Island in the stream

There was probably a time, not so long ago, when ‘Made in Taiwan’ – whether embossed on a piece of plastic, engraved into metal or printed on a label – was one of the most widely understood phrases in English, recognised even by those with no ability to speak the language. Taiwan – which the Portuguese named Ilha Formosa, ‘the beautiful island’, when they first sighted it from their ships in the 16th century – had earned itself a reputation as the world’s factory decades before its much larger neighbour, mainland China.

The island still dominates contract manufacturing in the computing and consumer electronics space, playing host to several of the world’s leading electronics manufacturing service (EMS) providers, original design manufacturers (ODMs) and original equipment manufacturers (OEMs). These companies design and assemble products, or product components, for big-brand consumer electronics maufacturers such as Apple, Dell, Google, Nokia, Sony and Xiaomi, to name just a few. Four of Gartner’s top five EMS/ODM companies for 2013 were Taiwanese (Foxconn, Pegatron, Quanta and Compal), while all of Venture Outsource’s top 10 ODMs for 2014 – based on revenues derived from manufacturing that had been outsourced to them – hail from the island (in order: Pegatron, Quanta, Compal, Wistron, Inventec, Lite-On, Cal-Comp, Qisda, MiTAC and Wistron NeWeb). In 2014, Taiwanese companies accounted for over two-thirds of the global semiconductor foundry market. Things seem to be going fairly well for Taiwan’s chipmakers, with substantial growth recorded for most last year (see Table 1).

Figure 1. Export and GDP growth, Taiwan and China 2005-2013

Source: World Trade Organisation

But times are changing nonetheless. The onward march of rivals from elsewhere in the world – and notably from mainland China – is plain to see (see Figure 1). The semiconductor foundries have something of an advantage, in that they are upstream market participants. But in areas further down the chain that are even more saturated, such as electronics parts manufacturing and product assembly, the encroachment of foreign competition is even more obvious. Companies from the mainland can often provide contract manufacturing services to high-tech innovators from North America, Europe and elsewhere at substantially lower prices, eroding the Taiwanese players’ already extremely tight profit margins.

War on two fronts

While competition from within Asia in Taiwan’s stronghold of high-tech manufacturing is heating up, the island’s businesses also face another major challenge from a different direction. Mainly coming from North America and Europe, patent owners – in some cases, the same high-tech companies that engage Taiwanese outfits to build their products; in other cases, non-practising entities (NPEs) – have become increasingly aggressive in asserting their IP rights against Taiwanese manufacturers, which have found themselves among the most frequent foreign defendants in US infringement proceedings.

As an indication of this, a 2014 study conducted by Marketa Trimble of the University of Nevada, Las Vegas William S Boyd School of Law revealed that Taiwan is the fifth most frequent country of origin of foreign defendants in US patent litigation, being party to more cases than its much larger cousin, mainland China. Research published back in 2008 by Colleen Chien of Santa Clara University School of Law revealed that companies from Taiwan had been named in 56 US International Trade Commission cases between 1995 and 2007, making it the second most represented country at the quasi-judicial body after China.

Assets in the bank

It is clear that patent owners looking to assert their assets have had Taiwan’s businesses in their sights for some time now. This seems almost paradoxical when one considers how many patents Taiwanese companies own themselves.

Figure 2. Top 10 foreign countries by share of US patents granted 2001-2014

Data from the US Patent and Trademark Office reveals that Taiwan was the fifth most common country of origin for holders of US patents issued between 2001 and 2014 (see Figure 2). Furthermore, according to the Want China Times, Taiwan has the highest per-capita ownership of US patent assets in the world, with every million Taiwanese owning 355.7 patents in the United States in 2012. According to the most recent statistics from the Taiwanese government, the island had a population of almost 23.4 million in 2013. While that goes some way towards explaining why the ratio is so high, it makes the figure no less impressive; rather, it points to just how dynamic domestic businesses have been in filing and acquiring IP assets in the world’s leading patent market. It also gives some idea of how competitive Taiwanese companies have been on a global scale in recent decades.

