Published on July 01st, 2007

[ Nevertheless ] Hope and Fear: Doing Intellectual-Property Business in China

As leading-edge, international electronic-design companies get more and more involved with China, a complex set of emotions typically emerges: enthusiasm, hope, greed, and a little bit of fear. The fear seems to revolve around questions of reaping the benefits of a sophisticated growing market while maintaining differentiation. In many cases, it boils down to a question of intellectual-property (IP) protection: If I expose my key designs and know-how, will I maintain control? Will I get paid? Will my product become commoditized worldwide?

Rightly or wrongly, countless stories of pirated DVDs and Gucci handbags fuel this fear. Uncertainty about contract and patent enforcement, combined with unfamiliarity with the rapidly evolving Chinese market, make many companies extremely wary about exposing their IP in China. These issues are particularly poignant for those companies with business that comprises the explicit licensing of IP. High-value intellectual property, such as processor cores, commands both significant license fees and perunit royalties. When IP owners understand four questions, they can manage the risks and opportunities more effectively:

Intellectual property comes in many different forms: market knowledge, manufacturing techniques, software binary code, hardware source code (e.g., Verilog), board-level schematic designs, organization work flows, and countless other abstract forms of value. Much is carried only in the brains of team members. The greatest value and greatest risk are typically found in explicitly portable modules like hardware and software source code. After all, such modules can often be separated from the rest of the product and redeployed in a variety of other systems. Companies should generally focus their attention on these types of IP. Needless to say, pure-play processor-IP companies like Tensilica explicitly build highly portable and reusable IP. They have intense incentives to protect it.

All companies have an incentive to protect their own intellectual property. It is the foundation of their differentiation. Aside from contractual and moral obligations, a company may not have strong economic incentives to protect the intellectual property of its suppliers, partners, and customers. Once a company's own IP and in-sourced IP are mixed together, however, the company may have ample incentive to protect the combination. For example, Tensilica has found that giving customers easy and seamless processor extensibility encourages them to capture their own IP within Tensilica processor configurations. As a result, they will more diligently protect the processor design.

A successful intellectual-property business depends on a level of trust, which is built on a combination of confidence in the business partner and the legal system that underlies the IP contract. As we've become more deeply involved in the Chinese market, the great range of established and emerging companies becomes clear. Some are led by teams with long international experience. They are fully engaged in supplying products to customers outside China. Their experience with international standards in business practices, contracts, and intellectual-property protection makes these companies look much like their equivalents in Silicon Valley, Korea, or Europe. This orientation exposes them to both international legal jurisdictions and international capital markets, making the trust foundation easy to build. Many other Chinese companies have equally strong and sophisticated managers and products, but less exposure to international customers and markets. This restricts the avenues of legal and market recourse for IP licensors. It also makes building the trust more important and more careful. Over time, successful Chinese companies will likely adjust to the best practices in IP protection as they expand directly into international markets.

For many types of IP, more exposure simply means more risk of commoditization. Platform IP, such as microprocessors, introduces another factor. With a processor platform, the more people who use it (i.e., build systems and write software for it), the more of a standard it becomes. This "network effect" subtly changes the incentives of the platform owner. The owner recognizes that there might be something worse than having people steal IP: having people steal the competitor's IP! This does not mean that processor companies give away their IP, as such a move is generally self-destructive. But they are biased toward wider proliferation in rapidly emerging markets like China.

These four issues help shape IP strategy in China. For a successful platform-IP company, it leads to the idea of pricing and packaging for proliferation. With this in mind, Tensilica built easy-to-use "Diamond core" processor packages at prices as low as $75,000- a fraction of the price of other processor cores-to encourage legitimate proliferation in China and around the world. The goal is to deliver and support cost-conscious customers and still make handsome margins while encouraging proliferation and discouraging piracy. What chip designer would really want to use a black-market copy of the processor design without any support or warranty of correctness in a major design? With the "priced-for-proliferation" business model, that designer can get guaranteed quality and support for a fee that is small compared to the rest of the investment in the design.

Ironically, China isn't a large market today. But it has two highly attractive features to strategic platform-IP providers. First, it has huge growth potential. While Chinese semiconductor companies aren't likely to become giants overnight, the growth of semiconductor consumption in China will spawn many successful China-based chip companies over time. Secondly, the recent emergence of Chinese chip-design companies means that relatively few new designs are simple incremental enhancements of old platforms. More designers start with a clean sheet of paper. They also can start with fundamentally better ideas in architecture. This freedom often translates into faster, more cost-effective, and more flexible designs. The potential benefits are clear as long as the IP risks are managed.

In the end, wariness-if not fear-is appropriate for owners of valuable intellectual property entering the Chinese market. But enthusiasm and hope are even more appropriate. Intellectual-property protection is becoming increasingly manageable, thanks to the rising sophistication and international experience of China's electronic designers, the development of significant local intellectual property, and the growing trustworthiness of the Chinese legal system.
Dr. Chris Rowen is President and Chief Executive Officer of Tensilica, which he founded in July 1997. He was a pioneer in the development of RISC architecture at Stanford in the early 80s and helped start MIPS Computer Systems Inc. in 1984, where he served in a variety of functions including as Vice President for Microprocessor Development and managed MIPS in Europe. When Silicon Graphics purchased MIPS, he become the technology and market development leader for Silicon Graphics Europe. In 1966, became Synopsys' Vice President and General Manager of the Design Reuse Group. He received a B.A. in physics from Harvard University and M.S. and Ph.D. in electrical engineering from Stanford University.

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