‘Different Sectoral Contexts’ approach is vital for IAM

… noted Jeremy in the last post to IP Finance. SMEs in the automotive sector may be interested in a recently completed study which maps the IP business models behind ten cases of US patent, trade secret and trade mark litigation brought by the most prolific US patent applicants in the field of braking technology. The study’s author runs the Engineering Intellectual Property Research Unit at Cranfield University’s School of Engineering.

The study shows that the predominant IP monetisation mechanism in the field of braking is that of “monopoly provision”, i.e. using IP to exclude competing suppliers. There is only one instance of a patent licensing relationship, that being with a company already related to the patentee, suggesting that SME developers of braking technology may struggle to license into prolific US patent applicant companies.

As regards the IP mix that such SME developers might employ, the study confirms that trade secret protection is not used above raw material / component-level manufacture. It also illustrates the risk of third party patent infringement associated with trade secret protection.

The greatest threat of infringement litigation appears to come from competitors at a similar level on the value chain, the study also showing that neither the small size of an SME nor the large size of a company’s patent portfolio can guarantee immunity from suit.

Life's good for BMW and Audi in Korea?

As recently reported e.g. in the Guardian, Korean electronics company LG has sued German car companies BMW and Audi for importation into Korea of cars incorporating LED lights that allegedly infringe LG's patents.

The LED lights in question are made by Osram, which itself is reported to have sued LG and Samsung in the Korean courts for infringement of patents relating to the technology used to make white LEDs.

It would be interesting to know the commercial logic behind LG’s move: although BMW is the most popular imported car brand in Korea, the Guardian article notes that imported cars account for less than 10 percent of the Korean market. Moreover, the 16,579 BMW cars reported as being sold in Korea in the first eight months of this year are a small fraction of the 1,021,927 sales reported on the BMW website for a similar period.

Balancing this is the significantly lower cost to LG of litigating on their home turf. The Korean litigation would also appear to have generated publicity that has reached far beyond Korea’s borders. Is this publicity a signal of LG's willingness to litigate in more significant markets if a settlement is not reached?

Green auto IP in joint venture

EVO Electric, a spin-out from Imperial College London previously referred to here and here, has recently set up a joint venture company with GKN Driveline, the world’s leading supplier of automotive driveline components.

Press releases suggest that EVO has licensed its IP to the joint venture company while GKN has contributed financing, engineering and commercial resources. The new company aims to capture a share of the rapidly growing market for hybrid and electric vehicle systems and, in the words of EVO CEO David Latimer, “will be pivotal in establishing EVO as a key player in the fast-growing global market for electric drive components”.

It will be interesting to see how much value EVO realises through this joint venture manufacturing business model. Company documentation suggests that EVO could simply sell its share in the joint venture company to GKN at some point in the future: EVO has already sold 25% of its own shares to GKN as part of the deal, GKN indicating the total value of its investment at closing to be £5 million consideration in cash.

Licensee buys Licensor in advance of IPO

New Year’s Day finally saw the acquisition of Smith Electric Vehicles UK by its US counterpart and licensee, Smith Electric Vehicles US (SEVUS). Founded in the 1920’s, Smith UK is the world’s largest manufacturer of commercial electric vehicles, producing the world’s largest battery powered truck, the Newton.

The acquisition offer was originally made in March 2010, a press release explaining that “the transaction includes the purchase of all of the Smith US common stock currently held by Tanfield (Smith UK’s parent company), as well as the License Agreement by and between Tanfield and Smith US, and the intellectual property necessary to allow the combined businesses to operate globally.” According to the FT, SEVUS was offering £37m plus a £33.3 m stake in the enlarged company if it was able to float before September 2015.

However, by the time Heads of Terms were signed in August 2010, a press release indicated that Tanfield “expected to retain a significant interest in the combined entity and share in its future growth and opportunity”, noting that “SEVUS's plans include a possible public offering of its equity securities on the US NASDAQ exchange, which could be as early as the first half of 2011.” According to GigaOM, quoting SEVUS CEO Bryan Hansel, “the revised agreement calls for Smith U.S. to buy an agreement under which Tanfield licenses its electric vehicle technology to Smith for a 1-percent-per-vehicle royalty fee, as well as all the assets of SEV UK and the intellectual property necessary to allow the combined businesses to operate globally.”

