ip analysis and entering new markets

IP Analysis & Entering New Markets

Huawei Takes on the World with R&D

2016

Table of Contents

R&D and IP Analysis: A formidable partnership 3

The Story of Huawei: From Domestic Roots to Global Footprint 4

How to evaluate which markets are best 5

Global strategy and patenting go hand-in-hand 7

Litigation 10

Knowing when to license 14

What Huawei teaches us 15

Conclusion: Structure the business for success 16

Investing in R&D increases a country’s economic growth prospects. One of the latest studies to prove this point comes from Begun Erdil Sahin, of Istanbul Kultur University, who claims that a 1 percent increase in R&D spending can grow an economy by as much as 0.61 percent. 1

The question is, does the same apply to individual enterprises? Can investment in global R&D expansion create a world leader? If so, what does such an approach look like? There is one example that is becoming the textbook model for global expansion. Chinese enterprise, Huawei, has adopted a unique approach to R&D. It invests at least 10% of its annual profit in the research department.2 The figure varies from $3 to $5 billion, and means that 44% of its employees work in R&D, out of which 1,200 are in Europe.3 And just last month, it announced the creation of a further 250 R&D jobs in Canada, as it commits a further $212 million to a major project to expand 5G technologies.4 It now counts as the only Chinese company in the Fortune 500 that registers more sales revenue from foreign markets than in the domestic market, at 67%.5 In this paper, we will take a look at Huawei’s journey towards becoming an international innovator through the lens of IP data. We will discuss how this information can be used in any sector to form the foundation for evaluating questions, such as the viability of entering new markets; the importance of IP strategy within the global context; and how IP strategy should be aligned with clearly defined business objectives that unite R&D and IP goals.

© 2016 All Rights Reserved 3

1 http://www.ekonomikyaklasim.org/eyc2015/userfiles/downloads/_Paper%20207.pdf 2 http://www.chinatechnews.com/2014/11/24/21196-huawei-will-build-rd-center-in-south-korea 3 https://www.theparliamentmagazine.eu/articles/partner_article/huawei/huawei-launches-new-european-research-institute 4 http://www.dnd.com.pk/huawei-going-to-invest-in-a-major-rd-project-in-canada/110077 5 http://www.europeanbusinessreview.com/?p=8221

R&D and IP Analysis: A formidable partnership

Founded: 1987

2015 Revenue: US$ 60.839 billion

Employees: 170,000+ (2015)

44% ...work in R&D

67% ...of sales are international

The early days It was about a decade after its foundation in 1987 by Ren Zhengfei that Huawei looked to take on the international stage. It had started its life as a company that re-sold telecommunications switching equipment (PBXs) imported via Hong Kong. In the early years, much resource was directed towards studying how to reverse-engineer the switches that they were selling. Domestic strategy In contrast to many other Chinese companies, which had decided to pursue expansion based on joint ventures with foreign partners in order to gain first-hand insight of their technologies, Mr Ren Zhengfei hedged his bet on a 100% Chinese company. He believed that his company would appeal to local authorities more if there were no foreign investors involved. He was right – and Huawei worked closely with the authorities in Beijing, providing telecommunications and switching equipment to government-affiliated agencies, as well as being able to secure lines of credit when required.6

Taking on the world After securing its domestic position, Huawei turned its attention overseas. Expansion started in 1999 with a global research and development centre in Bangalore, India; followed by another in Stockholm, Sweden in 2000. In 2001, came four more R&D centres in the USA, after which Huawei also embarked on a number of joint ventures, including with 3Com, Siemens and Symantec.7

The right strategy at the right time When commencing overseas expansion, finding the right countries that align with future IP strategy is vital. Selecting a country where a product cannot be protected can leave you open to copycat inventors who can compete locally and drive down prices, leaving you unable to recoup the investment made in launching there. On the other hand, securing IP protection for your product in a new territory can open up the possibilities of licensing and partnerships, leading to a much more lucrative outcome. A combination of statistical factors can be used to find the next best candidates for international expansion – essentially, this is using IP analysis to derive a market attractiveness score for each territory. A score could be based on how well a territory - and the competitive landscape in that territory – is able to support the main objectives of the business.


