Technical Market Access and Quality Infrastructure Part 4: Standardization and Innovation

1. Technical Market Access and Quality Infrastructure Part 4: Standardization and Innovation Beijing Quality Partnerships LLC Klaus Ziegler, Legal Representative ESEUNE Business School, 23 September 2013

2. How to Commercialize Innovation Results? • There are two basic avenues: • Privatize the technology and use it closed circles via licensing • Publicize the technology and thus creating an environment where the innovation is broadly used • Registering IP’s (Intellectual Property) in all relevant markets including China is of strategic relevance • Different IP regimes in different markets (e.g. first come – first serve in China) • Standards are an effective way for generating adaptors of the new technology: • Ideally the standards contain technologies for which the organization holds IP’s… • Condition: Willingness to license under FRAND conditions (Fair, Reasonable, and Non-Discriminatory)

3. Standardization strives for predictability and a level playing field; standardization is a public good Innovation strives for excellence and exclusivity How to combine these two? Standards for interoperability open new markets and competition Measurement standards allow for differentiation and benchmarking Standards for safety, quality, and environmental performance allow innovators to follow market expectations or to exceed them Standards for management and processes support innovation within an organization Standardization versus Innovation

4. And fosters economic growth by: Creating more competition and level playing field Providing equal access to innovation Ensuring interoperability of new technologies Fostering competitiveness of EU Industry And helps companies to differentiate through: Knowledge transfer Cost and risk reduction Faster time to market And creates a strategic advantage in global markets: First mover of new technology Market for innovative companies and talents EU: Standardization Enables Innovation…

5. Compulsory standards are the legal basis to ensure product safety, occupational health, and sound environmental behavior of products and production processes (used in “pre-market” and “post-market surveillance) Standardization is a tool to disseminate scientific experience and accelerate technical innovation (“leapfrog technologies”) Standardization is a tool to develop a strong domestic knowledge base and a related industry (“home-grown standards”) Standardization shall support domestic R&D and the development of products based on Chinese IPR (“indigenous innovation”) National safety and security interests shall be reflected in the standardization system (e.g. “Infosec” standards) Export of Chinese standards shall support Chinese trade policies Chinese Standardization Policy

6. Requires: Better understanding of standardization work in government and industry Access to standardization for SME Clear positioning within government Better integration of standardization in R&D work Dissemination of new technologies Achieving critical mass of participants Reform and adaptation of standardization New challenges: globalization, new economic powers, technology evolution, technology convergence Focus on Innovation Aspect of Standardization…

7. Consensual Technology Transfer Standardization reflects “Best Practice”, allowing industry to integrate R&D and management experiences IPs locked into standards are generally based on the “FRAND” principle, and thus publicly available against fee Forced or Induced Technology Transfer Access to Standard Development Organizations in exchange for technical contribution, often including technology disclosure and know-how transfer Performance standards as basis for market access Standardization and Technology Transfer

8. IPR in Standards – Legal Framework in China

9. ETSI IPR Policy is fully aligned with policies of ISO/IEC/ITU-T IPR owners are entitled exercise their rights and to benefit from their IPR’s; this includes the right to refuse the granting of licenses Standards are based on solutions which best meet the technical objectives of ETSI; this might include the use of IPR’s ETSI is seeking a balance between the needs of standardization for public use in the field of telecommunications, and the rights of the owners of IPR’s ETSI is trying to reduce the risk of wasting investment in preparation, adoption and application of standards, due to an essential IPR which is and remains unavailable Information about existence of essential IPRs shall be obtained as early as possible Licensing negotiations are commercial issues between the companies involved and are to be addressed outside ETSI (!!) The ETSI IPR Policy: an Overview

10. Technical Market Access and Quality Infrastructure Part 5: Impact on Companies and Supply Chains Beijing Quality Partnerships LLC Klaus Ziegler, Legal Representative ESEUNE Business School, 23 September 2013

