Southeast Asia – the innovation outsider
Southeast Asia presents a wealth of technology investment and commercialisation opportunities. However, the fact that its IP infrastructure is still developing means that novel approaches are needed
In September 2016, BlackBerry’s CEO announced that the company was transitioning to a licensing-led business model and ending all “internal hardware development” – effectively exiting the product market. While the announcement came as no surprise to market observers, eyebrows were raised over the news that the first third-party BlackBerry product would be built and marketed in Indonesia.
Back when it was known as Research In Motion, BlackBerry was the pioneer of the smartphone industry and for a time the leading producer of such devices, distinguished by idiosyncratic push-button keyboards and favoured by busy executives the world over. However, times have changed and BlackBerry has since lost significant market share to more formidable rivals including Apple and Samsung. It makes sense that the company is playing to its strengths in software, security and patents to survive. However, Southeast Asia is best known for low-quality manufacturing and a thriving trade in counterfeit goods – hardly the best base to reinvent one of the mobile industry’s premium brands.
Yet despite these negative connotations, the location is far from inappropriate. BlackBerry remains one of the most popular smartphone brands in Indonesia and has retained a substantial following there, even while its star has waned elsewhere. Moreover, with a population of 260 million, Indonesia is the third largest consumer market in Asia and the fourth in the world – and one that in many respects is still largely untapped by foreign brands.
Look beyond Indonesia and there are more markets with abundant prospects in the region. To the northeast is the Philippines, another island nation of 100 million people with rising incomes and a growing thirst for brands; to the northwest lie Malaysia and Singapore, the region’s wealthiest countries, with another 35 million-plus inhabitants. Even farther north are the 60-million strong population of Thailand and another 100 million in Vietnam. While Cambodia, Laos and Myanmar – which have only recently opened up to outside investment – lag behind these others in development terms, they are expanding rapidly.
These 10 countries together form the Association of Southeast Asian Nations (ASEAN) – a politico-economic pact established in 1967 with the aim of creating a single market. While ASEAN mirrors the European Union in theory, it is very different in terms of the level of cooperation and harmonisation between members, some of which were locked in bitter armed conflict within recent memory.
All too often overshadowed by its neighbours – particularly China – the ASEAN region presents significant, and perhaps less fiercely competitive, opportunities for high-tech businesses. Increasingly impressive credentials in scientific and technological R&D also mean that there is a thriving culture of start-ups and spin-outs crying out for foreign investment.
“Businesses are really starting to look to Southeast Asia in terms of innovative technology creation,” says Alan Adcock, partner and deputy director at Tilleke & Gibbins in Bangkok. “Governments here are starting to actively support R&D in their own countries.” Slowly but surely, public R&D expenditure is on the up and governments are realising that they need to assist and foster innovation if they want to accelerate economic development and become even partially self-sufficient in technology, rather than continuing to rely on foreign innovation.
“Governments here are looking to China’s IP and technology growth as an example,” he continues. “They are thinking, ‘If China can do it, why can’t we?’ In Southeast Asia, there is now this political and social drive to transition from low-value manufacturing to the knowledge economy. Manufacturing is becoming more and more automated, and it takes fewer hands to assemble a widget nowadays, so technological innovation is becoming more important.”
Realising this potential requires expertise in IP strategy. However, the relative dearth of such capabilities – along with the underdeveloped nature of local IP systems – presents a significant impediment to growth. “A big problem is that you’ve got very uneven levels of sophistication between the region’s IP systems,” explains Nick Redfearn, deputy CEO and partner at Rouse in Jakarta. “A fundamental barrier for businesses coming here is that if you take Indonesia and Vietnam, you’ve got more than half the population of ASEAN in two incredibly underdeveloped IP systems. You simply don’t get to talk about enforcing or monetising IP rights if there’s no effective patent system in place.”
Redfearn maintains that even outside these two jurisdictions, there is barely any patent litigation to speak of: “The problems with weakness in the legal and regulatory infrastructure mean that all commercial disputes are a major headache, let alone those relating to IP. It means that these countries – and particularly the less developed ones – can be difficult places in which to do any kind of business.”
Source: World Intellectual Property Organisation NB: Spike in 1995 filings coincides with Singapore’s accession to World Trade Organisation, Agreement on Trade-Related Aspects of IP Rights, Patent Cooperation Treaty and revision of domestic patentability rules. Laos and Myanmar are not included due to incomplete/unavailable data.