6 https://csis-prod.s3.amazonaws.com/s3fs-public/legacy_files/files/publication/130215_competitiveness_Huawei_casestudy_Web.pdf 7 http://www1.huawei.com/en/about-huawei/corporate-info/milestone/index.htm

R&D and IP Analysis: A formidable partnership

The Story of Huawei: From Domestic Roots to Global Footprint

Not all countries will provide an environment that is right for an organization’s specific objectives. Those with stronger IP protection, for example, can be best for organizations wanting to collaborate more with others on new technologies. On the other hand, organizations may choose to enter weaker IP markets with older technologies, to mitigate risk in the event of imitation or piracy.8

The macro situation and government policy As the World Economic Forum explains, “governments can, and do, play a critical role in spurring innovation.” It points out the example of Israel, where the public venture-capital fund Yozma has provided early-stage backing to some of the country’s most dynamic companies. This has created a healthy environment for R&D, benefitting educational institutions, foreign companies in Israel, as well as Israeli companies themselves. There is strong support for continuing to encourage further investment in R&D and incentivizing more international companies to open R&D centres there. Consequently, it is second only to Korea in terms of total proportion of GDP spent on R&D. Nordic and central European countries also dominate the top ten list, as shown below.


8 For more, see http://thecge.net/wp-content/uploads/2016/01/Capturing-Value-frrm-IP-in-a-Global-Enviroment.pdf

How to evaluate which markets are best

2.5%

3.0%

3.5%

4.0%

4.5%

2009 2011 2012 2013 2014 2015 (E)

South Korea

Israel

Japan

Finland

Sweden

Denmark

Switzerland

Germany

Austria

United States

Spend on R&D as proportion of GDP – Top Ten countries

Source: World Bank and estimates


9 https://www.b2binternational.com/publications/china-market-entry/

How to evaluate which markets are best

Finding the right talent The macro-economic situation is one aspect, but it is also, of course, important to select a country that can provide the right skill set to support the technologies being pursued, as required by the business. For example, some countries will have a greater tendency towards certain technologies than others, and the specific mix of specialities will vary by territory. In Finland, for instance, the top patenting areas are: transmission of digital information, electric digital data processing and wireless communication networks. In Germany, on the other hand, the top three are: medical, dental and personal hygiene; heterocyclic compounds; and acyclic and carbocyclic compounds. High levels of patenting activity means that the skill set for specific technologies in certain markets will be well supported, although the competition will also be much tougher. The position of the competitors within the IP landscape, will determine whether the right course of action is to apply for local patents, explore licensing opportunities, or avoid the territory at this time. It is why new market entry, and IP strategy need to be considered very closely alongside competitor analysis. Using IP data in the evaluation IP data will help with more specific decisions as well. For example, using address data, it is possible to locate the best locations for future R&D facilities. While in Europe, resources are much more centralised, this is considerably different in China. As B2BInternational explains: “As in many countries, China has actively encouraged the setting up of industrial clusters in specific cities or regions, and in many cases. entire industry supply chains can be concentrated in a small handful of cities.”9 IP information can reveal where the hubs for specific industries are, for any country around the world - and will indicate whether this lines up with your sales office plans or highlight any potential drawbacks. IP Analytics: Lines of Enquiry

Technology

Do I have freedom-to-operate in the

new country? Does the product require

any local adaptation, and if so, to what

extent?

Competitive Landscape

Who’s in the competitive

landscape? What are their strengths

and weaknesses and how will that affect my GTM?

Litigation risk

How do companies protect their rights?

Are there high volumes of litigation

in specific tech areas? Is it a strong

or weak territory for protecting IP?

Co-operation

What are the possibilities for joint

ventures, or licensing?

To what extent does the government

stimulate patenting activity?


10 https://en.wikipedia.org/wiki/Huawei 11 http://www.cnet.com/au/news/dont-know-huawei-or-zte-you-will-soon/ 12 http://www.economist.com/node/21559929

Global strategy and patenting go hand-in-hand

Success on the international stage Getting the strategy right at the earliest possible stage, making use of all the possible data available, can mean the difference between success and failure when it comes to the international stage. Consider, for instance the long-running domestic rivalry between Huawei and ZTE. Protection of intellectual property has emerged as one of the publically visible outcomes of their competitive spat, which came to a head in 2011.10 In March 2012, CNET ran an article: “Don’t know Huawei or ZTE? You will soon.”11 Out of the two, Huawei has initially won out as, by August, The Economist concluded: “Thanks to its size and its international reach, it is Huawei that gets most attention.”12 However, IP data reveals that the signs of a winner were appearing at a much earlier stage. In fact, by comparing the filing activity of the two vendors, it is evident as far back as 2006 that Huawei had started to move much faster than ZTE in terms of innovation.