11. Certification Schemes – and their Impact • Compulsory certifications / licenses / marks / labels; defined in the respective legislation e.g. for: • Product and production safety, e.g. CCC in China • Environmental soundness, e.g. EU building energy certificates • National security interests, e.g. OSCCA for cryptography • Voluntary certifications / marks / labels / approvals • Public / government owned labels, e.g.: Eco-labels and Energy-labels, US Energy Star • Private labels, e.g.: Kitemark, VDE-Mark, Lead-Certificate • Non-public private systems, especially for procurement • Types of assessment modules • Self-declaration • Second party assessment in supply chains • 3rd party assessment –independent certification / inspection / testing body • Witnessed self-assessment (a mixed form) Question for better understanding: Is the CE-Mark a compulsory label?

12. Legal Impact of Voluntary Standards • Contract Legislation • Standard defines how a product or service should look like • Used as reference by experts • Product Liability Legislation • Standard reflects technical knowledge at the date of issuance • Non-compliance might lead to assumption of negligence • Product Safety Legislation • Standards describe how the essential and/or detailed requirements for safe products can be met • Harmonization use of standard leads to presumption of conformity • Compulsory Standards  use of standard is a legal requirement • Product Safety Directives and Regulations in EU • New Legislative Framework (NLF) / New Approach: CE Marking combined conformity assessment requirement

13. Global Supply Chain Challenges • Business complexity in sourcing, manufacturing, distribution • Different products are manufactured in different geographies with varying capabilities • Broad range of products for different markets Source: Kinaxis

14. Impact of CCC on Supply Chains • Design/Technical specifications • Chinese standards are not always identical with international / European standards, this might require changes in design and configuration • Chinese regulations will affect the selection and design of components: small changes can lead to massive increase / decrease in certification requirements • Additional testing and production controls might be required, even if not needed for the planned supply chain • Timing • Approbation and Homologation in China is often more complicated and time consuming than in other markets – and not always predictable • Legal obstacles might end in time-consuming remedy actions: Import of samples, definition of origin and manufacturer • Cost • For small series cost of certification and testing can be prohibitive: spare parts (!) • Cost considerations might also lead to a reduction of modifications and number of alternative components

15. SME – How to help yourself: • Understand basics of the standardization system of the markets you are exporting to, especially the difference between compulsory and voluntary standards • Identify the industry associationin charge for your business sector and get to know the key people • Identify the organization in charge for developing standards in your business (in developing markets often a research institute or an industry association) • Identify the testing labsin charge for type approval in your business; get familiar with their operating processes • Understand the key players for voluntary and compulsory certificationschemes applicable for your business • Get organized: It is always easier to work within an industry association; participate in the local Business Chambers • Use respectable freely available knowledge bases, on internet and otherwise; however be careful about the reliability of information

16. Technical Market Access and Quality Infrastructure Part 6: Homologation in Practice Beijing Quality Partnerships LLC Klaus Ziegler, Legal Representative ESEUNE Business School, 23 September 2013

17. EU – Principles of Homologation • The system in the EU finds its origin in removing all barriers to trade to create a single market • Placing a product on the market of a single Member State is placing a product on the common EU Market • Creating a single market requires a single legislation: • Directives (to be incorporated in the national legislative system of each Member State) and • Regulations (immediate applicability) addressed to manufacturers • EU Directives and Regulations are superior to national Member State legislation

18. Concept of Homologation in Europe Basic principles of the Sectoral Directives/Regulations: • The conformity assessment measures are based on the perceived risks associated with the product / production processes; whilst the default setting is: Self-Control by manufacturer (or any person taking over his responsibility) • The manufacturer is always responsible for placing a product on the EU market in conformance with the relevant Directives/Regulations • Depending on the requirements of the relevant Directives/Regulations the manufacturer is obliged to • affix the conformity mark to his product • draw up the declaration of conformity • provide the necessary information for safe use • seek intervention of a third party

