Executive Briefings

Has China Changed Its Tune on Intellectual Property?

A recent story in the New York Times details a dispute between General Motors and the Chinese government. GM wants to sell the Chevrolet Volt, the company's new plug-in hybrid car, in China. In order to qualify for subsidies that would make the vehicle competitive, GM is being required by the Chinese government to transfer several of its core technologies to a joint venture with a domestic automaker. The deal would give the Chinese manufacturer access to proprietary systems that took GM decades to develop.

Just another day at the office for companies doing business in China.

GM's experience is an offshoot of China's "indigenous innovation" policy, which was supposed to decrease the country's reliance on foreign technology by restricting government procurement to companies whose intellectual property was developed domestically. In reality, critics say, the policy has encouraged the forced acquisition of foreign IP, in violation of rules set out by the World Trade Organization. The world's most dynamic economy is using access to its markets as a gun to the head of foreign companies with coveted technology.

Indigenous innovation is part of an even larger picture, detailing China's historical contempt for the very notion of intellectual property protection. Beyond highly questionable conditions such as those imposed on foreign automakers, the country has engaged in rampant piracy and counterfeiting for years. Companies such as Callaway Golf Co. have had to deal with endless numbers of cheap knockoffs, causing them to rethink their commitment to manufacturing legitimate product in China. Pirated movies continue to make up a thriving industry there, despite cosmetic efforts to stop it. And Chinese manufacturers are well known to have replicated legitimate products and sold them outside the distribution chain of their customers.

Most of the recent stories about trade friction with China have focused on that nation's dubious currency-valuation practices. But the IP rights issue, in all of its forms, could prove to be a far greater barrier to trading fairly with China over the long term.

U.S. interests haven't been silent on the subject. Treasury Secretary Timothy Geithner recently charged that China is "very, very aggressive" about stealing U.S. intellectual property. A bill pending in the House of Representatives seeks to impose import duties on Chinese goods in order to offset losses by U.S. companies from piracy and counterfeiting.

China gives plenty of lip service to IP protection. It is a signatory to many international agreements on the subject, including the WTO's TRIPS pact, which calls for strict enforcement of IP rights. Recently, it promised further action in that area. Following a meeting of the China-US Joint Commission on Commerce and Trade, China vowed to launch a "special campaign" to consolidate enforcement efforts within the central government's IP office. It pledged to eliminate those controversial rules on indigenous innovation for government procurement. And it appears to have reversed its policy of requiring technology transfers for the making of "new energy" vehicles.

Does all of this signal a fresh determination by China to follow the rules? Mark Stein, partner in the law firm of Higer Lichter & Givner LLP, believes it has no choice. "If they want to play in the world community economically," he says, "they're going to have to start respecting these rights."

Stein agrees that China's previous efforts to protect international IP have been "of limited value." That's putting it mildly. But the nation's massive economic growth of recent years has altered the picture dramatically. If China truly wants to achieve "first-world" status as a political and economic giant, it will have to respect the rule of law.

It stands to lose a lot from the status quo. Callaway is just one of many global companies to have cut back or eliminated their presence in China due to concerns over IP protection. Several of Stein's clients have shifted production to other parts of Asia, such as Malaysia and South Korea, where copying is less of a problem. "If China doesn't change," he says, "it will continue to be a country where companies come in and out."

How can global manufacturers protect themselves now? An obvious but valuable step is to register all patents, trademarks and copyrights with border-protection agencies around the world. They can help legitimate businesses to get illegal merchandise seized. (Importers and exporters know how tough it can be to free confiscated shipments, suspect or not, from the clutches of customs agencies.) Another tip is to have individuals on the ground in the source country to monitor IP violations. Companies can offer their agents incentives for compliance, such as exclusive licensing arrangements. The licensees have a motive to cooperate because they lose money if someone is underselling or replicating product, Stein says.

The internet is another field of battle. Websites selling counterfeit or pirated merchandise can be shut down through the hosting internet service provider, or with the help of ICANN, the Internet Corporation for Assigned Names and Numbers. Help can also come from international organizations such as the WTO and World Intellectual Property Organization. The latter, of which China is a member, is active in lobbying countries to adopt and enforce rigorous IP laws.

Fighting IP rights miscreants can be a long and frustrating effort, but "companies need to be unafraid of taking strong action like litigation," says Stein. "One or two strong results make things expensive for [violators]."

What won't work is draconian legislation like the House bill to punish China for failing to protect IP. Putting aside the fact that it's unlikely to pass in the current Congress, such an effort is counterproductive, says attorney Jeffrey Kaufman of Oblon, Spivak, McClelland, Maier & Neustadt, LLP. The measure seeks to impose duties on all goods from China, he notes, whether or not they were produced by violating suppliers. China would almost certainly retaliate, with a bruising trade war the likely outcome.

Only time will tell whether China is sincere about mending its ways. I wouldn't bank on seeing radical change in the near future. "While I'm optimistic that China is going to get better," Stein says, "I have no illusion that we'll wake up tomorrow and find that enforcing a violation [of IP] in China is just as easy as it is in the U.S. or Canada." So think carefully about whom you trust your product with in the meantime.