0

5,000

10,000

15,000

20,000

25,000

ZTE

Huawei

Huawei outpaces ZTE for innovation in terms of patent filing

Source: PatSnap Insights

Volume, Patents filed



The evidence is even stronger when considering filing activity at an international level, rather than domestic level. More than 20% of Huawei’s patenting activity came consistently from outside China from 2006 onwards. However, IP information goes much further than simply revealing patent volumes. While the level of internationalisation already gives some insight into broader strategy, a much more in-depth picture can be obtained from analysing other aspects of patenting activity.

0%

10%

20%

30%

40%

50%

ZTE Huawei

In this radar map to the left, we can see that the ‘Internationalisation’ is just one of a number of areas of strength for Huawei over ZTE. This is a measure which quantifies the degree to which an organization's inventors engage in collaborative R&D with inventors outside the home economy. And Huawei also considerably beats ZTE in science-driven R&D, which evaluates the share of patents with a Bibliographic Citations Ratio (BCR) value higher than 50%; as well as Quality Improvement, which is based on the share of an organization's patents in the pool of highly cited patents, relative to its share in total patents.

Quantity Improvement

Joint R&D

Internationalisation

Tech diversification

Market driven R&D

Quantity Growth

Science-driven R&D

Tech specializ-

ation

Proportion of international patents

IP Strategy radar map

ZTE

Huawei



The outcome for Huawei Huawei has demonstrated an ability to move away from its roots in reverse-engineering, to becoming a world player capable of international innovation. And its approach translates into market success. In 2015, Huawei was dubbed world leader in 4th generation mobile communication technology (4G) patents, owning 25% of the total granted. Its focus on 4G technology has led the company towards building 154 4G networks, from a total of 300 Long Term Evolution (LTE) networks in the world.13 Having an IP strategy which is linked to the global strategy, and which supports the company goal’s has enabled Huawei to capitalise on being a faster, earlier mover into new country markets. This type of IP and competitive analysis is a crucial component for any company evaluating overseas expansion, and should be integrated into the decision-making process. Using IP data to set targets This analysis will help to set goals and targets vis-à-vis the competition and to answer business questions such as: when is the right time to hit overseas territories? Are we ahead or behind the competition? What markets will gain us the quickest advantages and do we need to set targets, such as reaching a certain proportion of international patents versus domestic? Only by addressing these kinds of questions can one be sure of achieving first mover advantage for international markets. Also, as international expansion increases exposure to risk, IP analysis is the best way to evaluate and mitigate this factor. One of the risk areas, for example, being the ever growing likelihood of litigation.


13 http://www.patentsino.com/en/news/2015/0310/78.html


Risk of litigation rises with international activity The South-East Asia IPR SME Helpdesk is an EU-funded project that provides free, business-focused advice relating to IP concerns for small and medium companies who wish to enter this market. In its comprehensive guide, it points out: “Prior to entering any new market, it is highly recommended that a vulnerability assessment be conducted. Such an assessment should include, at a minimum, the verification of availability and freedom to operate, and the anticipation of risks and potential enforcement issues. Entering a new market and protecting IPRs sometimes means being ready to enforce or defend rights in order to ensure that business objectives are met.” However, it goes on to warn: “Focus on business needs before legal outcomes.”14 Therefore, what a business is prepared or able to ‘sacrifice’ with regards to IP dictates which countries are more suitable for initial expansion and the local legislation in those countries, in turn, will dictate the best IP strategy – so these have to be in sync, with risks accounted for. We can see, for instance, in the case of Huawei, that global expansion has come at a cost in terms of litigation, as the number of cases where it has been hauled into court as a defendant increases dramatically as it achieves international success, with a spike in 2013:


14 http://www.southeastasia-iprhelpdesk.eu/sites/default/files/publications/Top20-English.pdf

Litigation

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

As Plaintiff (cases)

As Defendant (cases)

Number of US litigation cases involving Huawei


As Huawei becomes ever more established in specific tech areas, they too are now taking action themselves to protect their IP where necessary, with litigation action in the US commencing in 2016. As Yongwook Paik and Feng Zhu state in their paper The Impact of Patent Wars on Firm Strategy, “Patents and patent enforcement strategies have become essential components of firms’ contemporary competitive strategies.” 15

Using data from patents, it is possible to determine the level of risk associated with different technology areas. The top IPC classifications for Huawei include H04L, H04W and G06F. These correspond to the areas of transmission of digital information, wireless communication networks and digital data processing, respectively. If we take a look at the litigation trend in these areas, it is possible to determine the level of risk associated with each of these various technologies, in terms of the number of cases in the US courts:


15 http://www.hbs.edu/faculty/Publication%20Files/14-015_82697dd2-5915-45fd-8973-d2751a87f9ef.pdf

Litigation

0

500

1,000

1,500

2,000

2,500

3,000

H04L - Transmission of digital information

H04W - Wireless communication networks

G06F - Digital data processing

Number of US litigation cases, by technology sector

In particular, the G06F category, digital data processing, demonstrates a higher litigation risk than the other categories. When considering a move into international markets, an assessment can be made with regards to the risk factor, according to a specific technology segment.