Founder and director at Singapore-based technology transfer consultancy Linden Partners Jasmine Kway is regularly called on to navigate the complex and often confusing IP regimes – or absence thereof – facing businesses keen to expand into Southeast Asia. With some countries lacking established systems of patent protection, companies are presented with a real strategic conundrum. “The biggest challenge is that some of these countries don’t even have IP acts in place,” explains Kway. “So at the end of the day, the consideration often has to be: ‘What is the risk factor?’ Clearly, registering trademarks is crucial before the product is launched. But in terms of the technology, you look at countries with huge growth and investment potential like Myanmar or Cambodia and see there is just no real patent protection there.”
And even in those countries where patents have made it onto the statute books, whether this protection is effective is another matter. “A company may have to decide whether a critical part of its product should be kept closely as a trade secret and may have to rely on trusted distribution channels rather than IP protection,” Kway continues.
The lengthy pendency rates at patent offices throughout the region represent a further procedural hurdle. “Backlog is a critical problem in Southeast Asia,” confirms Yingyong Tanthanapongphan, IP manager at Bangkok-based Siam Cement Group (SCG). “There aren’t enough patent examiners to review applications, which makes the registration process too long and a pain for applicants. In addition, software solutions for patent search and analysis to enhance patentability for under-resourced small and medium-sized enterprises (SMEs) are lacking. The government needs to provide more resources, both human and software, to elevate the quality of the patent system in Thailand. Other ASEAN countries also face the same problem.”
Source: Intellectual Property Corporation of Malaysia
This situation is nonetheless improving. Previously, technology owners often did not bother to register their IP rights in certain countries, as registration was no guarantee of effective protection. However, this often led to problems farther down the line when those rights holders were considering technology transfer, licence or collaboration agreements.
“For those IP owners who did not consider some of the Southeast Asian countries as viable jurisdictions to protect their assets in and missed out on patents, they have to look at other non-patent intellectual property to embed in those agreements when licensing or transferring their technologies to local partners,” explains Adcock. “Sometimes it could be trade secrets; sometimes copyright; sometimes know-how or show-how.”
While Adcock stresses that instances of foreign companies missing out on patents are becoming rarer, they still do occur – particularly in relation to areas of newer technological development, where the rights holders are small, early-stage businesses, university spin-outs or even lone inventors. “In energy, biofuels, green-tech – areas which Thailand and other countries in the region are really keen to attract – a lot of these businesses are not so financially rich as to be able to file patents across a region like Southeast Asia, with its multiple jurisdictions,” he points out. “A lot of these companies are smaller, and understandably focus their limited resources on patenting in the United States, Europe and perhaps China and Japan. Those companies need to be a little more creative in identifying their intellectual property and bundling that into a licence or tech transfer relationship.”
While this can be a headache for partnering companies, it is not necessarily a deal breaker. However, when it comes to future investment or seeking an exit, issues can arise. “If your partner is specifically keen on the relationship, then they may not necessarily care too much that the technology hasn’t been protected by way of a patent,” says Adcock. “But investors and financial backers and lenders will likely take a different approach. They are going to be looking at how that technology exists, how it came into being – and how it is protected by registered intellectual property.”
So while a commercial partner may happily consider a non-patent licence or other relationship, there are often other parties than the licensee to consider. This is particularly true in emerging markets, where public finance is at work. “Especially in Southeast Asia, local government might be party to a tech transfer relationship or local banks might have financed the deal for the licensee,” he continues.
Moreover, the lack of efficacious IP systems and strategic awareness among local businesses makes tech-driven investments in Southeast Asia inherently riskier for foreign entities. “One of the problems here is that too many local businesses still see intellectual property as just a cost – they don’t yet see the business value in it, so they don’t invest in it,” explains Redfearn. “So as an investor, when you buy a local company, typically you are going to have to spend a lot of money trying to build up an IP portfolio after the acquisition.” Issues relating to intellectual property in Southeast Asia often end up being much more complicated, risky and expensive than in other countries, he adds. “Local companies and governments often fail to recognise that the associated cost ends up getting paid by somebody – and more often than not, it’s local customers that have to pay through higher prices.”