The final deal, according to a December press release, gives Tanfield $15m, split into twenty monthly payments, and a 49% holding in the enlarged SEVUS business. Thus Tanfield would appear to have sacrificed jam today in expectation of much more jam on the floatation of SEVUS in 2011. But are the stock markets ready for another Electric Vehicle IPO? GigaOM notes the successful IPO by Tesla Motors in 2010 but observes that:

“aside from their shared focus on electric vehicles, Smith US and Tesla could hardly be more different. Tesla has its carefully crafted high-profile, glitzy brand, consisting of luxury vehicles priced for a sliver of wealthy consumers (although lower-priced models are set to launch in the coming years). Smith U.S., on the other hand, has kept a low profile building electric trucks for unglamorous commercial fleets.”

It will be interesting to see how the markets decide.

Low patent count portfolio strategy succeeds against Toyota

Hot on the heels of last week’s post about UK hybrid automotive technology company EVO Electric comes the news that, after six years of litigation, US hybrid automotive technology company Paice LLC has finally reached a settlement with Toyota regarding certain Toyota vehicles found to be equivalent to a Paice US patent.

The litigation has been notable for the refusal of both US district and appeal courts to grant an injunction, prompting Paice to launch proceedings before the US International Trade Commission (ITC), which has the power to bar imports by Toyota. The prehearing conference at the ITC was scheduled for July 15.

“Paice is committed to the ongoing development of hybrid technology and selected research activities,” notes the CEO of Paice in the company’s press release. However, no new patent filings in the name of Paice LLC are indicated on the Espacenet database; rather, all six entries are indicated as having a priority date of 1998. Similarly, the eleven US patents listed on the Paice website all appear to derive from US filings made between 1992 and 1999.

For some views on the ethical rights and wrongs of Paice’s business model, see "Trolling in cleantech-Paice & Toyota settle".

A low patent count portfolio strategy?

At the beginning of 2010, business consulting company Frost & Sullivan awarded their Entrepreneurial Company of the Year award to EVO Electric Ltd, a spin-out from Imperial College London in the field of green automotive technology. As noted here in April, F&S appeared to place more emphasis on innovation in EVO’s business processes than on technical innovation as measured by patent filings.

A similar emphasis on the part of EVO is suggested by a 1 June 2010 press release to investors, which announces:

“the launch of its new generation of Axial Flux motor and generator technology, which promises to dramatically improve the cost, performance and efficiency of hybrid and electric vehicle powertrains. Applications include hybrid, plug-in hybrid and all-electric vehicles, range extenders, auxiliary power units (APU) and integrated starter-generator (ISG) systems. The new generation of Axial Flux products offers the highest power density among electric motors currently available for automotive applications.”

Despite this announcement, no new patent filings in the name of EVO Electric are indicated on the electronic UK IP Office Journal. Rather, the last UK application would appear to have been filed in February 2009.

Frost and Sullivan on Entrepreneurship, Innovation and IP

Market research and business consulting company Frost and Sullivan have recently presented their Entrepreneurial Company of the Year award to green automotive company EVO Electric Ltd.

"EVO Electric's effort to bring axial flux technology motors from a lab to the market highlights the company's entrepreneurial spirit," says Frost & Sullivan Research Analyst Bharath Kumar Srinivasan. "By developing a large network of partners in industry and in the financial community, EVO Electric has succeeded in commercialising its unique technology and pioneering the use of large axial flux machines in the automotive industry."

EVO is a spin-out from Imperial College London. Espacenet and the UKIPO online journal suggest several published and unpublished PCT patent applications filed initially by Imperial and latterly by EVO itself. However, no mention of these patent applications is made in the press release, which instead highlights innovation in business processes aimed at increasing the value of the product and company:

“Engineers are involved in any brain-storming session to put forward ideas and improvements on existing products” it notes. “Based on the ease of implementation and resource requirements, the best ideas resulting from the session are short-listed and implemented either immediately or after strategic analysis. This process adds value to the product at no additional cost to the customer or EVO Electric, while keeping the employees motivated and highly involved.”