Further, IP data will reveal who is pursuing action in the various technology areas, giving an indication of the likely adversaries in the event of litigation. As Yongwook Paik and Feng Zhu go on to state in their paper, “litigants’ strategic responses may include countersuing, settling, exiting the market, inventing their way around patented technologies, and strengthening their own patent portofolios.” Having this information available before committing to global expansion can help to evaluate outcomes for various risk scenarios. IP information also reveals the competitive landscape in terms of the players in a given market, and the technologies they have patented and are actively protecting. International expansion has taken Huawei into a number of legal cases, with various outcomes:


16 http://www.hbs.edu/faculty/Publication%20Files/14-015_82697dd2-5915-45fd-8973-d2751a87f9ef.pdf 17 http://techcrunch.com/2011/04/13/motorola-and-huawei-settle-patent-lawsuit/

Litigation

Cisco vs Huawei In 2002, Cisco commenced legal action against Huawei for patent infringement, accusing the Chinese company that it had stolen Cisco technology for routers and switches. When the lawsuit started, Huawei stopped selling the incriminated products. Twenty months later, Cisco settled with the Chinese giant, after the latter agreed to change the interface, user manuals, user assistance screen and parts of the source code. The decision came only after a third party reviewed the case and Cisco acknowledged it could lose the lawsuit.16

Huawei vs Motorola In 2011, Huawei sought to prevent Motorola sharing Huawei’s intellectual property (IP) information with Nokia Siemens. The two companies settled by agreeing that Motorola could share the commercial agreements with Huawei for a fee, and could afterwards share the confidential information with Nokia.17

Being able to identify the right course of action demands a high understanding of the local IP landscape in the target country or countries – and the appetite for taking the various paths has to be determined by business strategy. In the Huawei cases, we have seen examples of defensive strategy, where the new market entrant registers IP and monitors competition for infringement; and offensive strategy, where a new entrant anticipates and blocks competitor activity with IP. Of course, there is also another option – to commercialise IP assets, such as by licensing a technology.20


18 http://www.networkworld.com/article/2164862/lan-wan/huawei-loses-to-zte-in-french-patent-suit.html 19 http://www.fosspatents.com/2014/01/huawei-settles-with-rockstar-consortium.html 20 See http://www.southeastasia-iprhelpdesk.eu/sites/default/files/publications/Top20-English.pdf for more information

Litigation

ZTE vs Huawei The most dynamic series of litigation cases in the patent field concerns ZTE. Starting in 2012, the two Chinese giants sued one another repeatedly in China and Europe. Huawei initiated ten patent infringement claims against ZTE in Europe, while ZTE filed 18 against Huawei in Europe and China.18

In 2012, Huawei had its claims regarding a patent application for a thinner USB device rejected in China. The action had the same fate in Germany and France. Then, in 2013, Huawei won a temporary sales ban in Germany for ZTE's 4G base stations, as the court decided in this instance that there were too many similarities with Huawei's patent.

The Nortel patents lawsuit In 2013, Rockstar Consortium, a company that had acquired Nortel's patents, sued Huawei, Google, Samsung and four other Android smartphone companies.19

Huawei was the first to settle, and while details of the agreement have not been disclosed, the Chinese manufacturer did not let the litigation last more than a couple of months.

Huawei has pursued cross-licensing agreements in its rise to the top As mentioned, in 2015, Huawei became the world leader in the area of 4G patents, although they have also had to establish relationships with vendors where necessary in order to achieve this international status, most notably with Ericsson. In 2016, Huawei extended their global patent license with Ericsson, including a cross license that covers patents relating to both companies' wireless standard-essential patents. Under the agreement, both companies are able to access and implement the other company's standard-essential patents and technologies globally.21

Using IP information, we can identify the technology areas in which the highest amount of licensing is taking place. Looking at the licensing statistics, as represented by the blue pins below, for the top ten IPC codes in which Huawei is active, it is clear that the most licensing activity in the industry takes place within patents pertaining to data communication and electronic digital information, while the area relating to network resourcing, licensing is quieter - in terms of volume.


