Intellectual property in Asia’s boardrooms

Getting IP executives and the senior management team on the same page is a challenge no matter where in the world you are based. However, it can be particularly tricky for companies in Asia. In more established markets, such as Japan and Korea, the corporate culture has sometimes proved resistant to the IP value creation methods now so popular in the United States and Europe. While there is less baggage in developing Asian markets, particularly China, this is because there is far less experience of intellectual property full stop. This makes it particularly tough to communicate why intellectual property is business relevant.

In many ways Asia is the centre of the patent world. Most patent-focused US and European multinationals have IP teams on the ground – usually a mix of local and foreign professionals. Senior executives with these teams – most often based out of locations such as Beijing, Shanghai or Tokyo – are often responsible for patent sales and licensing throughout the whole region. Completing these deals requires a good understanding of the dynamics between Asian IP departments and the business executives who have to approve them. However, the wide range of approaches within the region means that this is a moving target.

Speak to a few companies in the region and it swiftly becomes clear that there is no uniform Korean, Japanese or Chinese approach to corporate IP management. Every company has its own unique history with intellectual property and works to achieve its own business objectives. It is important not to overstate the effect of various national corporate cultures in the IP business world – your average airport business book about negotiating with such-and-such a country is unlikely to help you seal a complex IP deal in Asia, or anywhere else. However, deal makers who have spent time in the region maintain that there are unique trials to conducting the business of intellectual property here.

This article draws on discussions with corporate IP department heads in some of Asia’s largest tech companies about how they communicate IP value to their organisation, how they gain approval for patent licences and transactional deals, and how the corporate structures in which they operate are changing. It also draws on background discussions with Asia-based deal makers from multinationals about how corporate structure affects deal making in Asia’s key markets.

To whom am I speaking?

For chief IP officers (CIPOs) doing business in Asia, a vital precursor to any negotiation is to identify their counterpart and where that person sits within the company. Over the last four years, IAM has identified and recognised the tech companies based in Asia with the most impressive IP records, an effort we call the Asia IP Elite. Meeting with IP executives from this diverse group of 56 companies across the region, it has become apparent that no two IP departments are alike. However, there are a few dominant philosophies when it comes to where the IP function is located.

In 2015, we surveyed the members of this group on a range of issues and found differing approaches with regard to where the head of intellectual property sits within an organisation. Nearly 40% of the companies responded that the head of their IP department reports directly to the CEO, while just over one-quarter of IP heads were under another board-level executive, such as a chief technical officer (CTO) (see Figure 1). Around 20% said that intellectual property came under the purview of the general counsel, suggesting that intellectual property is integrated into the legal department.

Figure 1. Who do Asia IP Elite CIPOs report to?

Toshimoto Mitomo

Corporate executive, Sony Corporation

“An IP executive has to understand what’s going on outside the company, and have a more neutral view about the technology and where the industry is going”

In Japanese companies, IP departments have long been closely associated with the R&D function. “Normally, IP executives are senior researchers and engineers who have a long work history in R&D,” confirms Toshimoto Mitomo, corporate executive at Sony. In other countries around the region, there is more of a split between independent and legal-based IP teams. However, regardless of which model is used, the salient questions for a negotiator are how commercial or business-focused the other party is, along with that person’s level of access to and influence with the CEO or other board-level executives who will sign off any new deal.

On the first point, the trend is clear: IP heads are becoming increasingly business focused. Mitomo provides a good example of this: as head of Sony’s IP department, he is also responsible for mid to long-term business development. “An IP executive has to understand what’s going on outside the company and have a more neutral view about the technology and where the industry is going,” he explains. This in turn allows for a more independent assessment of one’s own intellectual property. So far, few Japanese companies are mixing intellectual property and business fluidly. However, given the way that the technology industry is changing, Mitomo believes that this would be a welcome change. “No single company can produce everything, because everything is connected to the network,” he argues. “Global alliances have to be based on collaboration.”