Philip Lim Feng, CEO at Exploit Technologies (ETPL), the IP commercialisation arm of Singapore R&D agency A*STAR, agrees that the lack of reliable IP protection in many ASEAN countries could be deterring significant investment in the region and holding back economic development. “Foreign investments are attracted to business environments that have, among other business considerations, IP rights that are enforceable and transparent,” he points out. “This requires a legal and regulatory framework that balances IP rights fairly between IP owners and users. In addition, continuing efforts, such as those by the Singapore government, to build a research talent pool help to attract foreign investments looking for capabilities to undertake research, which then lead to IP creation that can be further exploited.”
Source: IP Office of the Philippines
Source: Vietnam National Office of Intellectual Property
One foreign-founded technology-focused investor which has had a base in Southeast Asia for almost a decade is Xinova – or, as it was known until earlier this year, the Invention Development Fund (IDF). It was set up by Intellectual Ventures (IV) back in 2007 to develop and commercialise patent portfolios around early-stage technologies. While global in outlook, IDF gradually began honing in on the Asia-Pacific region; as its focus began to diverge from that of other IV funds, the decision was taken to divest it into an independent entity. The spin-out, and rebranding as Xinova, was completed in September 2016.
David Drake is Xinova’s senior vice president of partnerships and heads up its Korea and Singapore offices. Much of his focus is on collaboration, partnering and investment opportunities in Southeast Asian countries. “Way back when the fund was established in 2007, the observation was rightfully made that there was a need in Southeast Asia that we could meet,” he explains. “That type of strategic thinking about intellectual property and innovation was fairly nascent here.”
Given its reputation for weaker IP protection, and low IP awareness, it might be expected that the majority of high-tech and innovation-focused investors would shun Southeast Asia. However, for Xinova, this is a challenge worth tackling in the long term. “The issue of intellectual property makes our job of making investment decisions more complex, but not necessarily more difficult,” says Drake. “The question is often put to us: ‘Why bother patenting there?’ Even assuming you can’t enforce in those particular markets today, if you don’t patent in them, you’re effectively giving away those countries. If, three years from now, you have world-changing technology, you have no leg to stand on if you never filed the patents. The cost of doing so in these markets is so small that by not filing, you’re giving up so much option value.”
Bridge to Southeast Asia
The IP world’s attention is inevitably concentrated on China and the measures it is taking to become the next patent superpower. But there are signs that regional neighbour Japan is making its own bid to become the dominant patent player in the markets to the south of the Middle Kingdom.
For several decades, Japanese entities have been among the most active patent filers in many Asian jurisdictions, with Southeast Asian countries no exception. However, recently it appears that the Japanese are growing even more interested in what the ASEAN region has to offer.
“Japanese companies do have a significant presence here, especially the big ones,” says Biruntha Mooruthi, vice president and head of IP services at PlaTCOM Ventures in Malaysia. “I can confidently say they are very active in terms of filings. A few big-name Japanese companies are also looking at acquiring local IP assets.”
In Thailand, Alan Adcock, partner and deputy director at Tilleke & Gibbins, reports similar activity. “Japan is the number one source of foreign direct investment here, and the Japanese appear to be relocating a lot of their Chinese manufacturing operations to Southeast Asia.” There is a geopolitical dimension to this, as both China’s and Japan’s governments have plotted a more nationalistic course in recent years, reawakening some historic tensions. However, there are also economic reasons; manufacturing in China has become increasingly more expensive, making Malaysia, Thailand and other ASEAN states more attractive. “Certainly, they’ve always felt Southeast Asia was important enough for them to protect their intellectual property in, and particularly since Thailand and some others have joined international processes like the Patent Cooperation Treaty, which makes companies look at the region as more viable for IP protection.”
In a further sign of the country’s influence on the regional IP landscape, Japanese sovereign patent fund operator IP Bridge signed a collaboration agreement with Malaysia Digital Economy Corporation (MDEC) – an agency under Malaysia’s media and communications ministry which is responsible for promoting the development of the middle-income country’s information and communications technology industry – in October this year. The memorandum of understanding signed by the two parties will see MDEC and IP Bridge cooperate on IP creation and enable Malaysian high-tech businesses “to leverage… Japan’s vast research and development field for creating innovations in technology as well as entering the Japanese market”, as described in a press release announcing the deal.
According to IP Bridge CEO Shigeharu Yoshii, Malaysia and the rest of ASEAN present a massive and largely untapped opportunity for commercialising and monetising Japanese-developed IP assets. “The ASEAN economy is growing rapidly and needs various technologies and related engineers,” he explains. “SMEs in Japan are holding various technologies and engineers which can support ASEAN market needs. IP Bridge can connect them both to create high-potential businesses.”