Other success factors identified by Frost and Sullivan include:

- The higher power/torque density of EVO Electric's motor/generator, which enables a customer to reduce the overall weight for a given power rating, thereby increasing the efficiency and/or range;

- Focus on technology applications with near-term potential, such as commercial vehicles (taxis, delivery vans, buses, trucks) and military power generators;

- Focus on planned areas, for example R&D and business development, so that the various tasks do not spread its financial and human resources too thinly;

- Partnerships with Tier 1 automotive suppliers to improve market presence and enable the technology from EVO Electric to be manufactured based on the expertise of Tier 1 suppliers;

- Targeting niche markets that are relatively cost insensitive.

MG Rover's IP lives on

The reporting of MG Rover’s demise in 2005 was notable for its considerable discussion of intellectual property. According to The Times of 26 July 2005, Nanjing Automobile Corporation acquired the MG marque and intellectual property associated with the MG variants of the Rover 25, 45, 75 and the MG TF sports car. Sources suggest a price tag of £50 million, which included the MG Rover assembly lines, engine plant and R&D capabilities.

If the significance of IP went over the heads of the general public at the time, this may change with the recent decision of the High Court in Nanjing Automobile (Group) Corporation & ors v MG Sports and Racing Europe Ltd & anr. [2010] EWHC 270 (Ch) (available on Lawtel).

The decision relates to the efforts of an English company to continue using the trademark “MG” in its name. The fact that a co-defendant is William Riley, great-grandson of the founder of the iconic Riley Motor Company, lends further interest. Both defendants base their entitlement to continue on the purchase in 2007 of certain assets from the liquidators of MG Rover Group and MG Sport and Racing Limited. Unfortunately for both defendants, judge Sir William Blackburne found them liable, ordering them to change their company name to one which does not include the letters MG and to transfer to Nanjing any domain names including the mark “MG”.

Rights in the “Rover” mark were never sold to the Chinese or indeed to their predecessors Phoenix. Rather, they were retained by the even earlier owners, BMW, before being sold to Ford as part of their acquisition of Jaguar and Land Rover in 2006. It is presumably for this reason that the vehicles now manufactured by Nanjing are sold under the name “Roewe”.

So What Will Branding Look Like in a Small Car World?

One of the most interesting aspects of trade mark practice is to deal with the relationship between trade marks and brands. When I had the pleasure to speak last July in India on branding, I dutifully attempted to set out the differences between trade marks and branding. Characterizations of this distinction abound and we did our best to distill them down for the audience. It was all most entertaining, until--during the Q&A afterward-- a person from the trade mark department of a major multinational was asked to what extent she was involved in brand activities at the company. The answer was simple and direct: "Not at all".

Her comment reminded me how both close, yet how removed, trade mark practice is from branding. Trade mark lawyers deal with issues such as likelihood of confusion, source identification, and inherent distinctiveness of trade marks. At the end of the day, however, the trade mark profession is apparently there to serve the further interests of the brand. What the brand manager wants is the assurance that all is quiet on the trade mark front, so that the she can get on with the task of developing and sustaining value in the brand.

I was reminded of this when reading an article that appeared in September 19th issue of The Economist, entitled "Small Isn't Beautiful: The Car Industry." The article described the continuing challenges confronting the automobile industry. From my IP perspective, one particular portion of the discussion caught my attention. There, the article, citing analyst Max Warburton, explained one major set of reasons why small vehicles are less profitable for car companies than are large vehicles, by comparing the small-car Fiat 500 with the sports utility Audi Q7 as follows:

"...[T]he fixed costs are nearly identical, whereas the variable costs of making the Q7 (labour, raw materials, and so on) are only about 10,000 Euros higher for the Audi. Yet the Fiat sells for as little as little as 10,000 Euros, compared with a sticker price of at least 40,000 Euros for the Audi."

The article went on to list three factors that augur in favour of a permanent trend in favour of small vehicles:

(1) The sale of more pricey cars has been encouraged in part by the availability of cheap leasing credit. In addition, there was an anticipation of a high post-lease sales price, which is depressed if too many such high-price vehicles are leased and later put into the secondary resale market.

(2) Baby boomers will more more likely to purchase smaller cars in their later years, because they will require less seating capacity.

