Former Ambassador: China Cutting Corners on Technology

By Gary Locke

China rolls out some new world-changing, headline-grabbing technological marvel every month, it seems.

Yet, at the same time that Chinese companies are introducing world-leading technologies, some Chinese policymakers and business leaders are flouting international law—and acting as if China were a poor developing country whose companies need special treatment.

The problem revolves around the royalty rates for “standard-essential patents,” or SEPs. These are the patents on standardized technologies—like technology using Wi-Fi and 5G communications—that ensure high-tech products from different manufacturers can work with each other. SEPs are the reason different brands of smartphones and laptops can all access the same wireless networks, for instance.

International agreements require the owners of the patents on standardized technologies to allow others to use them—to license them to any interested party on fair, reasonable, and non-discriminatory (FRAND) terms. This ensures that all firms—from industry giants to tiny startups—can incorporate the latest standardized technologies into smartphones, cars, appliances, and many other products.

In recent years, however, China has upset this global order by unilaterally lowering SEP licensing rates that its domestic companies would pay.

Beijing’s preferential treatment towards domestic firms has encouraged many Chinese companies to either underpay for patent licenses or not pay at all, and simply wait for legal challenges rather than seeking legitimate licenses at the outset. This is particularly noticeable in China’s burgeoning automotive industry.

Modern cars include an array of features that rely on standardized patented technologies, including cellular-connected features that improve road safety, increase traffic efficiency, generate cost-savings, and more. Automakers in the United States, Europe, Korea, Japan, Vietnam, Brazil, and elsewhere pay fair rates to inventors and patent holders to implement these standardized patented technologies in their connected vehicles.

Yet Chinese automakers are demanding the sorts of discounts that a poor developing nation would conceivably receive. Through China’s industry trade association, CATARC, these automakers have effectively organized a group boycott of securing licenses for standard-essential patents.

This behavior is illegal under the antitrust and patent laws of many countries, including China. But it is nevertheless pervasive. Of the roughly 200 million cars around the globe equipped with 3G, 4G, or 5G technology that have been properly licensed, only a tiny fraction were made in China, and most of those were made by affiliates of Western automakers.

That doesn’t mean Chinese vehicles actually lack those technologies. Far from it. Chinese companies have been quick to incorporate new versions of key standards—such as 5G—into their vehicles. They just haven’t paid for the privilege, with vanishingly few exceptions.

Ultimately, this practice will impede economic growth across the world. SEP owners—including Chinese innovators—need fair compensation in order to continue improving existing technologies and developing new ones. Just as Chinese companies expect to be paid fair rates for their technology used outside China, they should pay fair rates for the technology they use in China.

Top policymakers in Beijing believe that China deserves more respect on the world stage. But respect is a two-way street. If China hopes to help shape the 21st century and steer the global economy, it has to stop acting like a poor developing nation that cherry-picks which international norms it will follow. It’s time to recommit to FRAND principles—and reaffirm that every company, regardless of its nationality, must pay its fair share in licensing fees for the technologies we all rely on.

Gary Locke is the former U.S. Ambassador to China, U.S. Secretary of Commerce, and Governor of Washington State. This piece originally ran in Newsweek.