China s Strategic Emerging Industries and Their Potential Impacts on MNCs

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1 China s Strategic Emerging Industries and Their Potential Impacts on MNCs Benjamin Bai Partner Allen & Overy LLP January 2013 Allen & Overy 2013

2 Allen & Overy 2013 South China Morning Post, August 28, 2012

3 Background On July 9, 2012, the State Council of China released the Circular on the Planning and Development of Strategic Emerging Industries of the 12 th Five Year Plan. Development of the strategic emerging industries ( SEIs ) identified by the Chinese government as key engines of future growth for the Chinese economy. The Chinese government plans to invest US$1.5 trillion in SEIs through 2015 most sectors are expected to be open to foreign investment China s blueprint for becoming an innovation powerhouse Allen & Overy

4 Guiding Principles Innovation-driven, open development ( 创新驱动 开放发展 ) Independent and self-reliant innovations ( 自主创新 ) take center stage develop independent and self-reliant innovations foster original innovations integrate innovations innovations based on technology import are no longer a priority. Allen & Overy

5 Benchmarks Substantial improvement in the quality and quantity of invention patents for SEI technologies Certain key enterprises in the SEIs will invest more than 5% of their total revenues in R&D The SEIs will achieve an average annual growth rate of more than 20% through 2015 GDP share by the SEIs 2% in % in % in 2020 Allen & Overy

6 Strategic Emerging Industries 1. Energy-saving environmental protection 节能环保 ; 2. Next-generation information technology 新一代信息技术 ; 3. Pharmaceuticals and biotechnology 生物 ; 4. High-end equipment manufacturing 高端装备制造 ; 5. New energy 新能源 ; 6. New materials 新材料 ; 7. New-energy vehicles 新能源汽车 Allen & Overy

7 Twenty Strategically Important Projects 1. Commercialization of energy saving technology and equipment 重大节能技术与装备产业化工程 2. Commercialization of environmental protection technology and equipment 重大环保技术装备及产品产业化示范工程 3. Resource recycling 重要资源循环利用工程 4. Broadband 宽带中国工程 5. High-performance integrated circuits 高性能集成电路工程 6. New generation flat panel displays 新型平板显示工程 7. Internet and cloud computing 物联网和云计算工程 8. Information technology for civilian use 信息惠民工程 9. Protein and other biological medicines and vaccines 蛋白类等生物药物和疫苗工程 10. High-performance medical diagnostic equipment 高性能医学诊疗设备工程 Allen & Overy

8 Twenty Strategically Important Projects (con t) 11. Bio-breeding 生物育种工程 12. Biomaterials 生物基材料工程 13. Aviation equipment 航空装备工程 14. Space infrastructures 空间基础设施工程 15. Advanced rail transportation equipment and key components 先进轨道交通装备及关键部件工程 16. Marine engineering equipment 海洋工程装备工程 17. Intelligent manufacturing equipment 智能制造装备工程 18. Integrated application of new energy 新能源集成应用工程 19. Key materials 关键材料升级换代工程 20. New-energy vehicles 新能源汽车工程 Allen & Overy

9 Biotechnology During , the biotech industry is targeted to grow at an annual growth rate of more than 20%. Four sectors are in focus: Biopharmaceuticals Biomedical engineering Bio-agriculture Bio-manufacturing Allen & Overy

10 Biopharmaceuticals China will target innovative drug developments for the treatment of AIDS, viral hepatitis, malignant tumors, cardiovascular and cerebrovascular diseases, diabetes, etc. By 2015, more than 30 new drugs with self-reliant intellectual property will be commercialized in China. More than 200 pharmaceutical formulations will be marketed internationally. By 2020, more than 5 innovative drugs will have been registered and marketed internationally. Allen & Overy

11 Biomedical Engineering Focus will be on: (1) high-performance diagnostic imaging equipment; (2) highly-integrated, high-sensitivity, high-specificity and highstability clinical diagnostic and treatment equipment and associated reagents; (3) tissue engineering, intervention and minimally invasive treatment, rehabilitation and other products; and (4) digital, mobile medical systems, especially those that can be used cost-effectively in primary health care institutions and high-end clinics. Allen & Overy

12 Bio-Agriculture By 2015, China will have developed 20 new animal varieties and 180 high-yield, multi-resistant, highly efficient new plant varieties with coverage of 500 million mu (about 34 million hectares). By 2020, one to two Chinese seed companies will have become global top 20 players. There will be 10 to 15 agricultural biotech products companies that have global competitive advantages. Key technology areas include: new genetically modified plant varieties, space breeding, molecular marker-assisted breeding, heavy ion irradiation breeding, prevention of major diseases and their associated vaccines, bio-fertilizers, and other green agricultural products. Allen & Overy

13 Bio-Manufacturing By 2015, a substantial portion of China s industrial chemicals will be bio-based. Specifically, organic chemical raw materials and industrial biological materials, such as polylactic acid, polybutylene succinate, etc., will reach a production capacity of 100,000 tons. New biotechnology processes will be used in chemical engineering, pulping, printing, dyeing, and leather tanning on a large scale. By 2020, bio-based materials will account for 12% of the total industrial chemicals output. By 2020, the biological fermentation industry output and technology will have reached the international level. 30% of the chemical engineering, printing, dyeing, tanning and like industries will have used biotechnology, thus resulting in a large-scale reduction in pollution and energy consumption. Allen & Overy

14 For more details on the Circular, please see the following article: Becoming An Innovation Nation Benjamin Bai and Cecily Zhang, China Law & Practice, Vol. 26, No. 7, September/October 2012 Allen & Overy

15 An Equal Opportunity? The Circular makes it clear that there are opportunities for MNCs to invest in the SEIs and that foreign invested entities in China are eligible for participation in the SEIs. But the devil is in the detail! Are you perceived as a local company? Are you partnering with local companies? Does your WFOE own IP? Have you realigned your R&D according to the SEIs? Allen & Overy

16 Local Ownership of IP Practicing entity (i.e., WFOE) in China should own relevant IP ü Potential tickets to Chinese domestic market ü Enforcement made easier Two ways to obtain local ownership of IP ü Local R&D (under cost sharing model; but cost plus does not work) ü Transfer of IP from parent company to WFOE Transfer pricing/global tax efficiency may conflict with local ownership of IP Tax people may say no to you (and they almost always win) But is China important to you? Allen & Overy

17 Final Thoughts The perfect innovation storm is brewing in China. More domestic technology champions will emerge in the next five years and beyond. MNCs must realign R&D and IP ownership in China to be relevant. Local ownership of IP can help MNCs to participate in Chinese domestic market. MNCs may have to rely on IP to fight for future survival in China. Allen & Overy

18 Thank You For More Info, Please Contact Benjamin Bai Partner Allen Overy LLP, Shanghai office Allen & Overy