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A recent story in the New York Times details a dispute between General Motors and the Chinese government. GM wants to sell the Chevrolet Volt, the company's new plug-in hybrid car, in China. In order to qualify for subsidies that would make the vehicle competitive, GM is being required by the Chinese government to transfer several of its core technologies to a joint venture with a domestic automaker. The deal would give the Chinese manufacturer access to proprietary systems that took GM decades to develop.

Just another day at the office for companies doing business in China.

GM's experience is an offshoot of China's "indigenous innovation" policy, which was supposed to decrease the country's reliance on foreign technology by restricting government procurement to companies whose intellectual property was developed domestically. In reality, critics say, the policy has encouraged the forced acquisition of foreign IP, in violation of rules set out by the World Trade Organization. The world's most dynamic economy is using access to its markets as a gun to the head of foreign companies with coveted technology.

Indigenous innovation is part of an even larger picture, detailing China's historical contempt for the very notion of intellectual property protection. Beyond highly questionable conditions such as those imposed on foreign automakers, the country has engaged in rampant piracy and counterfeiting for years. Companies such as Callaway Golf Co. have had to deal with endless numbers of cheap knockoffs, causing them to rethink their commitment to manufacturing legitimate product in China. Pirated movies continue to make up a thriving industry there, despite cosmetic efforts to stop it. And Chinese manufacturers are well known to have replicated legitimate products and sold them outside the distribution chain of their customers.

Most of the recent stories about trade friction with China have focused on that nation's dubious currency-valuation practices. But the IP rights issue, in all of its forms, could prove to be a far greater barrier to trading fairly with China over the long term.

U.S. interests haven't been silent on the subject. Treasury Secretary Timothy Geithner recently charged that China is "very, very aggressive" about stealing U.S. intellectual property. A bill pending in the House of Representatives seeks to impose import duties on Chinese goods in order to offset losses by U.S. companies from piracy and counterfeiting.

China gives plenty of lip service to IP protection. It is a signatory to many international agreements on the subject, including the WTO's TRIPS pact, which calls for strict enforcement of IP rights. Recently, it promised further action in that area. Following a meeting of the China-US Joint Commission on Commerce and Trade, China vowed to launch a "special campaign" to consolidate enforcement efforts within the central government's IP office. It pledged to eliminate those controversial rules on indigenous innovation for government procurement. And it appears to have reversed its policy of requiring technology transfers for the making of "new energy" vehicles.

Does all of this signal a fresh determination by China to follow the rules? Mark Stein, partner in the law firm of Higer Lichter & Givner LLP, believes it has no choice. "If they want to play in the world community economically," he says, "they're going to have to start respecting these rights."

Stein agrees that China's previous efforts to protect international IP have been "of limited value." That's putting it mildly. But the nation's massive economic growth of recent years has altered the picture dramatically. If China truly wants to achieve "first-world" status as a political and economic giant, it will have to respect the rule of law.

It stands to lose a lot from the status quo. Callaway is just one of many global companies to have cut back or eliminated their presence in China due to concerns over IP protection. Several of Stein's clients have shifted production to other parts of Asia, such as Malaysia and South Korea, where copying is less of a problem. "If China doesn't change," he says, "it will continue to be a country where companies come in and out."

How can global manufacturers protect themselves now? An obvious but valuable step is to register all patents, trademarks and copyrights with border-protection agencies around the world. They can help legitimate businesses to get illegal merchandise seized. (Importers and exporters know how tough it can be to free confiscated shipments, suspect or not, from the clutches of customs agencies.) Another tip is to have individuals on the ground in the source country to monitor IP violations. Companies can offer their agents incentives for compliance, such as exclusive licensing arrangements. The licensees have a motive to cooperate because they lose money if someone is underselling or replicating product, Stein says.

The internet is another field of battle. Websites selling counterfeit or pirated merchandise can be shut down through the hosting internet service provider, or with the help of ICANN, the Internet Corporation for Assigned Names and Numbers. Help can also come from international organizations such as the WTO and World Intellectual Property Organization. The latter, of which China is a member, is active in lobbying countries to adopt and enforce rigorous IP laws.

Fighting IP rights miscreants can be a long and frustrating effort, but "companies need to be unafraid of taking strong action like litigation," says Stein. "One or two strong results make things expensive for [violators]."

What won't work is draconian legislation like the House bill to punish China for failing to protect IP. Putting aside the fact that it's unlikely to pass in the current Congress, such an effort is counterproductive, says attorney Jeffrey Kaufman of Oblon, Spivak, McClelland, Maier & Neustadt, LLP. The measure seeks to impose duties on all goods from China, he notes, whether or not they were produced by violating suppliers. China would almost certainly retaliate, with a bruising trade war the likely outcome.

Only time will tell whether China is sincere about mending its ways. I wouldn't bank on seeing radical change in the near future. "While I'm optimistic that China is going to get better," Stein says, "I have no illusion that we'll wake up tomorrow and find that enforcing a violation [of IP] in China is just as easy as it is in the U.S. or Canada." So think carefully about whom you trust your product with in the meantime.

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