Asia: R&D’s New Center Of Gravity?

Craig Norris is the Tech Editor for TV Technology Europe.

What effect does the global economic downturn have on the future development of technology for the TV industry?

One effect is the slashing of expenditure budgets by the larger manufacturers of broadcast equipment. In the happy days of the 1980s, companies like Sony were proud of the fact that about 10 per cent of their revenue was invested in R&D.

Borne out of that generous Sony R&D budget came many fundamental devices that we now take for granted: CCD sensors for video and still cameras; VLSI chips for digital signal processing; lithium-ion batteries; metal particle recording tape; the world’s longest-living data storage media, the 3.5 inch microfloppydisk; and the CD-ROM, which is still being sold and used today, almost twenty years after its first introduction.

Times have changed, and Sony’s R&D budget is now a much smaller percentage of their total revenue. Sony isn’t alone on the subject of budget cutbacks: Few, if any, first world broadcast manufacturers today can afford the luxury of investing a double digit percentage of their revenue in R&D – unfortunately.

To reduce the cost of manufacturing high tech products in the 1980s and 1990s, America and Europe looked to Korea, Taiwan, and China to supply the cheap labor and land for their factories. The aforementioned Asian countries have built their economies on the back of OEM manufacturing – not just for components, but for completed goods as we l l . Chances are that your laptop computer and mobile phone were made in one of those Asian countries.

As Japan’s economy collapsed in the 1990s, followed by the shock wave of September 11, 2001, and the ensuing non-stop military imbroglio in the Middle East, and finally the economic meltdown known as the Global Financial Crisis of 2009, the Asian OEM manufacturers have found themselves at great risk of losing the wind from their economic sails as America’s buying power evaporates.

Accordingly, the ‘Asian Tigers,’ as some economics commentators like to call them, have had to shuffle their way up the value chain. They have done this by shifting steadily from OEM contract manufacturing to creating original designs – and then making and marketing devices under their own brands.

The transformation from subcontractor to front line brand is already complete in the IT and telecom industries. HTC, Acer, Lenovo, Asus, Samsung, LG, and Huawei are just a few obvious examples. These Asian companies mostly got their big break by being contracted years ago to manufacture devices and products for the American, Japanese, or European high tech innovators.

Apple, IBM, Motorola, Sony, Panasonic, Philips, Alcatel, Thomson, and many other well-known western/Japanese brands like them are powerful today because they had the R&D resources to come up with new ideas for technology solutions, and registered the patents for their ideas. Then they contracted the Asian OEM manufacturers to produce the devices based on those patented ideas.

For a couple of decades, it was a smooth one-way flow: ideas from the big western and Japanese names were fed into Asian factories for mass production and then shipped to the world as finished products under the western or Japanese brand name. Everybody was winning, at least for a while. Everybody knew their place in the supply chain, and was comfortable there.

Unfortunately, as R&D budgets came under pressure in the west and in Japan, the supply side of ideas to Korea, Taiwan, and China started dwindling. With the recent loss of millions of jobs in America, the demand side for consumer products made in Asia also fell.

Coinciding with the declining OEM statistics in Asia has been the emergence of fresh young talent in the Asian high-tech workforce. New young blood brings new ideas and fuels the innovation cycle to the point where perhaps the Asian OEM manufacturers can start to go it alone now. They can build their own products based on their own designs and sell them to the world under their own brand names.

This already happened in Japan in the 1970s and 1980s. It might be happening now in the emerging Asian countries. But the environment is somewhat different this time around.

The reason: In the 1970s and 1980s, a lot of new ideas like the CD player and the Walkman were launched into a relative vacuum – by which I mean, there wasn’t much, if any, headwind in the way of competing ideas. There wasn’t much intellectual property ‘noise’ to drown out the signal of a new product introduction.

But times have changed: the ‘Era of the Engineer’ has well and truly ended. We are deeply entrenched now in the ‘Era of the Accountant’ and the simultaneous ‘Era of the Lawyer’.

Anyone who thinks up a clever idea for a new electronic product today must prepare themselves for a battle – a legal battle. Need proof? Witness the tit-for-tat litigation going on between Apple, Nokia, HTC, Google, Oracle, Samsung, and others. It’s a fact of life now that almost any attempt to launch a new high-tech product will sooner or later run afoul of someone who claims to own a patent on the ideas embedded in that product.

Like snipers, the patent owners will often stay deliberately hidden until the company they plan to sue has gained some altitude and momentum in the marketplace. Then the snipers take aim at their chosen victim’s profitable business – and pull the trigger.

These predatory patent owners don’t necessarily intend to stop the competitor from making their product, although they rattle their swords in the courtroom under that banner. What they really hope for is that the patent infringer will lose the case and pay up lots of money as a penalty, followed thereafter by obedient and continuous royalty payments.

Many big name western manufacturers of the past are in happy retirement today, enjoying a steady flow of royalty payments; all thanks to successes in the courtroom. Kodak and Ampex are two such legal victors who come to mind.

The only hope for the up-and-coming manufacturers is to hold a patent of equal value that can be traded or used as a vaccine or force field against potential litigation. And so it is today that Asian manufacturers have joined the race for patent registrations more as a defense against being sued, rather than as an offense against others who may follow them.

Supporting the above statement is a news story published by Reuters on August 25 – with the headline as follows: “China’s telecom patent boom heralds innovation era.” This Reuters article goes on to say: “China’s telecom giants are building up a warchest of patents to help give them an edge in the legal battles raging between the world’s smartphone makers, aided by Beijing’s push to transform the country from workshop to innovator.”

The article also quotes the following statistics: “ZTE was the second highest filer of international patent applications in the world last year according to the World Intellectual Property Organization, making 1,863 different filings. Huawei was the fourth most active filer with 1,528 applications, having been in the top spot in 2009.”

It continues: “Patent filings are soaring across most sectors in China – last year there were 313,854 patents registered in the country according to the Thomson Reuters Derwent World Patents Index, a 12 percent rise from 2009. China was the third highest filer of patents in 2010, just behind the U.S., which registered 326,945 and Japan with 337,497. Japan has been the leading patent filer in the world for the past decade but its lead is narrowing, with its filings volume down 12 percent since 2006. China is up 83 percent.”

The trend is clear: with massive debt and gutted manufacturing capabilities, America and Japan hope to make their future fortune from royalties. They may no longer have the necessary capital to bring new products to market like they did last century. But they have plenty of lawyers on staff to register patents in the hope of getting a piece of someone else’s action.

The Asian Tigers are smarter and wiser now. They know they should fight fire with fire.

Like the proliferation of nuclear weapons during the Cold War, watch now as an exponential proliferation of patents and law suits unfolds.

Engineers are horrified, of course. But this is the Era of the Accountant and the Era of the Lawyer. The Era of the Engineer has passed into history.

Welcome to the 21st Century.