Chinese TV set manufacturers are under assault. Recently, the U.S. Federal Communications Commis-sion (FCC) ordered that beginning on March 1, 2007, all TV sets exported to the U.S. market must be digital and that TV sets with screen size exceeding 13 inches must measure up to the technological standard enacted by the U.S. Advanced Television Systems Committee (ATSC).

This standard is actually backed by patents, which belong to overseas industry giants. Therefore, since TV sets exported to the United States must measure up to this standard, many manufacturers-and certainly Chinese companies-must pay patent fees to those who possess the patent.

As a matter of fact, several years ago, the 6C alliance (Hitachi, Panasonic, Toshiba, JVC, Mitsubishi and Time Warner), and the 3C alliance (Sony, Premium and Philips), IC and Mpegla had all asked for patent fees from Chinese TV companies. Currently in Europe, a DVB-T standard, similar to the U.S. ATSC standard, is also intended to impose patent fees on Chinese companies.

Zhang Ping, an intellectual property rights (IPR) professor with Peking University, pointed out the passive situation of Chinese TV manufacturers, resulting from the lack of IPR in the color TV sector. Zhang said about 72 percent of patent technology in China's digital color TV sector is controlled by European, Japanese and American companies.

Statistics from the Chinese Ministry of Information Technology show that of the 91 million color TV sets manufactured in China in 2006, about 48 million were exported, with most of them going to American and European markets. Currently, South Korea is required to pay $20-30 for each set to the ATSC. If that same amount of patent fee is imposed on Chinese companies, they will have to pay about $1 billion each year.

Zhang said the Chinese color TV industry only brings in about $400 million in profit annually, which falls far short of the $1 billion in patent fees. Apart from ATSC's claim, many other companies that possess patents have made public their decisions to collect patent fees. If all of them require patent fees for their technology, the whole Chinese color TV industry may suffer huge losses and be forced out of European and American markets.

Defensive measures

Faced with patent challenges from foreign companies, the Chinese color TV sector has been upgrading its internal cooperation.The China Video Industry Association (CVIA) has set up a special IPR committee to cope with this patent crisis.

Hao Yabin, Deputy Secretary General of the CVIA,said, "Chinese

companies respect others' IPR, but it doesn't mean that we can accept the $20-30 patent fee for each TV set. It is too high. The Chinese color TV sets exported to the U.S. market only make a tiny amount of profit of $2-3 for each."

Zhang said domestic color TV enterprises need to talk and negotiate with patent owners on exact patent fees rather than follow their decrees blindly.

"Regarding the patent fee, Chinese color TV manufacturers should first of all make a list of all the technological standards and raise questions and reason with the U.S. side," Zhang said. "For instance, there are some unnecessary and invalid patents like the anti-counterfeiting patent. Therefore, Chinese color TV manufacturers must do their homework and find out which are necessary and which are not."

Meanwhile, Chinese companies have already started to tackle the problem. Not long ago, 13 major TV giants, including TCL, Changhong, Konka and Skyworth, signed a cooperative agreement. They have established a third-party professional IPR company to deal with the IPR pressure from foreign countries. They will make a concerted effort to establish a digital TV patent pool, as well as a collective negotiation organization.

A patent pool is an agreement between two or more patent owners to license one or more of their patents to one another or third parties. A patent pool may provide competitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.

Lin Yunfang, Vice President of the CVIA, said as many as nine foreign patent holders and organizations have demanded royalties from Chinese manufacturers, and a weak bargaining position has been a common problem for Chinese firms.

"By forming an alliance, domestic makers will be able to bargain for a fair price by taking advantage of their strong manufacturing capability and significant market share in China and other parts of the world," Lin said.

Shen Jian, Brand Chief Superintendent with Skyworth, added, "After the IPR alliance is set up, if a Chinese national standard is formed, foreign players must manufacture in accordance with our national standard and pay patent fees to us."

However, there are many who are optimistic about the issue of patent fees.

"People exaggerate a lot when they say that Chinese color TV sets will have to be forced out of the U.S. market because of patent fees," said Wei Zili, Spokesman of Xiamen Overseas Chinese Electronic Co. Ltd. "Even if a high patent fee is imposed on us, the cost advantage of Chinese color TV sets is still there."

Wei further explained that the patent fee is designed for every player who wants to enter the U.S. market, which means Chinese rivals' patent fee will also increase.

"Therefore, our cost advantage can also make us distinguished," said Wei.

Hao of the CVIA echoed Wei's view, adding that there are almost no color TV manufacturers in Europe and America, and the sales volume of Chinese color TV sets accounts for over 50 percent of the world's total sales. If the patent fee is imposed, it may add some cost but Chinese color TV manufacturers won't retreat from the United States and European countries. On the contrary, some manufacturers should further expand their international market share."

Revere IPR

For a long period of time, Chinese color TV manufacturers and even the whole electronics industry have bent over backward to increase production while ignoring the concept of IPR.

"Chinese companies have applied for many patents," said Hao. "But the number of applications doesn't mean anything. The key is to make use of those patents," said Hao.

Statistics from the State Intellectual Property Office (SIPO) reveal a strange phenomenon: The materialization rate of patents is very high, reaching 70 percent, while that of foreign countries is only 20-30 percent.

"It is not a good thing," said Deng Jun, a research fellow with SIPO. "The high rate means Chinese enterprises have not fully realized the market value of their patents."

"We can use patents to stop rivals and guarantee the profitability of whoever has them," Deng said.

Take IBM for example. The company owns more than 2,000 patents in personal computers (PCs). After purchasing the PC business of IBM, Lenovo has a patent revenue as high as $30 million. As for hi-tech companies, patents actually generate profit and are inseparable parts of a successful business.

"Industrialization is just one part of patent implementation and China is lagging behind other countries in terms of adept operation of patents," said Deng.

To date, the patent has become an effective weapon to call the shots in the international market. Multinational companies apply for key patents and actualize them, while the secondary patents are chiefly used to put up barriers or collect patent fees. That's why the utilization rate of patents in the world is only 20-30 percent.

"I'm 100 percent sure that in the field of digital TVs, and even in all the IT industry, there are many trash patents," said Zhang, the Peking University professor. Foreign patent organizations claim that only necessary patents can be listed in patent pools. However, actual practice is different. Multinational companies tend to tie non-essential patents into sales, resulting in many tie-in patents.

Deng believes that Chinese enterprises should learn to make full use of patents from multinational companies and from attending relevant IPR training courses.

As for Chinese color TV manufacturers, Deng noted that the compulsory standard made by ATSC provides them with an opportunity to learn how to use the patents effectively to make a profit.