Impressive though these numbers may be, quantity tells us little or nothing about the quality of the assets in question. “Generally speaking, there are few really strong patent portfolios here,” admits Wei-Fu Hsu, corporate vice president and general counsel at Mediatek. “Except for the biggest corporates, most Taiwan companies do not have quality patent portfolios that afford them freedom of operation. As such, as their businesses grow bigger, they still often face strong IP challenges from their competitors and licensors such as NPEs or operating companies.” Research from Taiwan’s National Applied Research Laboratories found that, in spite of the huge patent holdings at their disposal, Taiwanese companies paid out NT$115 billion ($3.83 billion) in patent licence fees in 2012, while collecting only NT$30 billion ($1 billion).

With such large portfolios on their hands, one would assume that there would be plenty of opportunities to countersue, cross-license and negotiate, and thus reduce the litigation risk. So what makes Taiwanese companies such an attractive target? And why do they continue to file for, and maintain, so many patents without getting any meaningful returns on them?

Part of this may be down to the fact that Taiwanese companies simply do not own many patents that others want to license or buy; or, worse still, that many of the patents in question are of such dubious quality that counterparties are confident of getting them invalidated. “Taiwanese companies had, and in some cases still have, the notion of quantity over quality when it comes to patent filings,” explains YP Jou, CEO of Wispro Technology Consulting and the man responsible for the Hon Hai/Foxconn Group’s patent matters. “Pushing volumes instead of developing quality patents incentivises underqualified patent agents to create low-quality patents. Taiwan companies create a lot of innovative products; but without qualified IP professionals and patent agents to manage portfolios, those products are not well protected.” Jou is quick to add, however, that this does not mean that most, or even many, Taiwanese patents are lacking in value creation potential. Rather, it would seem that a number of factors at play are holding the Taiwanese back from realising that potential, where it exists.

Drilling down, something that many in the industry observe is that, in keeping with the EMS/ODM/OEM nature of their holders’ business models, most Taiwanese-owned patents typically cover methods, processes and incremental innovation – where such things are patentable – rather than disruptive technological advancements. It is only in more recent years that a few manufacturers have begun to invest seriously in groundbreaking new R&D. “Except in a few technology fields, Taiwan companies are basically followers,” explains Cecil Liu, president at TGKW Management, which handles patent filing and monetisation strategy for E-Ink. “The objective disadvantage for Taiwan companies is that, even if we have some good patents covering improvement, the fundamental patents are owned by other companies.”

Follow the leader

That Taiwanese companies are generally technology ‘followers’ means that they are subject to the licences and royalty payments of the technology ‘pioneers’. The accumulated royalties levied may also lead to so-called ‘royalty stacking’, which further erodes the profits of Taiwanese companies. Meanwhile, the cost of maintaining their vast portfolios is also squeezing budgets.

Taiwanese companies need to become more selective in their filing strategies, while at the same time monetising the assets that they already possess. The solutions may be plain to see, but they are easier said than done.

For one thing, there is an issue with the prevailing corporate culture, which tends to view intellectual property purely from a cost perspective, as opposed to as an asset. “Faced with the burden of portfolio maintenance cost and with very limited experience in licensing and selling, patents are more like a big expense to Taiwanese corporates than assets that can potentially bring in cash,” says Joseph Chang, vice president of technical analysis at Transpacific IP. The cost of litigation and the risk that assertion can bring to a portfolio – especially in the United States, with the soaring popularity of the inter partes review regime – also deters cash-strapped Taiwanese IP owners from enforcing their rights. “The changing legal environment results in a feeling that patents are a game only for the big players, and that many patents will be killed off by legal and administrative procedure no matter how good the underlying technology is,” he adds. Nevertheless, Chang believes that there are ample opportunities for Taiwanese companies to license out their patents, with particular strengths in the display technology and semiconductor areas.

AU Optronics’ director of intellectual property, Spencer Yu, agrees that Taiwanese IP assets have potential both for monetisation and for assertion against business competitors. “Taiwan companies have developed intellectual property for decades and some are now making the transition from defence to offence mode,” he says. For Yu, the failure of Taiwanese rights holders to maximise the value of their assets is as much due to the domestic IP ecosystem as to any outside factors. “Taiwan continues to play a key role in developing technologies for manufacturing services and has good practice in creating intellectual property,” he argues. “However, we have a limited home market here and hence a restricted IP playground. A smart, globally focused IP strategy is therefore critical for Taiwan patent owners.”

