In November 2009, the Ministry of Science and Technology, the National Development and Reform Commission and the Ministry of Finance jointly issued Notice No. 618, requiring enterprises registered in China to apply for accreditation of indigenous innovation products. The program would have provided the Ministry of Science and Technology with authorization to prioritize accredited products for government procurement. Of particular interest to foreign enterprises were requirements that an applicant's use, disposal and improvements to a relevant product's intellectual property (IP) must not be subject to foreign restrictions, while any trademark used would first require registration in China and would also need to be free of restrictions from any related foreign brands. Under this program, foreign-invested companies whose products are not locally developed would not be able to participate equally with their Chinese competitors in government procurement unless they agreed to take the risk of removing licensing restrictions from their IP. In response to the notice, foreign associations and business leaders expressed concern that the system promoted domestic favoritism and would potentially result in discriminatory requirements for companies looking to take part in the government procurement market, while also restricting the capacity for innovation and development in China.

Partly in response to such concerns, on April 10, 2010, the same three government departments jointly issued for public comment revised draft regulations intended to clarify China's indigenous innovation policies. Of particular interest to foreign companies are explanations in the revised draft that set out eligibility requirements for products to receive national indigenous innovation product accreditation. The "Draft Notice Regarding the Launch of the National Indigenous Innovation Product Accreditation Work for 2010" will close for public comment May 10, 2010.

Both the November 2009 notice and the revised April 2010 notice detail the same six product areas eligible for National Indigenous Innovation Product accreditation:

• Computing and application hardware
• Communication products
• Modern office equipment
• Software
• New-energy products and devices
• High-efficiency and energy saving products

Many revisions in the draft appear consistent with comments and recommendations made by foreign business leaders following the November 2009 notice, including:

• Modifications to IP requirements that would extend innovation accreditation to include products based on overseas IP licenses
• Modifications that require applicants to own exclusive rights to a product's trademark, or the right to use the trademark in China, rather than requiring trademarks and brands to first be registered in China
• Removal of the requirement that a product must possess highly advanced technology that reaches or surpasses international standards. These requirements have been replaced with requirements focusing on energy conservation and substantial improvements.

Despite these revisions, a lack of clarification on the use of the product list and its relevance to government procurement preferences, as well as the relationship between national and lower-level product lists, remain concerns. Persistence of current local and provincial lists could serve to limit the usefulness of the changes contained in the draft. The draft also does not address the question of whether applicants must continue to provide information as to whether their products contribute to import substitution.

If you have questions or would like additional information on the material covered in this Alert, please contact any of the people listed below, or the Reed Smith attorney with whom you regularly work. 

	Hugh Scogin Partner Beijing/New York +86 10 6535 9588		Mao Rong Of Counsel Beijing +86 10 6535 9500		Zack Dong Counsel Beijing +86 10 6535 9583