(3) Stronger emissions standards will favour small vehicles.

Find the Killer Brand

I have several thoughts on all of this.

1. The article emphasized in bas-relief the relationship between branding and profitability, and the branding potential to leverage variable costs several times over the ratio of variable costs to fixed costs. It is no wonder that branding at the high end of a product line is so coveted. That said, the article also revealed the difficulty of leveraging brands in an environment with a clear (at least to The Economist) trend away from a consumer preference for high-end car products.

2. If it is true that smaller cars will be increasingly preferred, and that the margin on the sale of each such car will be materially less than that earned on the sale of a branded high-end vehicle, then the challenge is how to restructure a successful branding stratgegy in such an environment. In such a situation, there will be in increasing emphasis on unit sales to make up for the loss of profits from decreased high-end brand sales.

3. From the branding point of view, the trick would seem to be to find the right branding for a lower-priced product offered by a company that had previously emphasized a higher-end product in its high end/low end product mix, and had calibrated its brand accordingly. This rebranding effort will need to compete with current brands that are perceived as identifying smaller cars of high value. How this competition of rebranding cars to emphasize smaller vehicles at the lower price range, both at the house mark and model name level, will play out may go a long way to determining the long-term viability of at least some of the companies in the auto industry.

What is to be of the CHRYSLER brand?

The tendency to disassociate trademarks from manufacturing and production misses the complex interrelationship between the two. Of particular interest is the move by a company from being an anonymous contract manufacturer (think of Taiwan and the semiconductor and electronics industries) to brand holder, whereby the manufacturer attempts to garner the value-added of consumer goodwill for its products.

The move from manufacturer to brand holder is not an easy one. The seemingly endless gestation of the ACER mark is testament to the difficulties that even the most successful contract manufacturer faces when it seeks to enter the brand-building and goodwill-generating arena.

An interesting twist on this phenomenon was reported recently in Business Week, under the title "A Strange Detour for Chrysler." We all know that US car manufacturers are in a dire straights, battered by gas that is too dear for many Americans, and stuck with dinosaur-sized SUVs that interest only the curator at the Smithsonian Institute. What to do with the excess manufacturing and distribution capacity? Chrysler seems to have come up with a challenging solution--turn yourself in a contract manufacturer and even a marketer of the cars of others.

The new home for SUVs?

As reported, it is not just that Chrysler is planning to put the CHRYSLER mark on a restyled Versa subcompact made by Nissan. After all, sharing platforms and the like is already old-hat in the auto industry. What is more interesting is that Chrysler is negotiating with Nissan to sell Nissan's ALTIMA brand vehicle through the Chrysler sales and distribution network. Moreover, Chrysler is also reported to be offering itself as an "assembler-for-hire" for any manufacturer that wants to sell truck and minivan products, but might want to save on the costs of manufacturer and production. (Why anyone wants to get into this business at the moment, especially since Chrysler itself has been a market leader, is another question, but both Nissan and Volkswagen seem to be interested of renting the Chrysler facilities for this purpose.)

One can be skeptical about this and ask the obvious question: If the name of the game in the US auto industry is to try and design cars that US consumers are likely to buy in an age of elevated oil prices, and if Chrysler is committed to protecting its brand, why is it selling cars for Nissan and making minivans for Volkswagen? That seems to be a sure-fire formula for brand dilution or worse. Should not Chrysler be committing 150% of its resources to designing, building and selling cars that Americans will want to buy?

According to the report, the reason for these measures can be found at the doorstep of Cerberus Capital Management, the private equity entity that forked over $7.4 billion dollars for 80% of Chrysler. Chrysler, aka Cerberus, needs to find ways to save cash and reduce costs. Better to generate an income stream for your underutilized sales and manufacturing facilities, even if they might dilute the long-term value of the marks and names.

Maybe that is the key point here. Maybe there isn't any long-term plan for preserving Chrysler as a going-concern and with it, the CHRYSLER name and brand. Save and cut costs today, and sell-off the company tomorrow. The name (in whole or in part) will go, and the sales and manufacturing capacities will change hands to someone else better able to turn them into successful product lines--but under that person's name and brand.

First you cut cookies, then you cut brands.