19. EU – New Approach / NLF: Basic Modules Source: EU Guide to New Approach

20. Flow Chart of Conformity Assessment Procedures Source: EU Guide to New Approach

21. The Chinese CCC System of Market Access • Background • CCC is mandatory for 23 categories of products • CCC is mandatory for domestically produced or imported products! • CCC shows the conformity of a product to the safety requirements and environmental performance set by laws and regulations • Implemented since 2003, established to comply with WTO/TBT requirements • Certificates valid now for 5 years • What is the CCC mark? • According to the class of products (23 categories), different CCC marks available, e.g. safety, EMC, etc. • CCC mark has to be labelled either on the product, the packaging or both

22. CCC – Institutions and Benefits • Institutions involved • Certification and Accreditation bodies: AQSIQ, CNCA • Certification bodies: 10 • Accredited laboratories: approx. 160 • What are the benefits? • Consumer recognition • CCC is THE official license • Elimination of substandard products and processes • Better protection of Intellectual Property (?)

23. Can CCC be avoided? For products in the CCC catalogue the basic answer is: No Exemptions: • Products not included in the scope of the underlying standards • Components built into products (tested during main process) • CCC Exemptions (very few and not guaranteed!) • Products made exclusively for export • Trans-shipments using bonded warehouses Special attention is required for: • Alternative components • Future spare parts

24. Case study 1: Components and CCC (1) CCC Rules Location Customs Most Value Added? Country of Origin? “Made in?” CCC Applicant Applicant Responsibility Manufacturer Component I Motor Brake Factory 3 Factory Motor Brake CH CH SK CH Value > 50% Factory 1 Factory 2

25. Case study 1: Components and CCC (2) • A real situation we are currently facing: •  Motor manufactured in Slovakia •  Brakes added in Switzerland •  Machinery assembled in China •  Machinery may be exported to US • Common sense would say that first and foremost regulations and standards for products and installation in the USA will define product design, but… • Motor represents > 70% to value of the component, then • Country of Origin for Customs ≠ Manufacturer for CCC • Small components with motors require CCC in China (also with brakes) • Detailed requirements testing & production control in CH • Motors must comply with energy performance regulations (MEPS), but • MEPS (EU) ≠ MEPS (CH) ≠ MEPS (CN) ≠ MEPS (US)… Components

26. Case Study 2: Standard update Update of GB standard 01/2010 01/2011 03/2011 09/2011 • New CCC application • New testing • New initial factory inspection might be required • Upgrade possible • CCC still fully valid • CCC suspended • Upgrade process has to be completed • CCC deleted • 6 months ban to re-apply • CCC Factory No. cancelled On the CCC certificate the relevant GB standards are noted!

27. Some basic tricks of the trade • Chinese certification systems are generally not linked to HS-classifications: The applicability of certification schemes is in general determined by the scope of the underlying standards; such examination is expert work and requires lots of experience • China has many more standards than Europe – so be warned: there might be compulsory standards around which do not exist anywhere else. A good source for identification of standard is the platform www.eu-standards.eu • All standards in China undergo a five-yearly review. It is quite likely that underlying standards are changed during the validity of a compulsory market access license. In case the standard changes you must “upgrade” the respective license within set time limits (in general less than one year) • Exemptions from compulsory license schemes do exist: However do not assume that you will be granted an exemption – unless you have very good reasons to believe this • All licensing schemes are based primarily on a “watertight” documentation. This is more important than type testing and inspection; the related work should not be underestimated • Once your goods get stuck at customs it is in general too late to apply for the required licenses – unless you can afford to have your goods waiting for months in bonded warehouses… So get your paperwork right before even considering to ship goods to China!

28. For any further information, feel free to contact: Klaus Ziegler President klaus@quality-partnerships.cn Mobile +86 139 1091 0826 Beijing Quality Partnerships LLC Suite 1510, Zhongyu Plaza, A6 Gongti Beilu, Chaoyang District, Beijing 100027 Tel +86 (10) 8523 6268 Fax +86 (10) 8523 6238 www.quality-partnerships.cn