Speak to Taiwanese IP-owning companies and you will discover that cross-licensing between them is rare; there are also few stories of Taiwan companies suing each other for infringement. This is partly because of the small, interconnected nature of Taiwanese industry and the fact that many companies have shared origins. Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC) – the world’s largest semiconductor foundry businesses by revenue last year (see Table 1) – both started life as spin-outs from the Industrial Technology Research Institute (ITRI), Taiwan’s state-funded R&D organisation. Wistron is the result of Acer spinning off its ODM business back in 2000; Pegatron was likewise hived off from Asus in 2010. This situation means that companies are often disinclined to seek or renew licences or assert against one another, and had led to a generally peaceful coexistence.

Another factor at play is that Taiwan has never been considered an important market in and of itself by either domestic or foreign IP owners, says Liu: “We therefore don’t enjoy the home-court advantage on legal actions against US or even Chinese companies. Subjectively, most Taiwan companies treat enforcement of patents as a high-risk business due to their huge revenue. Their worry about getting countersued overwhelms their expectation of royalty income.”

Home and away

Figure 3. Taiwan patent applications 2009-2014

	Total	Residents	Non-residents
2009	78,425	51,256	27,169
2010	80,494	52,107	28,387
2011	82,988	52,221	30,767
2012	85,073	52,515	32,558
2013	83,211	50,714	32,497
2014	78,014	45,868	32,146

The fact that patent applications submitted to the Taiwan IP Office dropped by 31.4% between 2013 and 2014 shows that, overall, companies appear to be losing interest in Taiwanese-issued patents (see Figure 3). As Liu and Yu suggest, one reason for this is the small size of the Taiwan marketplace; another is the inability to extract any value from such assets. “Our judicial system makes it difficult for patent owners to enforce their rights under patent law,” say Jou. “The bar for a lawful complaint is much higher than that in a common law system like the United States, and the plaintiff bears a heavy burden of proof. High damages awards are rare and this discourages enforcement. Also, due to the general low quality of patents, the invalidity rate is substantially high, at roughly 70%.”

While some Taiwanese companies are clearly lacking in IP strategy nous, others have leveraged patents in innovative ways in order to generate business value. Anecdotally, one tactic was explained to me which a number of Taiwanese corporates have deployed when renewing cross-licence agreements with larger, more formidable foreign companies. With the foreign licensor often expecting to demand a price hike and a requirement to license additional patents, Taiwanese licensees have bought up portfolios, housing them in shell companies or offshore vehicles. When the time comes to renew the cross-licence, they transfer in the acquired intellectual property to boost their existing portfolio with the aim of improving their bargaining position in negotiations.

Taiwanese EMS/ODM/OEM companies also regularly use patents and other IP assets to tie in contractors and ensure that they get repeat orders. By patenting product design features and manufacturing methods where possible, they can stand out from competitors and perhaps additionally assume some of the IP-associated risk within the supply chain. This can be beneficial to the contractor and can discourage it from reducing its orders or switching to other manufacturers.

Moreover, a handful of Taiwanese companies have adopted a more aggressive approach to monetising their IP assets through assertion and licensing campaigns. In some cases, they have acquired high-quality IP assets for monetisation purposes, thus circumventing any issues presented by potentially lower-quality home-grown patents. E-Ink’s licensing of its Hydis display technology portfolio is one example; Foxconn’s assertion of display-related patents it acquired from NEC against Funai, Mitsubishi Electric and Toshiba in the US courts is another. Asus has transferred a number of its patents to an entity named Innovative Sonic, which is included on PatentFreedom’s list of the top 25 NPEs by size of patent holdings. Several Taiwanese manufacturers were also involved on the buy side in a November 2012 deal that saw Transpacific IP purchase, on behalf of a consortium of Asian companies, a portfolio of patents relating to BIOS technology from California-based Phoenix Technologies. These assets are now owned by Kinglite Holdings, which since April last year has filed suit in US courts against Taiwanese companies Gigabyte and Micro-Star International and US manufacturer American Megatrends, alleging infringement of some of the acquired patents.

And it is not only the United States that could prove a happy hunting ground for patent monetisation; Taiwanese companies are arguably uniquely placed to make the most of mainland China’s developing IP marketplace, too (see box below).

