The white whale of trying to close a China business deal from afar. We endlessly see Western technology executives lose sound judgement and spend a year or more chasing gigantic deals with state owned enterprises (SOEs) or other public companies for large, highly competitive projects. For a number of reasons, this will never work out. Here is how it generally happens.
An enterprise software company that doesn’t have a presence in China is approached by a large China company, usually at a trade show or through their board’s network. A high-level executive at the public company is impressed by the technology and assigns a resource to investigate and pursue cooperation. The Western company sees only green (or red in this case). After a number of emails they get very excited and mark the public company as a top prospect and their gateway into the China market.
A year later — after having spent an untold amount on free trials, sales time and frequent trips to China — they are convinced that a deal is just around the corner. But it’s not.
How a China business deal generally goes (and shouldn’t)
We have seen this time and again, and in practice the real story is as follows:
The SOE executive was genuinely interested in the technology, and he passed it onto his R&D team to take a look. His team was excited to meet the company and learn about a technology that they only previously read about. The R&D team gets trials, meets with the Western company, and learns everything they need to know about what the technology does. They have accomplished their goal — from the Chinese company’s perspective that is the end of the story.
Why? Well, the problem is that in most cases, unless there is a compelling reason championed by a business person, the technology will never leave the R&D department. In reality, there might be an excellent use case, but if it is not a perfect fit then R&D will typically not be able to suggest deployment.
However, the Western company does not understand that this is the end of the line. Thinking that the deal is still near completion, they continue pinging the Chinese company, offering suggestions, and trying to push the project forward. Out of respect to a foreign company that is showing them so much “face,” the R&D team continues to communicate and share ideas and look for projects together.
After nothing happens, the Western company gets frustrated and flies its executives out to China thinking they can close the deal that way. They are usually treated well, taken to dinner, and some Chinese executives will come in and say some pleasant words about how they hope they can find a way to work together. Or in other cases, the key executives will suddenly have a last-minute emergency and send a replacement. Obviously, this is not a good sign.
Where ADG comes in
This is usually the point of the process in the China business deal where ADG is engaged. After an assessment and speaking directly to our contacts at both the Chinese company and in our partner network, we’re usually forced to come to the conclusion that there is no real traction for a deal (much to the surprise of the Western company). In some cases the barrier to a deal may be issues related to the business model or other issues that the Chinese company thought were not possible to resolve (and was uncomfortable bringing them up with a Western company). However, in many cases, there was never any intention on the part of the Chinese company to make a purchase.
In the end, the Chinese company will not take either a political or business risk to be an early customer of a company that has not fully committed and invested in the China market. This is especially true in today’s world if you are an American or European company. While most Chinese companies have good intentions, a China business deal is highly tied to personal networks, and if you don’t have a presence in China, your company simply does not have a network. Also, many deals at public companies have some level of government involvement in the background, which is another barrier for Western companies trying to do direct sales.
China is a unique market, and Western technology companies can rarely close major deals from outside of the country. In the vast majority of cases, they need an experienced and dedicated team on the ground inside of China to even close their first China business deal, never mind to work towards long-term growth and success. So, don’t be Ahab: do it right and build from the ground up in China.
A question almost every one of our clients asks early on is, “what about China intellectual property protection?” It’s an important question. The good news is, it’s getting better for global tech companies.
China in general is respecting IP more than ever, especially as China companies are increasingly developing their own IP; there are new China intellectual property laws providing better protections for intellectual property and global tech companies; the courts are getting better at China intellectual property enforcement; and the pool of attractive China partners is expanding — many publicly listed overseas and or with globally trusted investors and boards.
Still, you need to be smart and need an integrated, comprehensive IP protection strategy that fits your unique situation. So what are some of the strategies for protecting your IP? Here’s some practical ideas:
Do the basic legal things — register your patents, trademarks, and copyrights
Register your patents, trademarks, and copyrights in China. If there is ever an issue this could help later. Do it early in your China development process. If you don’t register your patents, trademarks, and copyrights in China, you won’t have any formal IP protection.
Use all possible technical measures to secure your China intellectual property
We’ve seen companies come into China with software that could be simply copied. Do whatever you can to protect your China intellectual property technically. Provide code that is obfuscated instead of source code. Require a revocable license key for software to run, have it be cloud based/SaaS, Don’t share everything with your partner/JV (i.e. maybe withhold key elements and provide as needed). Compartmentalize critical IP elements and processes and strategically limit access.
The key is partner selection and partner engagement
From our experience the best strategy to protect your IP in China is selecting and managing the right partners. If foreign tech companies lose IP in China, they typically lose it to unscrupulous (often smaller) companies that they have limited engagement with.
Work with companies that are leaders in the China ecosystem and when possible that are listed outside of China such as in HK or the US or elsewhere. Work with those that are expanding globally — these companies have a lot to lose in reputation and want to avoid litigation and market access issues. Seek out partners that you have good chemistry with the management team and that are invested in by reputable investors (many global investors have great China portfolio companies that can make compelling partners).
Often when we see tech companies that have China intellectual property or partner issues — it’s the companies that met their China partner at trade show or conference or via a delegation where they had limited engagement prior to entering the partnership or where they didn’t reach out to a broad set of potential China partners (i.e. 10, 20, or more) in order to find the partner(s) that fit best.
After finding and engaging the right partners — ensure you stay deeply engaged with them on a local basis — through your own team or a local representative/go to market partner — and that your team stays connected with their teams across levels and departments. Maintain a great relationship with the partners’ management teams and communicate with them often.
The China fly-in-fly-out approach without a local presence or trusted local representative greatly increases your IP risk.
Even when selecting great partners and staying close to them, it’s important to have regular, cooperative audits (don’t wait for problems).
Ensure your contracts are developed specifically for the China market.
This way you can more easily bring legal action against an IP infringer in China. Contracts should developed specifically for the China market and not just translated/adapted from your home market. We see many companies thinking they can do a simple translation without understanding what’s required in the China market.
Foreign judgments typically won’t be enforced in China so you should consider using China jurisdiction (China courts/China arbitration) for dispute resolution.
Regardless, seek expert legal advice as there can be critical differences related to various industries, sectors, solutions, as well as different China provinces and cities.
Become the customer of your partner
A strategy, which can help by maintaining a lasting, mutually beneficial relationship, is to become the customer of your China partner. Develop a deeper alliance where you have your China partner engage in some level of R&D or product development for your global products and solutions. It could be a key feature or subsystem but whatever it is, being the customer of your China partner can reduce their incentive to hurt the relationship while at the same time can help expand your product development capacity and potentially be a cost reduction strategy as well. Cross investments into each other’s parent companies is another way.
Partner (or JV) with a large enforcer — have a major China strategic partner protect you (while they’re protecting themselves)
Many China tier 1 players have such a strong market position that others in the market don’t want to oppose them. By partnering with a China major, the risk of IP loss can be reduced as the China major will be your IP enforcer in China. If you’ve set up a JV or licensed your technology to a tier 1 player, your partner will work to ensure other less ethical local players don’t steal your IP. They can also work with the China government around standards, certifications, and licenses — which may also help.
Stay on the technical edge and promote your roadmap — “the best defense is a good offense”
And while all the various strategies have their costs and benefits and effectiveness, as they say — “the best defense is a good offense”.
Maintain an aggressive innovation and product development program and ensure the market is aware of your roadmap. China customers want the latest and best product features and functionality — so if your IP is compromised, make any benefit to the thief short-lived.