Joo Sup Kim

Vice president and head of IP licensing, LG Electronics

“A CEO’s mindset is very simple: they know business. If they decide on a goal, the employees have to meet it. But invention is a very different thing”

Joo Sup Kim, vice president and head of IP licensing at LG Electronics, finds that Korean companies are about 50-50 when it comes to having the IP function come under the CTO, as LG’s does. This is due to the fact that a major portion of Korean industry remains focused on manufacturing rather than ideas-oriented business. Nevertheless, Kim points out that the reporting structure does not necessarily tell you everything about how business-savvy a corporate IP team actually is. He uses China as an example. “Even though many Chinese companies organise the IP team under the general counsel, they often have an IP transactions team in place from the beginning,” he explains. “This reflects that they understand intellectual property as one of the company assets to be commercially transacted between buyers and sellers.”

The second big concern for a deal maker is to identify where decision-making power lies. In more hierarchical organisations – an apt description of many large corporates in Japan and Korea – it is relatively straightforward to figure out where a negotiating counterpart might be situated. In addition, the consensus-based approval process means that while you may not be talking with the decision maker, you may well be speaking with a decision maker.

Things are somewhat less certain in China, especially outside the top tier of advanced tech companies (such as those listed in the IAM Asia IP Elite). One major multinational CIPO observes: “I think that in China, the IP executive has much deeper access to the management compared to companies in other regions,” citing factors including the government’s attention to IP matters, companies’ wishes to expand beyond China and improvements in domestic R&D.

YP Jou

CEO, Wispro

“Most Chinese companies are getting more careful about buying patents because there’s no after-sale service”

However, a keen observer of the China market from another global tech giant sees things differently. “In the greater China market, IP departments’ positions are very, very limited,” maintains YP Jou, CEO at Wispro Technology Consulting. “Most IP professionals have no opportunity to join top management meetings or train in other management experiences. This is critical.” A Western licensing executive believes that this is one of the biggest challenges to doing business. “It’s hard to meet the ultimate decision-maker at many Chinese companies. I’m concerned that the message I’m communicating to my counterpart is not being communicated effectively within the organisation.” (See boxout: China’s youth movement.)

The truth is that both extremes are present in the China market – while the top handful of companies pay attention to intellectual property at a high level, rivalling any other jurisdiction in the world, the majority of organisations neglect the subject entirely.

Changhae Park

Vice president of IP monetisation, NXP Semiconductors NV

“When we sell patents, there are no strings – we understand they can be used against customers”

While it is a mark of respect for an executive to have direct access to his or her CEO, whatever the country, it is not without its downsides. NXP Semiconductors vice president for monetisation, Changhae Park, had a message for attendees at the recent IPBC Korea conference. “Being exposed directly to the CEO is nice visibility,” he conceded. “But what comes with it is constant pressure from the highest level to deliver numbers that you sometimes don’t think you can meet.”

Managing IP-business relationships

Park’s warning will have resonated among the Korean attendees in the audience. The prospect of missing a target set by a CEO is not a welcome one for anyone. This is especially the case in a jurisdiction known for having one of the most hierarchical business cultures in the world. When discussing relationships with their CEOs and the board, Asia-based IP executives emphasise the importance of working together to set expectations and objectives for an IP function. Most of them say that they present to the board on a semi-regular basis, while seeking special approval for certain deals and litigation – in particular, anything that involves a large sum of money.

Billie Chen

Chief IP counsel and director of IP, Taiwan Semiconductor Manufacturing Corporation

“I don’t go to management to seek final approval at the last moment”

“The major mission for our team is to protect TSMC’s freedom to do business worldwide, and protect our $30 billion in revenue in a very high tech area,” says Billie Chen, the Taiwanese chipmaker’s chief IP counsel and director of intellectual property. Mitomo points out that it is important to remember that the IP function ultimately works for shareholders, and plays a key role in protecting their investments. Those are certainly terms that a CEO appreciates. “We can do that by generating money, reducing cost, or helping business units to build relationships.” Jou echoes that last point, arguing that playing an advisory role in business transactions such as M&A moves is another important way to demonstrate IP value. As CEO of Wispro he has had plenty of opportunity to fill that role for Foxconn Group.

The value of intellectual property is considerably more difficult to communicate in companies where there is little tradition of patenting – unlike those mentioned above. Even when executives do understand that intellectual property is important, they still sometimes continue to treat it as an asset class which can be grown just like any other business unit. This can then lead to the undeliverable numbers mentioned by Park.

