Caixin
Apr 14, 2021 07:50 PM
BUSINESS & TECH

In Depth: Self-Styled ‘Godfather of Patents’ Rises, Falls on China’s Innovation Obsession

Liu Hua was a manager at a mold-making factory in the South China city of Zhongshan when he received an unusual call one day in 2017. On the other end of the line was a representative from a company called Huiju, telling Liu that his small company of just 25 employees and annual sales of 10 million yuan ($1.5 million) could be eligible for government subsidies designed to foster innovation.

The trick, the caller said, was understanding how to make Liu’s company look like an innovator. The caller went on to describe how Huiju could position Liu’s mold-making outfit as a new technology enterprise by obtaining a few patents as window dressing. The return would come in the form of at least 700,000 yuan to 800,000 yuan in government subsidies.

Liu would go on to buy Huiju’s “technology pack” for an annual fee of 98,000 yuan, as well as six mold-related patents from Huiju’s website.

“At the time, my understanding was that the government had a policy of giving subsidies to developers of new technologies,” Liu told Caixin. “These patents had no use whatsoever for actual production. They were only meant to be added to my application.”

Many other businesses fell for a similar pitch.

The company behind those propositions billed itself as a patent specialist that was one of China’s newest unicorns as little as a year ago with a market value of more than 10 billion yuan. But now Huiju has come under a cloud, suspected of illegal public fundraising as it enters a new stage of simply trying to survive, even as its slick website continues to offer a wide range of products and services.

The company’s 40-year-old founder Xie Xuhui, a self-styled “godfather of intellectual property,” liked to say Huiju was a game-changer that could take intellectual property (IP), mostly in the form of patents, from the traditional realm of large corporations to the much larger masses of small- and medium-sized businesses.   

His company operated in a gray area, offering itself up as an organization that could monetize IP — even though it lacked a license to offer financial products and services or experience in risk control for such products.

“China is the best place to realize the commercialization and industrialization of IP and scientific and technological achievements in the world,” Xie said in a speech at the opening of China’s largest annual internet conference in 2017. Most of his propositions involved finding ways to make money from patents, be it by selling “technology packs” and patents to small businesses like Liu’s, or by providing financing to companies trying to make themselves over to apply for government subsidies.

Numerous intellectual property specialists told Caixin that it’s difficult to put a value on IP due to its abstract nature and constantly changing landscapes in technology and product design. Accordingly, traditional financial institutions have always been cautious about trying to turn IP into financial products.

Caixin requested an interview with Huiju in mid-March but has yet to get a response.

HUIJU charts_1

IP obsession

Huiju’s business was built on the foundations of China’s obsession with innovation, which Beijing sees as the key to moving away from low-end manufacturing to eventually challenge the West in the high-tech realm. Innovation is constant fodder in the headlines of China’s state media, and governments at all levels continually roll out new plans on the topic, driving home the message on many levels.

In practical terms, patents have become one of the government’s easiest ways to measure success in innovation. High-tech giants like Huawei are regularly lauded on the huge number of patents they receive each year, making them among the world’s biggest recipients, even though some experts say many of those patents have dubious value.

Huiju seized on those broader messages about innovation and patents to lure in smaller businesses owners and managers who had heard the messages but thought they had no way to enter the game.

Huiju used promises of big returns to raise huge sums of money and rapidly expand. In an open letter published in September last year, Xie said his company had signed contracts worth 2.45 billion yuan in 2019 alone and brought in revenue of 1.39 billion yuan. He boasted the company had 5.6 million registered members and nearly 5,000 employees working at 40 subsidiaries around the country at its height.

The “technology pack” that tantalized Liu and many others was a case of how Huiju could take a single product and milk it for cash at many levels.

Using the package as a product, Huiju would sign contracts with smaller companies, promising them it could sell them products and services that would offer huge returns when they received millions of yuan in government subsidies. Such returns did occasionally materialize. But far more often they didn’t, and many cases ended in contract disputes.

A former Huiju mid-level manager told Caixin that when selling the “technology packs,” employees were instructed to tell prospective customers that even if they were unqualified, Huiju could make them qualified. The company would then back up its words by amending its contracts to promise partial refunds of service fees for anyone whose subsidy applications didn’t succeed — even though it would usually refuse to make such refunds in the end.

The company also offered a range of other related financial products, such as “trademark management,” whereby clients would buy trademarks through Huiju and then hire it to manage that IP with more promises of big returns.

HUIJU charts_2

Squeezing out value

Xie was a salesman at heart, with an eager audience in the less sophisticated smaller business owners and managers he was targeting. He would tell eager listeners about Huiju’s dedicated team of specialists who could apply for patents with twice the usual success rate using half the effort required for most people.

For example, he would say, many companies might file for a single patent for their product, such as a tape recorder. But his team could take the device apart and get numerous patents, such as one for its exterior, one for its recording functions and yet another for its playback functions.

“One thing can be disassembled to get five or six patents, and suddenly you’ve satisfied the application requirements,” the former mid-level manager told Caixin.

The vast majority of patents sold to Huiju’s clients were of little or no actual value.

One manager described how Huijin sold the Wuhan technology company where he worked a patent for robots that could remove explosives for 30,000 yuan. To make the patent look more valuable, Huiju then signed a pair of contracts with the company, one stating the price as the real 30,000 yuan and another giving it an inflated price of 400,000 yuan. It instructed the company to pay the 400,000 yuan first, and said it would refund the difference later.

Many of Huiju’s methods resonate of similar practices in China’s peer-to-peer (P2P) lending industry that rose to prominence in 2015, only to become virtually defunct today after a government crackdown. In both instances, entrepreneurs like Xie used companies like Huiju to take advantage of China’s relative lack of investment options for individuals and financing for small businesses that were often overlooked by the traditional state-run banking system.

While many P2P lenders said they could bring big returns to investors by channeling their money into projects with dubious prospects, Huiju made its money by promising similar big returns for small businesses that purchased its products and services linked to IP.

Just as the P2P sector underwent a major cleanup that has eliminated most players, the IP space is also undergoing its own major cleanup that could cast further doubts on Huiju’s future. A big part of that charge is coming from the China National Intellectual Property Administration, which has warned of the importance of maintaining order in patent applications and has attacked the abuse of trademarks by squatters.

Contact reporter Yang Ge (geyang@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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