21 http://www.ericsson.com/news/1978769

Knowing when to license

Source: PatSnap


22 http://www.europeanbusinessreview.com/?p=8221 23 https://hbr.org/2015/06/huaweis-culture-is-the-key-to-its-success

What Huawei teaches us

Huawei as the blueprint for success? Admittedly, success does not come down to one factor alone. Huawei's founder, Ren Zhengfei, has always had the vision of a globally powerful company and used several business strategies combined to achieve his plan, including fostering a culture of high employee dedication; a rotating CEO technique;22 gradual decision-making; and long-term thinking.23

The approach to R&D dovetails into the commitment to long-term thinking and being able to plan an effective global expansion program. Of course, Huawei has always had government support in China and access to large lines of credit through banks in China to help bankroll its foray into international markets. However, having access to credit does not negate the need for an R&D plan that is fuelled by a comprehensive, global IP strategy; itself dictated by a clear company vision and well-formed targets. But it does mean that Huawei, with access to a larger bank balance, can afford a few mistakes along the way, which those with smaller budgets simply cannot. It’s why it is even more important for these companies to use competitive intelligence and IP data to ensure that mistakes can be avoided at different steps of the journey. Using competitive intelligence as an advantage The more knowledge that one can gather with regards to the competition, both domestically and in target markets, the better an evaluation can be made about the right course of action, and the more likely it is that a company will succeed in its goals. Following Huawei’s story through IP information and the accounts of its success provides fascinating insight into approaches that can work. And it shows how important it is to keep on top of the competitive landscape in order to navigate ones way to success. But it also shows what competitors can do to catch up. It provides valuable insight to companies such as ZTE with regards to where they can improve and what strategies to adopt if they want to close the gap, including adopting a rigorous and data-driven approach to IP. An organization that has concluded that it is ready to take its products to other markets, needs to ensure it has the right framework in place to achieve this – and a data-driven, carefully formed IP strategy is crucial.


24 http://thecge.net/wp-content/uploads/2016/01/Capturing-Value-frrm-IP-in-a-Global-Enviroment.pdf 25 http://www.southeastasia-iprhelpdesk.eu/sites/default/files/publications/Top20-English.pdf

Conclusion: Structure the business for success

Capturing value A recent paper from Juan Alcácer, Karin Beukel and Bruno Cassiman concludes: “[...] global enterprises will need to combine different institutional, market, and non-market mechanisms to capture value from a company’s know-how and reputation. Moreover, the precise combination of tools will depend on the local and regional institutional and market conditions. As a result, organizations interested in optimizing value capture from innovation may need to adjust their innovation, IP, and business structures.”24 In the paper, they argue for a globally oriented, cross-functional ‘value capture team,’ which should help navigate the complexities of global IP and turn challenges into opportunities. Preventing revenue loss It echoes the sentiment from the South-East Asia IPR SME Helpdesk, “A clear vision of IP strategy and how to use IP strategy to support development plans can impact a company's growth and prevent loss of revenue further down the road. IP assets can not only be protected but can also offer increased commercialisation, income generation, and other value added opportunities.”25 Use analysis to help set targets and goals In short, if your organization is mature enough to enter new country markets, and it doesn’t have a clearly defined IP strategy and global competitive analysis mechanism in place, then now is the time to make sure it does. Here are the four recommended IP areas to consider for setting specific targets and milestones:

Technology

Is the organization innovating quickly

enough to compete at a global level? How many new

patents should be aimed for?

Competitive Landscape

Is the organization ahead or behind the competition, and how does IP strategy need to

adapt to gain advantage?

Litigation risk

How do the countries selected for

expansion impact the litigation risk? How will this shape the

longer-term strategy?

Co-operation

Are joint ventures and licensing

opportunities being exploited?

Is the portfolio delivering

increasingly better return?

Establishing these as early as possible during the planning stages will create the best conditions for the most successful outcomes.

About PatSnap PatSnap is the leading IP Analytic and Management platform that empowers even non IP-proficient users to understand this competitive landscape. Through our simple yet powerful interface, IP is now accessible to everyone allowing you to compete and innovate on a global scale. Since it was founded in 2007, PatSnap has served thousands of customers in more than 30 countries worldwide including IBM, National Institutes of Health, United States Department of Defence, MIT and Singapore’s Agency for Science, Technology and Research. Find out more: www.patsnap.com

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ip analysis and entering new markets

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