IP Bridge’s role will be to act as an intermediary and provide relevant business support. “Certain companies in ASEAN countries wish to use Japanese technologies,” Yoshii says. “Both sides, however, have little chance to meet each other without an agent. IP Bridge would like to work as that agent.” The firm is planning to open an ASEAN start-up incubator in Tokyo and assist in sourcing finance; Yoshii adds that IP Bridge may also seek equity stakes in some partner companies.
Investments and M&A transactions are one thing. However, foreign businesses may also want to tap Southeast Asian markets both by licensing their intellectual property and technology to local partners, and by licensing in local innovation to further their business objectives. Again, the limitations of the region’s IP systems is frustrating efforts in this regard – as demonstrated by the paucity of licensing. Tanthanapongphan points out that IP monetisation is at a very early stage in Thailand and neighbouring jurisdictions, with most companies still squarely focused on manufacturing and relatively few even bothering to properly protect their intellectual property. However, the situation is improving. “In Thailand, quite a few companies get licensed-in technology, but there are some ongoing licensing-out projects too,” he explains. “SCG, for one, is running pilot projects for licensing-out and building the capability and teams needed to be ready for licensing business in the future.”
One issue with Thai and other technology owners is their approach to pricing IP assets and negotiating with prospective buyers and licensees from overseas. These shortcomings are particularly pronounced when it comes to universities, which invest a great deal in R&D and file a significant number of patents. “A lot of collaborations take place by way of a public-private partnership between a public university and private foreign research partner,” Adcock points out. “But a lot of the time, universities are very short sighted in terms of that collaboration. On several occasions I’ve seen foreign research projects leave Thailand and Indonesia and go to other countries because they were too focused on making money, at the expense of the purpose of furthering science.” He adds that negotiations with public research organisations in the region can typically be protracted, which puts off foreign investors and buyers.
Biruntha Mooruthi – vice president and head of IP services at PlaTCOM Ventures, a wholly owned subsidiary of Malaysia’s innovation agency which acts as a national technology commercialisation platform – has seen similar issues in her country. “Universities can tend to put a very high price on their licence fees,” she explains. “Foreign companies can find it a bit difficult to do deals here, because local players often do not understand what is involved in achieving successful licensing deals. They get too excited in terms of euros and dollars and put too big a price on their technology.” Mooruthi suggests that IP valuation - something that both the Malaysian and Singaporean governments have been heavily supporting and promoting - have an important role to play in this regard, helping parties to get to the point where they can agree to a fair, win-win deal.
When it comes to licensing out in the region, Lim says that borders still play an obfuscating role, despite the closer cooperation brought about by ASEAN membership. “One difficulty when trying to license or transfer our intellectual property and technology within the region or farther afield is related to geographical limitations that hinder our technical support,” he says. “This is especially critical in the case of a proprietary know-how knowledge transfer.” For example, he suggests that timeliness in responding to technical support is challenging when a licensee is not located in Singapore. “More importantly, as A*STAR’s commercialisation arm, ETPL’s charter is to transfer or license our intellectual property and technology to locally based entities to achieve a wider economic outcome or societal benefit. Hence, our engagement with such entities goes beyond simply licensing IP rights to a deeper collaboration to ensure that knowledge and capabilities are successfully applied to achieve business growth for the company. I am sure the objectives are similar for all in all jurisdictions in the region and beyond.”
For companies looking to expand into Southeast Asia, the argument for filing patents in preparation for market entry is clear. However, it is the growing sophistication of local businesses and R&D establishments which may do most to improve the region’s IP ecosystem. “All these companies in Southeast Asia are trying to launch outside and they clearly need investment to do this,” says Kway. “Often it is investors that bring in that IP expertise and awareness.” Kway maintains that Southeast Asia exhibits very strong commercialisation potential – particularly in sectors such as healthcare, energy and green-tech – and presents a golden opportunity for mature companies and investors. “Looking at this region, of course one of their main fears is going to be IP enforcement,” she concedes. “But I would say that the markets themselves will correct this. As the buy-in continues and investment starts flowing into the less developed nations, they will sit up and look at intellectual property more diligently. It’s an evolution. If investment doesn’t come in because of a lack of enforcement and weak IP rights, they will take action eventually.”