China is a case in point. The country as a whole regularly posts astonishing growth in patent filings – yet most practitioners will tell you that this has generated a huge quality problem. It is no longer uncommon to see a Chinese CEO at a shareholders meeting or product launch boasting about the number of patents that his or her company will file over the next year. However, this then puts considerable pressure on the IP function to deliver, prompting some to wonder whether the nation’s patent quality situation might be mirrored within some of its major companies.

Kim recalls a time in the mid-1990s when many Korean companies were in a similar position. After a wave of lawsuits from companies including Texas Instruments and Intel, many executives realised that the only way to decrease their royalty burden in the long term was to rapidly develop their own high-quality portfolios – a painful lesson on the importance of high-quality patents. “A CEO’s mindset is very business-oriented and simple: they are concerned about business only,” Kim explains. “If they decide on a goal, the employees have to meet it. But invention is a very different thing.” Even if you spend between three and five years generating a patent portfolio through prosecution, you may not find any valuable patents. Investment in intellectual property comes with no guarantees. Business people dislike this uncertainty. It was this dynamic, Kim says, that led some companies to embrace third-party patent acquisition which in turn created opportunities for vendors.

Negotiating conflict

As this example demonstrates, intense business pressures on an emerging company can cause IP teams to take new and more aggressive actions to build a patent arsenal, such as dipping into the transactions market. By that same token, the financial burden on a company in dire commercial straits can generate pressure to take more active monetisation measures, including litigation and sales. However, this is often the point at which companies in some countries encounter a new set of cultural hurdles.

Conflict avoidance is a prominent feature of Japanese business culture. It dovetails nicely with the mindset of most in-house corporate lawyers, who are first and foremost risk mitigators. Only in exceptional cases do two Japan-based companies battle each other in court over patent infringement. Although financial pressure has led several Japanese companies to sell off patent assets, few are happy to be publicly linked to non-practising entities or other organisations that might assert those patents, especially against other Japanese companies.

This wish to avoid conflict – particularly with customers of your business side – is by no means confined to East Asian corporates. As Scott Taylor of AT&T said at a recent IPBC event, one of the worst phone calls an IP manager can receive is from the CEO asking why one of the firm’s major customers has been sued using patents which have been sold to an assertion entity. Taylor explained that since AT&T’s customers include virtually the whole Fortune 500, its policy is to sell patents to operating companies. NXP has consciously chosen a different path. “When we sell patents, there are no strings,” Park explains. “We understand they can be used against customers.” While the policy has indeed led to some awkward situations, it also makes the job of divesting assets much more straightforward.

Figure 2. Do Asia IP Elite members receive sufficient management support?

According to deal makers, the pressure to stay away from deals which could forment conflict between a third party and a customer or compatriot is still prevalent in many Japanese companies. However, Mitomo contends that while companies should act fairly, they have to put their own shareholders’ interests first. “When we decide to sell some of our patents, we often give notice to third parties who could potentially be affected by the transaction,” he argues. “If for some reason that party is really concerned about the transaction, they should deal with the issue themselves. It is difficult to make everyone happy all of the time”. Whichever side they fall onto, this is a question that an increasing number of companies will have to deal with as new companies in Korea and Japan enter the patent sales market. It is one that will require communication between IP teams and business leaders.

China’s culture could not be more different when it comes to business conflict. With Chinese judges handling nearly 100,000 patent infringement cases each year, you will not find many large tech companies afraid of a courtroom scrap. This sets up a completely different set of challenges for deal makers. “As a Western company we’re likely not going to sue a Chinese company in China for patent infringement anytime soon,” points out one licensing executive. “Aside from all the political dynamics, the current return on investment is too low given the patent damages.” Counterparties know this and it can make licensing negotiations tough to conclude.

The competitive and confrontational business culture in China has also led some more advanced companies to embrace a more aggressive approach with regard to their own fledgling monetisation efforts. Telecom ZTE – taking a page from Foxconn and Panasonic – has recently spun off Inteq Technologies, which has been charged with handling its patent licensing, transactions and financing, while also providing services to other companies. On the issue of whether Inteq’s activities could produce business conflicts for ZTE, its president appears unconcerned, saying: “The businesses of Inteq Technologies and its mother company ZTE are clearly segmented. Inteq Technologies focuses on the commercial activity of patents, and targets as its objective the development and progress of the entire IP industry.”

