Coatings World - March 2011

consumer items do result in the loss of profit for many American companies, counterfeit auto and industrial parts can cost lives.

The illegal business of stolen IP orig-
inates from China’s shaky past. Histori-
cally there has been very little if any
protection of intellectual property rights
(IPR) inside China. In the early days the
Chinese were eager to acquire foreign
technology and often pursued such de-
sires with an aggressive licensing strat-
egy. There was an incident several years
ago reported in the Chinese newspapers
whereby one Chinese company had li-
censed critical technology from a foreign
company. The newspaper report read
something like the following: “One Chi-
nese company has licensed technology
now all Chinese companies have that
technology.”
Last March, the United States Interna-
tional Trade Commission banned imports
of cast steel railway wheels made by the
Chinese group Tianrui. Tianrui had hired
nine employees from the Chinese licensee
of Amsted Industries of Chicago, a maker
of railway parts. They came with an arm-
ful of trade secrets that allowed Tianrui to
muscle into the business.

This type of intellectual property theft is increasingly common, according to many American companies operating in China. In fact, some companies say, it is tacitly supported by Beijing, and includes forcing foreigners to disclose their technology in order to gain contracts.

China’s attempt to move up the tech ladder is understandable. Many countries in history have pursued technological progress by first trying to piggyback on foreign inventions before blazing their own trails. Still, intellectual property mis-appropriation through theft cannot be a legitimate government policy goal, especially in a country the size of China, which can and does flood world markets with ill-begotten high-tech products.

For almost 20 years the U.S. and other countries have been aggressively pressing China to improve its intellectual property protection regime. Yet China continues to be the number one source for counterfeit and pirated goods seized at our border, accounting for 79 percent of the total value

China

seized in 2009. The Chinese government itself estimates that counterfeits constitute between 15 and 20 percent of all products made in China and are equivalent to about eight percent of China’s annual gross domestic product. As you can see, this isn’t a trivial matter.

I recall many past negotiations with representatives of the Chinese government whereby they were interested in licensing true state-of-the-art technology. My company’s belief at that time was that the Chinese market for that particular technology was not sufficiently developed and that the best approach would be through the use of some of our older technology. Part of the rationale for our pursuing this “older technology” scenario was based on fear that we would lose our significant technological edge in the marketplace if we licensed our state-of-the-art products to the Chinese. Fortunately for us, at that time, the Chinese market was a nonevent. It was not large, not growing, not a critical market for our eventual success in the global market. Obviously, that situation is not true today for any participant who wishes to be a true global player in the Coatings market. However, even though the Chinese market is very attractive the issue of how to protect your IP has not changed from those earlier days.

It is noteworthy to point out that in the late 70s, early 80s the legal process for both protection and prosecution of IP theft inside China was essentially nonexistent. There have been significant changes, on the surface, to that situation. Unfortunately, most of these changes have been on paper rather than rooted in reality.

Has the Chinese IP theft concerns abated over the years? The answer to that question is no. It has gotten worse. The combination of deteriorating IP enforcement, domestic protectionism and human resource constraints are restricting the opportunities for foreign companies seeking to compete fairly in China, or so says a recent key business survey conducted by the American Chamber of Commerce in Shanghai.

The annual China business report surveyed 346 American companies operating in China and highlights lingering concerns over issues such as bureaucracy and unclear regulations.

According to this year’s survey, 71 percent of respondents feel enforcement of IPR “stayed the same” or “deteriorated,” up from 61 percent in 2009 and 64 percent in 2008. IP remains a top concern because U.S. companies perceive a lack of protection and enforcement for intellectual property rights to be a blow to their competitive advantage and is costing U.S. companies billions of dollars. The American Chamber of Commerce survey also noted that nearly 80 percent of companies surveyed agree that China’s regulatory environment is not transparent, though China has demonstrated an increased commitment to transparency. Although most American companies who have operations inside China are concerned about IPR issues the opportunities for growth that China represents often overshadow concerns of IP theft.

What does China have in place for the protection of your IP?

Since joining the World Trade Organization (WTO) about ten years ago, China has strengthened its legal framework and amended its IPR and related laws and regulations to comply with the WTO agreement on Traded-Related Aspect of Intellectual Property Rights (TRIPs). Despite stronger statutory protection on paper, China continues to be a haven for counterfeiters and pirates. According to one copyright industry association, the piracy rate remains one of the highest in the world at more than 90 percent and U.S. companies lose over one billion dollars in legitimate business each year to piracy. On average, 20 percent of all consumer products in the Chinese market are likely counterfeit. If a product sells in any part of the world, it is likely to be illegally duplicated inside China. U.S. companies are not alone, as pirates and counterfeiters target both foreign and domestic companies.