Apples Intellectual Property Challenge in China

Apples Intellectual Property Challenge in China

In just five years, Apple Incorporated (Apple) has seen itself go from being a niche maker
of PC equipment and multimedia playback devices to the being the largest technology company,
by market capitalization, and become so flush with cash that it has implemented a dividend and
stock repurchasing program. Apple has gone from being a technology industry spectator to the
800 pound gorilla in the room when you talk about PCs and mobile computing technology. As
Apple seeks continued growth, we face an unexpected threat to future growth in our largest
market for the foreseeable future, China.
As China strengthens its intellectual property and trademark laws, it protects foreign
companies intangible assets, but can also create a forum for technology and trade conflict
through Chinas legal system. This is the next obstacle that Apple needs to overcome to ensure
access to those growth opportunities in China that we seek. Additionally, negotiating this
minefield of intellectual property can provide a company framework for avoiding or handling
intellectual property and trademark issues in other potential growth markets, such as Brazil, India
and other emerging economies that are upgrading their energy and telecommunications
infrastructure.
Global Smartphone Industry Analysis
Apple is a global leader in smartphones, media players and stylish laptops used for
graphic design. It is not the global leader by sales volume, but it is considered the global leader
by profit, which is no small feat in the highly competitive global smartphone market. The
company has become so profitable that it recently instituted a quarterly dividend of $2.65 per
share and its board authorized the repurchase of $10 billion in stock to reduce its $100 billion

cash hoard (Wingfield, 2012). This section will discuss Apples role in this industry, as well as
the industrys global structure.
Apple and the Smartphone Industry
After having established themselves as dominant or early entry players in their home
countries, many have expanded globally to compete in markets where technological innovation
dominates. Apple, Inc. is now one of those competitors whose brand is recognized globally.
Apple has been listed as worlds most innovative company by both Bloomberg BusinessWeek
(2010) and FastCompany (2011) magazines. It has taken consumer electronics and created a
loyal following among its customers. The top manufacturers of smartphones are mostly based in
Asia and North America. Overall, the industry is very competitive and somewhat profitable with
Apple allegedly accounting for half of the industrys global profit. The industry, as a whole is
global, by nature, the primary product customization being language. Samsung and Apple are
the two global leaders.
The Smartphone Market in China
China is expected to become the worlds largest smartphone by the end of 2012 and is
Apples largest market and, therefore, Apples source for future growth. Intellectual property
issues that reduce Apple sales or prevent its products from being sold could greatly hurt future
profit growth. China is expected to comprise 21 percent of the global market for smartphones
(Tan, 2012). In 2011, Chinese consumers purchased 89.4 million smartphones.
Competitive Structure of the Global Smartphone Industry
The competitive structure of the industry is quickly changing. Despite strong barriers to
entry, new companies are trying to grab a piece of the market every year, competitively rivalry is
increasing for handsets and operating systems. Consumers have a much wider range of choices

than in the past, driving average prices and margins down. Due to the growth and market size
for smartphones, competition is increasing among suppliers to get contract work from the
manufacturers, lowering costs in the value chain. Finally, some analysts are predicting that
tablets may hurt smartphone sales in the future, but many consumers dont view them as viable
substitutes for smartphones. The figure below represents the competitive structure of the
smartphone industry.

Barriersto
Entry
STRONG

Bargaining
Powerof
Suppliers
WEAK

Intensity
ofRivalry
STRONG

Bargaining
Powerof
Buyers
STRONG

Threatof
Substitutes
WEAK

Country Risk and Intellectual Property for Apple in China

With a staggering population of approximately 1.35 billion, Chinas labor market is the
delight of many companies. In order to gain access to the Chinese market and, at the same time
reduce production costs, many United States manufacturing companies started moving their
production facilities to China or outsourced manufacturing of their products. This is due in part
to the fact that China provides access to low cost materials and cheap labor (Jayaraman, 2009).
Our company, Apple Incorporated, which is regarded as the most innovative and valuable