But in spite of these few examples, Taiwanese companies typically remain extremely hesitant when it comes to using their IP portfolios for anything more than protecting their product and service offerings. In addition to a focus on quality over quantity, collaboration will likely remain the prevailing trend – whether in the vein of the Kinglite deal mentioned above or in other ways such as patent pooling or cooperative licensing. To get to this point, however, companies may need some help from the public sector.

In other east Asian countries – including China, South Korea and Japan – governments have played an important part in creating a domestic IP market and promoting a more sophisticated understanding of intellectual property among their business communities.

In Taiwan, opinion is divided on the government’s efforts to bring the island’s IP ecosystem up to speed. Among some of the measures taken, it has reportedly offered tax breaks to foreign licensors in the hope that they will offer lower licence fees to local companies.

The more promising state initiatives include those backed by ITRI, such as the establishment of the Intellectual Property Innovation Corporation – a public sector provider of IP strategy consultancy services.

ITRI has also been involved in attempts to set up a sovereign patent fund in the style of South Korea’s Intellectual Discovery, Japan’s IP Bridge and France Brevets. However, the Taiwanese initiative – dubbed IP Bank – has generally been regarded as a failure. Industry insiders suggest that the concept itself generally has support from IP owners; but they also say that the government was unable or unwilling to earmark adequate funds to allow IP Bank to acquire high-quality, strategically valuable patents. As a result, the project has hit an impasse.

People power

As they cannot rely on state assistance for the time being, Taiwanese businesses will have to go it alone in terms of working out how best to maximise the value of their intellectual property.

The first step will be to analyse their extensive portfolios to identify assets that can be pruned, sold off or licensed. Looking ahead, they will need to increase their focus on filing – and acquiring –high-quality patents which secure them freedom to operate, soundly protect their products and offer potential for monetisation. “To achieve that, they need more highly skilled patent expertise, both in-house and from professional service providers,” says Hsu. “They also need to change their mentality and become more willing to invest in patent assets.”

For Jou, the ability to evaluate patent quality is a crucial skill that is generally lacking in Taiwan and is preventing realisation of IP value. But ultimately, better quality will result from a firm commitment to original innovation and greater investment in R&D (see Table 6). Some Taiwanese companies – such as Acer and Asus – decided to focus some years ago on new innovation and shed their contract manufacturing businesses altogether. And there are strong signs that other companies on the island are trying to shift from being technology ‘followers’ to ‘pioneers’. “Quality must be built on solid R&D capabilities as well as strong professional services,” Jou argues. “For filing patents, even if the company has a quality invention, the patent could potentially have little value if the patent agent is not experienced.” As an example, many companies and their patent agents in both Taiwan and China continue to file US or EU patents simply by translating their existing patents from Chinese to English, he adds: “These patents, even if somehow granted, face a huge risk of invalidation. Some companies take the other way around: filing US patents first and then translating them into Taiwan or China applications. Such patents are at risk too. Imprecise, improper translation to Chinese can be devastating to patents.”

Jou suggests that the key to getting quality filing and purchases right, and to successfully fending off assertions from competitors and NPEs, is in developing or consulting with a crack team of IP strategy professionals. “This team should be experienced in IP law, R&D, business and brokerage,” he says. “Experienced brokers may have better sources to higher-quality patents, therefore eliminating many junk patents at the get-go. The patent professionals can assist in researching potential prior art and evaluating the risk of invalidity. The legal professionals can assist with relevant research and litigation history of the patents. Those with an R&D background can evaluate the technology covered in the patents. Business professionals can research the patented technology’s value in the existing market. With a comprehensive team, a company can determine the value of a patent portfolio.”

The fact is that many Taiwanese companies already have access to this kind of expertise; but a combination of unawareness, corporate culture and budgetary constraints is preventing them from making use of it. “With the experiences of dealing with patent plaintiffs in the past 10 or 20 years, Taiwanese IP owners can position themselves as licensors very effectively if they can overcome the psychological barriers, including their fear of getting countersued,” says Liu. “But if they don’t begin to see licensing as a promising business, they have less motivation to go in that direction.”

Time is now running out. Mainland competitors are becoming more IP savvy by the day and are rapidly expanding their portfolios. All the while, Taiwanese patents – the bulk of which were filed in more financially stable times during the 1990s and 2000s – are expiring at an increasing rate. The window available to Taiwan’s companies to make the most of their investment in IP protection is closing fast.