Korea is a Patent Powerhouse... But "This" Causes Losses the More Smartphones Are Sold [Intellectual Property is Competitiveness]

③ Intellectual Property Utilization Levels in Numbers
Asia Economy - Seoul National University of Science and Technology Joint Project
4th in Global International Patents but $2.2 Billion Deficit in Industrial Property Rights
Importance of Securing Standard Patents... Am Holdings as a Good Example
Hybe's Business Using Original IP Accounts for 25% of Total Sales

[Asia Economy Reporter Kim Bo-kyung] South Korea is a self-proclaimed "patent powerhouse." Last year, Korea ranked fourth in the world for international patent (PCT) applications filed through the World Intellectual Property Organization (WIPO). The PCT system allows applicants to file a single application that has the effect of applying for patents in multiple designated countries. Korea has maintained its fourth-place position for two consecutive years, following China, the United States, and Japan. Despite the COVID-19 situation, the number of PCT applications last year increased by 3.2% compared to the previous year. During the same period, China and the U.S. increased by 0.9% and 1.9%, respectively, while Japan decreased by 0.6%. This achievement was possible because Korea has Samsung Electronics (3,041 applications) and LG Electronics (2,885 applications), just as China has Huawei (6,952 applications) and the U.S. has Qualcomm (3,931 applications).

Seoul Gangnam-gu, where large corporation headquarters are concentrated
Photo by Wikipedia

Despite these statistics, South Korea's intellectual property (IP) trade balance remains in deficit. According to the Bank of Korea, the country's IP trade deficit last year was $30 million (approximately 38 billion KRW). Although this is a significant reduction compared to deficits of $530 million (about 660 billion KRW) in 2019 and $2.02 billion (2.5 trillion KRW) in 2020, South Korea still cannot escape the status of a "perennial deficit."

The situation is even more severe when looking specifically at the industrial property rights sector, which is directly linked to corporate management. Industrial property rights include △patents and utility models △design rights △trademarks and franchise rights, and last year this sector recorded a deficit of $2.21 billion. In particular, the trade deficit in patents and utility models for domestic large corporations was $1.41 billion. Trademarks and franchise rights showed a deficit in foreign-invested small and medium-sized enterprises (-$1.6 billion).

2021 Intellectual Property Trade Balance
[Source=Bank of Korea]

Looking at the IP trade deficit by trading partner countries in the same year, the United States (-$3.03 billion), the United Kingdom (-$990 million), and Japan (-$580 million) ranked highest. The deficit was somewhat reduced thanks to increased copyright income driven by the global success of Korean Wave cultural content such as dramas and movies. It is well known that Netflix's drama Squid Game and the idol group BTS significantly contributed to this.

Jung Yeon-woo, Director of the Industrial Property Policy Bureau at the Korean Intellectual Property Office, offered a hopeful outlook on Korea's IP trade deficit. He said, "If we focus on securing overseas patents for profitable, high-quality technologies, our economic territory will expand." Considering that Korea's national research and development (R&D) investment is at a high level of around 100 trillion KRW, he expects the IP trade balance to turn positive within four to five years.

The IP deficit mostly arises from the manufacturing process of electrical and electronic products by companies. Director Jung explained, "Technology royalties paid to global standard patent-leading companies such as Qualcomm, Nokia, and Ericsson account for one-third of the total." Since these companies hold many fundamental technologies related to mobile phones, the more domestic large corporations manufacture and sell IT devices like smartphones, the more royalties they have to pay to overseas companies.

The irony that Korea's IP trade deficit increases as its business performs better underscores the importance of securing standard patents. The case of the UK semiconductor design company Arm Holdings precisely explains this reason. Arm Holdings does not manufacture or sell semiconductor chips; it has no factories or manufacturing personnel. Instead, it designs semiconductor circuit diagrams, files and registers patents, and licenses them to about 1,000 global partners such as Samsung, Apple, and Microsoft, receiving royalties in return. Licensing fees range from $1 million to $10 million (approximately 1.2 billion to 12.7 billion KRW), and royalties are known to be 1-2% of the chip price. The company focuses on developing designs that emphasize fast processing speeds and low power consumption. In 2018, it invested 42% of its sales in R&D.

Although not a manufacturer, Korea also has a good example. HYBE, the agency of the group BTS, is actively engaged in businesses utilizing intellectual property. Early on, HYBE recognized the potential of producing various secondary works through original IP and established the IPX division. HYBE IPX conducts diverse licensing businesses, from planning and developing goods based on BTS members to launching characters in collaboration with Line Friends. The content production company TakeOne Company partnered with HYBE (then Big Hit) in 2019 to develop the mobile game BTS World. BTS World is a storytelling game where players nurture BTS members into top artists. It surpassed 12 million downloads and recorded the highest revenue among K-pop idol games. Earlier this year, Naver Webtoon and web novels featuring BTS as characters were also released. According to HYBE's 2021 business report announced last March, sales from goods and IP licensing reached 317 billion KRW, accounting for 25% of HYBE's total revenue.

◆[Intellectual Property is Competitiveness] Planning

Our economy faces a "triple whammy" of high exchange rates, high inflation, and high interest rates. Continuous low birth rates and aging have reduced the contribution of labor to economic growth, and capital input has reached its limits. During his candidacy, Prime Minister Han Duck-soo expressed concern, saying, "The more important issue is the declining potential growth rate," adding, "It has been falling by about 1% every five years, and if this continues, it will reach zero percent." Asia Economy views strengthening intangible assets, especially intellectual property rights, as one of the ways for the Korean economy to escape the low-growth trap. Coincidentally, the new government appointed Lee In-sil, Korea's third female patent attorney with over 30 years of experience in intellectual property, as the new Commissioner of the Korean Intellectual Property Office. Asia Economy believes that a business structure that properly protects inventions and creations derived from human intellectual activities and utilizes them as revenue sources is necessary, and that the time to make such efforts is now with the new government's inauguration. Professor Ko Young-hee of Seoul National University of Science and Technology, who co-planned this topic with Asia Economy, said, "In that regard, it is an appropriate time to change the name of the government agency, the Korean Intellectual Property Office, to reflect integrated intellectual property policies."