technology company, was an early adopter of the idea of exporting finished products from China
and gaining access to the market.
Companies intending to do business in foreign countries face some challenges they were
not used to due to several economic, political and cultural reasons (Mann, 2006). Apple is not
immune from these factors. As attractive as the cost of labor and raw materials are to
manufacturers in China, the country ranks distant 83 among 160 countries studied by the World
Bank as being favorable to do business (Jayaraman, 2009). One of the reasons for this is the
political ideology of the Chinese government. China has been a Communist country for several
decades, in which the government alone exercises absolute power on legislative, economic, and
cultural institutions (Shirazi, 2005). Unlike Western countries, where there is a greater degree of
transparency in governance and doing business, rules and regulations for doing business in China
are not all always transparent. In the US, where Apple Incorporated was founded in 1976,
contractual agreements are as important as building relationships. This is not the case in China,
where building relationships is much more important than any contractual agreement. Plus, good
contracts, in and of themselves, in no way help Apple avoid red tape and bureaucracy that can
plague any unsuspecting and unprepared business.
Our corporation must be mindful that the legal system is loosely defined in China. Party
interests are the highest priority for allowing foreign business activity, but self-dealing and
corruption closely follow. Recently, the party chief of Chongqing, Bo Xilai, was removed from
his party post for scheming to replace his Chief of Police and put up obstacles to a corruption
investigation involving some of his family members (Wines and Ansfield, 2012). Foreign
businesses are not really protected from intellectual property infringements, although China has
made several modifications to its laws to be in compliance with WTO requirements.

There is an underlying cultural reason for why intellectual property theft is not viewed as
inherently wrong. It is rooted in the Confucianism philosophy that influences Chinese society.
Confucianism allows an individual to share what they create with the society in order to promote
harmony in the society. The Chinese culture is quite different from what is observed in the US.
The Chinese people give much gravitas to saving face or not being publicly embarrassed or made
to look poor. Making a Chinese employee look bad by correcting them in front of other people
would have grave consequences compared to what it was intended to be.
Also, the head of a company or organization is seen as the sole decider and executor of
strategies in China. Authority is handed down from the head and it proportional to the strength
of that employees relationship to the head of an organization. Chinese businesses follow strict
hierarchical order. For Apple to continue to succeed in China, it must be sensitive to these
cultural impediments of the Chinese way of doing business there. Apple representatives in
China must continue to be mindful to be patient because the Chinese are not always direct when
it comes to refusing or accepting an outsourcing deal. When conducting business deals on behalf
of Apple, it is imperative that a definite response is received in order not to give room for
assumptions and ambiguity.
Intellectual Property Rights in China
One of the major problems faced by foreign companies coming into Chin to do business
is the theft of technology and intellectual properties by both Chinese citizens and local
companies. The problem persists because the punishment meted out to offenders is not severe
enough to serve as a deterrent. It is not even uncommon in China for employees or local
competitors to steal technology of a foreign company or for even employees of a private sector
company take company secrets to a government sponsored organization (Barboza, 2011). The

communists principle practiced by the Chinese government made it difficult to fully enforce
intellectual property rights, until it became necessary to do so. There had been some
improvements since China joined the World Trade Organization (WTO) in 2001 (UK China IPR
Forum, 2004). These improvements still fall short of what is desirable in the western world. It is
expedient for Apple Incorporated to fully understand the dynamics of intellectual property rights
in China in order to successful in doing business in this country. Although, China has a
comprehensive intellectual property laws, the major shortcoming is the ability to enforce these
laws to the letter. This makes the detection of intellectual property right crime to be slight. At
the end of the day, infringers are favored in the widespread piracy.
Chinese business environment view trademarks and intellectual properties differently
when compared to what is obtainable in the western nations. China operates the first to register
system for trademarks. It does not matter if a different company has been using the same
trademark in commercials for a very long time; the first company to register the trademark under
the Chinese law is the rightful owner of such a trademark. However, they are quickly coming
around as the Proview case shows, which will be more fully discussed later in this memo. China
now processes many times the number of intellectual property and trademark cases as the U.S.
does, as shown in the chart below (China IPR, 2012).

Measures to Prevent Future Occurrences of Trademark or Patent Infringements

Chinese intellectual property law uses the first to register system, as opposed to the U.S.
first to use system. A company or an individual that first registers a trademark name with the
government owns it irrespective of whether they ever actually use the patent to create something
with it. To forestall such an occurrence in the future, Apple will need to register any future
trademarks it might want to use in China. This will be very important because Chinese market is
the second largest market for Apple product after the United States and will be Apples largest
market in the near future. Legal frameworks have been put into place that will prevent any
counterfeiting of products that will be involved with the trademark. However, it will be
necessary for Apple to file the trademarks even for conceptual product names before they are
discussed publicly. It is also very important for Apple to fully explore the network of
connections for the companies that it deals with in trademark issues, as the Proview case will
reinforce.
Apples Intellectual Property Issues in China
The company is facing its greatest intellectual property threat in China. The company
has filed more 350 claims in the U.S. for patent or trademark infringements. It has a mixed
record, globally, of successfully enforcing or defending itself. However, Apples intellectual
property issues in China constitute the greatest threat to the companys future financial
performance in what will be the worlds largest market for its products. It is currently fighting
intellectual property/trademark cases in China with Proview (Shenzen) and Korean consumer
electronics giant, Samsung.
As a result trademark registration issue, Apple Incorporated is currently facing a serious
intellectual property rights infringement in China. The problem has to do with the ownership of