Adcock agrees and points to the positive trend across ASEAN in terms of resident patent filings as a dynamic which should drive improvements to the region’s IP regimes. “When local innovative industries are creating technologies, they will nearly always want to protect them in their home jurisdiction,” he explains. “Inasmuch as regional IP offices may have had difficulties and issues with patent pendency and non-patentable subject matter, now that indigenous innovation is a part of Southeast Asia’s economic reality and locals are using those IP registries, there is an observable follow-on effect that registries have become more efficient.”
More applications from local industry means that there is more pressure to get the job done – and not just from the applicants themselves. Cognisant of the positive image presented by a blossoming domestic innovation ecosystem – and keen to secure increased investment from abroad – Southeast Asian governments are pushing for greater efficiencies and considering legislative reforms.
As is often the case when it comes to IP policy in the region, Singapore is leading the way. “Singapore has made it a huge project to become an IP and innovation hub,” explains Drake. “It’s obviously easier in a political sense, in a population of 5 million with the GDP the city has, to do those things. But the government intervention is paying off and IP protection is certainly respected here.”
Neighbouring Malaysia has also made considerable strides in kickstarting its IP market, with SMEs the main beneficiaries. “The Malaysian authorities have been effective in encouraging more collaborations among universities and companies to a certain extent,” says Mooruthi. “Initiatives such as PlaTCOM Ventures, SIRIM-Fraunhoffer, Public-Private Research Network and AIM-Steinbeis Malaysia are helping to raise IP awareness among universities and other research organisations, as well as industry.”
But elsewhere in the ASEAN bloc, governments need to do a lot more to boost R&D investment and improve confidence in their IP systems. “The government needs to spend on necessary resources and provide incentives, such as tax breaks and subsidies, for the private sector to enable them to do well in IP registration and exploitation,” says Tanthanapongphan. In Mooruthi’s view, governments in Southeast Asia should follow the pace set by Singapore and Malaysia: “They should promote more IP transactions and technology transfer and make funds available for IP protection, innovation development and upskilling, and introduce tax reliefs for foreign companies.”
Higher up the value chain
As Drake sees it, while there is significant diversity among Southeast Asian economies, taken as a whole they are currently at a stage in the cycle of innovation development already traversed by their northerly neighbours. “Japan went through that cycle in the 1970s: intellectual property initially was not seen as that valuable, but as its companies became more innovative, intellectual property and the preservation of those rights became part of the business culture,” he explains. “Then Taiwan and Korea went through it – back in the days when Samsung was still smaller than Sony, intellectual property was hardly talked about, maybe even ignored. And now we are seeing that change in China too.”
With the notable exception of Singapore, Southeast Asia is further behind the curve. However, change is in the air, which Drake can sense when he meets with people from industry. “Intellectual property as a strategy is becoming much more understood and important in the region,” he points out. “Five years ago, when I talked about our offering, people were interested but not passionate. Today, these regional companies have executives dedicated to innovation and intellectual property, and are using outside platforms like ours. They are paying a lot of attention to protecting their innovations, using patents and thinking about how to use them strategically to protect and broaden markets.”
Drake acknowledges that it is still early days from the standpoint of how intellectual property will be woven into wider business strategies. However, more and more Southeast Asian companies are at least thinking about strategic IP management: how it can create value for their businesses and where it can take them and their national economies next. Again, the example of China looms large. “A lot of high-tech manufacturing is leaving China and going to places like Vietnam, the Philippines and Myanmar, because China is now becoming expensive relative to those markets,” Drake observes. “That innovative drive which developed in China, to manufacture those things better, will also move. As more of that happens, Southeast Asia will migrate up. As innovation becomes more important, protecting it as intellectual property becomes more important.”
The Association of Southeast Asian Nations (ASEAN) has 10 member states: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. While there are significant differences between each of these in terms of IP protection, a few stipulations apply across the region when it comes to strategy:
- Apply for patents and trademarks where possible. Where patents might not have been filed for – especially in cases involving older technologies or small early-stage businesses – alternative strategies involving other IP rights and intangibles will be needed to finalise technology transfers, licences and other deals.
- Make sure that your product enters the market through a known and trusted connection –particularly in cases where patents were not (or could not) be obtained.
- Local IP strategy consultants, with networks throughout the various ASEAN markets and an understanding of the regional socio-political situation, can help to manoeuvre in the markets you are targeting.