The Motley Fool

China’s Patent Filings: Does Quantity Reflect Quality?

“Made in China 2025” program designed to encourage technological innovation and patent filings, has had amazing results. China’s double-digit increases in patent filings are unsurpassed worldwide. Still, many skeptics wonder whether those patent filing numbers mean anything. Filing piles of patents don’t guarantee that most or all of those discoveries will prove lucrative or worthwhile.

Quantity vs. Quality

Critics of China’s patent explosion complain that the majority of the country’s domestic patent applications are useless, adding nothing to the art/field associated with them. Some 76% of the patents filed in the PRC by Chinese nationals cover only minor improvements and changes.

Moreover, critics argue that the government’s patent filing incentive program is creating a glut of useless patents that will only clog the system, making it more difficult for hard-working innovators, entrepreneurs, and businesses to patent their ideas and advance their respective fields of technology.

The government’s incentive programs subsidize patent application filings, and give monetary incentives to companies and private citizens if they file patent applications. Companies that files lots of patents are given tax breaks and regulatory concessions too.

If you are a private citizen, you may be granted the right to reside in an area that you prefer to live in via hukou. You may qualify for a hukou for your area of choice if you file patent applications.

This problem created by the government incentive programs is compounded by the fact that patent granting officials are paid based on the number of patents that they approve. Thus, they have no motivation to screen out bad patents; doing so reduces their potential paycheck.

Moreover, the Chinese government has purchased a number of U.S. utility patents and encouraged its citizens to build on them. Thus, the government is making it even easier for Chinese nationals to file patents on preconceived and patented inventions. There are even companies and websites offering ideas for sale to people who want to file patents, but don’t have any ideas – a nifty cottage industry fueled by government incentives, companies seeking government favor, and pure self-interest and greed.

Given these circumstances, it’s understandable that people and companies may file patents that are worth less than nothing. They’re rewarded for the patent’s existence, not its quality.

Types of Patents

China has three types of patents: Invention, utility model and utility design.

Invention patents cover truly novel discoveries – breakthroughs in an existing design, process, or concept. They go through a rigorous 18-month approval process and receive 20-year protection

The other two types of patents can be granted for minor improvements and changes that don’t necessarily advance the art or field associated with the patents. They’re not put through intense scrutiny, and they can secure approval in less than a year. They are less valuable than the invention patents and only receive 10-year protection.

Patent Applications Filed and Approved in Mainland China (2017)

Type of Patent Number of Patents Filed Percentage of Total Patents Filed (%) Number of Patents Granted Percentage of Total Patents Granted (%)
Invention 1,245,709 35.2 326,970 19.0
Utility Model 1,679,807 47.5 967,416 56.2
Design 610,817 17.3 426,442 24.8

Garbage Patents  

Xinhua News Agency (XNA) has claimed that the PRC intellectual property (IP) sector is plagued by fake innovation, weak patents, and fake demands for IP protection. Furthermore, the fake innovation being subsidized by the PRC government is a waste of government resources, hurts innovators, and distracts policymakers from the ‘real’ technological needs of the country.

XNA’s claims are supported by numerous examples of PRC nationals literally copying USA patents and getting them approved in the PRC. Such individuals hope that their patent rights will be bought by the person or company that controls/owns the American patent if that product is sold or used in China. In other cases, some companies have been exposed as frauds trying to get tax and residency benefits from their employees via patent filings.

Patent Abandonment

Although the PRC subsidies, encourages, and incentivizes the filing of patent applications, it does not help the patent holders to pay the maintenance fees for the patents. The maintenance for a patent on a new-discovery invention patent one year after approval is 8,000 RMB (US$131). Maintenance fees for minor changes or additions, utility model and design patents, have increased from 600 RMB to 2000 RMB over the past two years.

Unless owners are making money from a patent or see a good chance to do so, they’re not likely to pay its maintenance fees. In 2018, 91% of design patents granted in 2013 became invalid because their holders failed to pay maintenance fees. After five years, the rate of abandonment for utility model and invention patents were 61% and 37%, respectively. Compare these rates to the USA: Over the same period of time, about 14% of patents granted became invalid because of failure to pay maintenance fees.

Rate of Abandonment of Chinese Design Patents Based on Patent Age

Age Active Patents

(Percentage of Total – %)

Percentage of Abandoned Patents

(Percentage of Total – %)

1 94 6
2 54 46
3 40 60
4 26 74
5 9 91

Rate of Abandonment of Chinese Utility Model Patents Based on Patent Age

Age Active Patents

(Percentage of Total – %)

Percentage of Abandoned Patents

(Percentage of Total – %)

1 95 5
2 73 27
3 63 37
4 56 44
5 39 61

2 key takeaways 

First, this is a great time to invest in companies that hold rights to a growing portfolio of invention patents, and pay the maintenance fees on them for more than five years. That latter move signals that the patents have value and are expected to produce revenue for the patent holders.

Second, look for companies that file triadic patents, and those that have patents that are often cited in patent applications filed outside of China. Those companies are likely to be producing high quality, novel, innovative products.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.