the iPad trademark name between Apple Incorporated and a Chinese technological company,
Proview Technology (Shenzen) Company Limited.
The Genesis of the Proview Problem
Proview Technology is a struggling company which manufactured computer monitors. It
was believed that the Proview Technology, which currently struggles under huge financial
burden, registered the trademark iPad with the Chinese government in the year 2000, almost
10 years before Apples iPad hits the global market (Voight, 2012). It is a fact that the launch of
iPad in April 2010 turned around the fortune of the company. In order to gain access to the
Chinese market, the company approached Proview Technology (Taiwan) for the purchase of the
iPad trademark name it had registered several years before the launch of the iPad.
Apple should have bought the trademark from the parent company, as well as the
subsidiary. Proview did not have a single product associated with the iPad trademark. As
previously mentioned, the company is going bankrupt. Very similar to Western companies,
Proview (Shenzen) is following the money to try to get out of its predicament. The company is
also seeking of an out-of-court settlement. They wanted the company to offset all their bank
loans. If Proview eventually wins the lawsuit, the company may have to change the name of its
tablets, which would be a blow to the companys global branding strategy. Changing the name
of the iPad in China wouldnt hurt sales, but it would increase the cost of doing business there
from a production point of view.
Proview alleged that Apple purchased the trademark name from it by fraudulent means,
using a shell company registered in the United Kingdom, IP Application Development (IPAD) to
buy the right at a sum of 35,000 pounds. They claim that IPAD did not disclose that Apple was
its parent company. They alleged that this has been an infringement on their intellectual property

right and that the trademark in China was not owned by Proview (Taiwan), but by Proview
(Shenzen). They sued Apple in a Chinese court, asking the court to stop Apple from using their
trademark name iPad in China.
In February 2012, the lower court granted their request. By that ruling, Proview
Technology is empowered by the court to prevent Apple iPad tablets from being sold in China
and banning of the exports of iPad tablets made in China (Lavorgna, 2012). This ruling is a
major setback for Apple in the Chinese market. Recently, Apple appealed this court ruling at a
higher court. Should Apple lose again, it still has the chance to proceed to the Supreme Court in
China. Unfortunately, Proview is not limiting its litigation on intellectual property right
infringement against Apple to the Peoples Republic of China, it has recently initiated an
infringement case again Apple in California, wanting the court to stop Apple from using iPad
trademark name for its tablets. Additionally, Proview is seeking $38 million in damages and an
apology, as well as a separate $1.5 billion for copyright infringement. This
The Apple-Samsung Fight
Apple is also embroiled in a global intellectual property fight with Samsung, including in
China. The two companies are exchanging patent infringement lawsuits for every aspect of
smartphone and tablet development, from the locking mechanisms to the look and feel of the
interface. This fight for global dominance has occurred in at least 20 countries, ranging from
Germany to Korea, where Samsung is headquartered.
Recommendations for Future Activity
To chart a more stable course for Apples growth in China, it must do three things. First,
it must vigorously fight all cases claiming infringement of some trademark or intellectual
property in foreign markets, unless there is a defendable bona fide claim, in which case the

company can settle. However, settling should only be done as a last resort based on the advice of
Apples attorneys and technologists. Settling too easily could encourage further spurious legal
claims against the company.
Second, future trademark and intellectual property issues should be definitively resolved
when a transfer transaction is made. The Proview case is a clear example of the shortcomings
associated with acquiring trademarks through third party companies to avoid paying a higher
price because they know Apple has deep pockets. Additionally, great care has to be taken when
dealing with trademark or technology purchases from the subsidiaries of companies that Apple
does not know more about. When dealing with subsidiaries, it is clearly necessary to also deal
with the parent company, as well, to ensure that ownership of a trademark or technology and all
of the associated rights are actually transferred to Apple.
Finally, Apple has to become more proactive in establishing trademarks for future
products and in emerging markets. Apple will have to take the steps of establishing a global
network of intellectual property staff that are stationed in the Apples most important markets. It
is not enough for Apple to simply protect its interests in Asia and the U.S., it must file it
trademarks for future, conceptual products in key markets simultaneously and it should be
handled in house with local assistance. Once a concept for an Apple product gets released to the
public, there will be marauding companies that will try to file their own trademarks, hoping to
compel Apple to make some form of payment to them. Filing product trademarks has to be dealt
with as much secrecy and coordination as new product roll outs.

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