quarter of 2017. The company has been increasing its patent filings at home and globally in the past few years. It has also actively obtained assets from third parties, including Intellectual Ventures, Blackberry and Intel.

Head of intellectual property Feng Ying is responsible for IP protection, trading, licensing negotiations, litigation and anti-monopoly issues. Before taking up his current position, he worked on electronics and communications patent applications and litigation dispute resolution at Huawei.

How did Shenzhen become a leading centre of innovation and intellectual property in China?

Shenzhen has many high-tech companies like Huawei, ZTE, DJI and Tencent. Also, it has a large number of PCT filings.

Shenzhen has capitalised on a few advantages to become an innovation centre:

• It attracts many talents and entrepreneurs, who have global vision and international experience.
• As a special economic zone, Shenzhen has more freedom and flexibility in setting up laws and policies that promote innovation.
• It enjoys unique geographical advantages in terms of space, facilities and development, simply by being located in the Guangdong-Hong Kong-Macau Greater Bay Area.

Currently, innovation is the driver of the global economy and many countries place innovation at the core of their competitive strategy. It took Shenzhen 30 years to transform from a technology desert to an innovation hub. Apart from its advantages in talent, policy and geography mentioned above, its achievement in such a short time also owes much to the local government’s consistent investment in innovation.

What is the innovation process like in a typical Shenzhen company?

The innovation process in Shenzhen is highly efficient and covers all aspects, which is definitely facilitated by its advantages in location, talent and public policy. Shenzhen has a strong appeal to professionals from China and abroad, and these people can inject their expertise and experience into corporates directly. Shenzhen has an innovation-friendly political environment and the government provides fewer legal and political regulations and restraints in order to encourage and support corporates to try new ideas. Shenzhen’s convenient location facilitates interaction with the world and this is a crucial factor, which gives it an advantage.

How do companies compete for IP talent with so many big tech companies in one area?

First, they make sure that IP professionals are respected and have enough financial resources and income so that they can continue to work in this area. Second, corporates value intellectual property in their budgets, including in how they value the IP team. Finally, intellectual property is respected from an administrative and judicial enforcement perspective here.

Where does the IP department sit in most Shenzhen companies?

The IP department in most Shenzhen companies is still marginal as it is considered a cost centre. However, as Shenzhen moves from a manufacturing city to an innovation city, more and more high-tech companies are realising the importance of intellectual property and building a strong IP department. So, the IP department is moving up in the corporate hierarchy and we see companies investing more in IP assets and professionals.

How would you assess the IP maturity of Shenzhen companies on a national and international scale?

Innovation quantity and quality in Shenzhen are at the top of the country. However, IP practices in most local companies are still lagging behind compared to those in US companies. Most domestic companies accumulate intellectual property for defensive purposes and the number of top-quality invention patents is still low. In addition, IP commercialisation and monetisation are not very mature in China yet, so the process needs more time.

What do you see ahead for Shenzhen’s IP and innovation environment?

There will be more start-ups and technology companies, with local corporates accumulating more IP assets and expertise. The innovation environment will be more dynamic and IP rights protection will continue to improve and become more sophisticated.

Many firms start doing significant business overseas before they have developed a comprehensive IP strategy. With products already on the market, they are looking to aggressively mitigate risk by speeding up the patent acquisition process and shortening the learning curve. Deals that involve portfolio sales and potentially some element of know-how may be an attractive proposition.

Many companies in the region are very focused on overseas markets – Guangdong Province accounted for nearly 29% of China’s total export value in 2016. If a foreign company can leverage patent rights in a jurisdiction outside of China, it stands a much better chance of completing a deal. One of the biggest reasons that mid-tier Shenzhen firms turn to external consultants is to game out litigation risk in various jurisdictions, including by identifying likely plaintiffs.

One defining characteristic of the Chinese tech space in Shenzhen is fierce competition around cost. With highly developed supply chains and lots of manufacturing capacity, firms are always seeking to gain an edge. The first question asked at the recent IPBC Shenzhen conference from the floor was how local companies could negotiate lower licence rates. One thing that Lenovo’s Shirley Chen advised in response was not to get too focused on price at the expense of other contract terms.

China’s second city for IP enforcement

Places that generate a lot of innovation will always have a certain level of IP activity around them. But activity specific to patent monetisation is often clustered around favourable enforcement venues – think Texas in the United States or Germany in Europe.

It is probably safe to say the Beijing remains the premier IP litigation site in China, based on the Beijing IP Court and the Higher People’s Court. However, although Shenzhen was passed over in favour of Guangzhou in the original specialised IP court scheme, it has emerged as something of a second city when it comes to patent litigation. The local government looks keen to burnish this image.

Probably the most significant recent case at the Shenzhen Intermediate People’s Court – the forum of first instance for patent disputes – was the first fair, reasonable and non-discriminatory (FRAND) ruling in the ongoing litigation battle between Huawei and Samsung. The Chinese company brought its case against the world’s top smartphone maker simultaneously in California and Shenzhen, but the Chinese court action moved much more quickly.

IPBC Shenzhen attendees exchange business cards

In January 2018, the court issued decisions based on infringement of two Huawei-owned SEPs and ordered an injunction against Samsung – the second such ruling ever in China. The case held important lessons for global FRAND watchers over how Chinese courts will apply a fault-based approach to awarding injunctions.

In its official announcement of the verdict, the Shenzhen court stated that the case and its result highlight the city’s “innovation-driven development strategy”. The decision came shortly after it was announced that IP cases in Shenzhen would soon be heard in a specialised IP-focused tribunal.

The list of major competitor cases brought in Shenzhen over the past year (see Table 1) demonstrates that patent plaintiffs, who have wide discretion over where in China to bring cases, already have a great deal of confidence in the competence of judges, even in this forum which lacks a specialised IP section.

City officials are also clear that one reason why they are working to make Shenzhen a hub for patent enforcement is to support local tech companies as they transition from manufacturing-driven to innovation-driven business models.

For example, in late 2017 the city’s customs officials seized around 260,000 products intended for export on the grounds of patent infringement as part of a special enforcement campaign. Past efforts have often been carried out on behalf of foreign brands in order to boost confidence in local IP protection – this time, the goal was to “nurture Chinese companies with IP advantages in their exported goods”. The beneficiaries of the blocked shipments were enterprises who were determined to be “capable of independent innovation” – a group that explicitly included Huawei and ZTE.

Speaking with government officials in the city, it is clear that there are many more big plans in store, including a major IP services centre and possibly a branch office of the State Intellectual Property Office. No doubt this drive is intended first and foremost to support the local national champions, which are blazing the trail for China in areas such as 5G and the IoT. However, they will also mean rich opportunities for foreign entities that acquire an in-depth understanding of this unique ecosystem.