Sealing the deal

Whether it is a patent sale, a cross-licence agreement or a litigation settlement, getting major IP deals approved by management takes not only years of trust but also effective communication over the course of each individual transaction. The mechanisms by which management signs off on agreements varies greatly among key markets in Asia, meaning that deal makers need to be highly adaptable. Their focus should always be giving their counterparties everything they need to demonstrate the business value of a transaction.

Once again, Japan and China present polar opposites, with smaller markets such as Korea and Taiwan falling somewhere in between. In Japan, most enterprises have strict, established processes – especially for patent licence negotiations. While this can take time, the goal is to equip the IP team with all the information it could possibly need when presenting to upper management. “It’s very process-oriented, whereas in Western countries the procedures are more ad hoc,” explains one experienced negotiator. China, on the other hand, can be even more ad hoc than most Western companies. This makes processes less predictable, although it can result in quicker completion times.

These different styles of negotiating can make it difficult to forecast revenue and deliver on time-sensitive targets, especially within the setting of a public company working to quarterly goals. “Your sales cycle time is longer and your calendar quarter is shorter, because once you get consensus at the patent department level, you still need at least three or four weeks to get the requisite internal approval from the board,” one Japan-based IP executive explains. Practically speaking, this means that if you want to complete a deal in one quarter, you need to have all material terms worked out with the other party’s IP team within six and eight weeks.

The process of deliberation can also be different from what licensing and sales executives from North America and Europe are used to. Rather than a CEO giving the go-ahead, many Japanese companies use a larger group of directors to consider the proposal in a more formal way. For IP department heads, that means more stakeholders with potentially differing interests who need to be brought on board. Again, things are different in China – there is usually one key decision maker, although as discussed above, it can be difficult for a negotiator to present his or her case to that person directly.

The consensus-based model does have its advantages. “You only need to get a couple of the various internal stakeholders to be an advocate for the transaction,” points out one anonymous deal maker. “If you arm them with the right arguments they can make a lot of progress in terms of convincing others.” While it is more straightforward to speak directly with a CIPO or general counsel, the flip side of this is that if you fail to convince this key contact, your prospects for reaching an agreement are severely curtailed.

Even when two CIPOs or IP heads have a deal ironed out, the work is not necessarily over – particularly in China. Speaking at a recent IPBC event, Microsoft’s senior director for patents in China Jian Ma stated that the company will sometimes be asked to help its IP counterparts sell a deal to the company’s management team. “IP folks in a Chinese company may understand the IP risks, but the board may not be up to speed,” she confided.

The fact that few deals being considered right now are pure patent licences, according to seasoned IP business hands, means that there is often some kind of business cooperation element that makes a potential partnership palatable to business executives. Other frequently requested information includes assertion proofs and details about what various third parties have paid for the same rights. For foreign licensors, the most business-friendly angle is often the way in which increased freedom to operate in overseas markets can help the company to grow.

Jou argues that there are other valuable add-ons which Chinese companies appreciate, particularly in patent sales transactions. “In the patent deal market, most of the deals are just one-time business, rather than a continuous relationship,” he explains. “Most Chinese companies are getting more careful about buying patents because there’s no after-sale service.” He believes that this is a missed opportunity. Chinese companies have rapidly advanced their ability to analyse patents for acquisition and are more interested than ever in paying top dollar for high-quality assets. The key ingredients which brokers or other sellers need to bring to the table are good long-term relationships in China and plenty of transparency and data about the rights on offer.

Groundwork needs to be laid early for any of these tactics to be effective. “I don’t go to the management to seek final approval at the last moment,” scoffs Chen. A clear strategy for any transaction or deal should be agreed with key business leaders well in advance.

It is just this kind of forethought that western deal makers need to bring to the table when trying to conclude agreements in Asia. However, if they are able to negotiate a way through the different business cultures and adapt their style of doing business, there is no reason they should not flourish in this business environment.