Rory Crump
Oct 29, 2012

China IP theft ring too big for one president

Mitt Romney is the voice of corporate America. At least when it comes to China bashing. Romney promises aggressive tactics when combating China’s intellectual property thieves and corporate spies. In contrast, President Obama leans on diplomacy and the WTO. China won’t decide this election, but U.S. companies do not want four more years of business disappearing out of factories and off of servers. Good luck to both candidates. It’s going to take a lot longer than one presidential term to change China’s evil IP ways.

We never hear industry use the words “alleged” or “suspicion” when talking China’s abuse of intellectual property. In fact, the sheer volume of Chinese copyright, trademark, patent and trade secret violations prompted the U.S. International Trade Commission to publish a study in 2011 quantifying the effects of Chinese IP practices. The USITC estimated U.S. IP-intensive businesses doing business with China in 2009 suffered losses of $48.2 billion in sales, royalties or license fees due to IP infringement.

Of course, this kind of illegal activity was never verified or, well, reported as earnings by Chinese benefactors. But the academic depth of the USITC report lends credibility to Romney’s claim IP theft has “cost” Americans 2.1 million jobs.

For harder evidence, DuPont, Pittsburgh Corning and American Superconductor (AMSC) are documented victims of stolen trade secrets. The AMSC case resonated because the perpetrator was caught red-handed. And due to the incident, AMSC lost 40 percent of its value in a single day of trading. The AMSC fallout also revealed a familiar pattern of Chinese companies dropping suppliers after mysteriously adopting their technology, overnight. The dark side of technology transfers.

Cisco, Motorola and Microsoft have fought Chinese companies over intellectual property. And although big multi-nationals take the brunt of Chinese IP abuse, smaller U.S. companies, startups and even law firms have reported similar attacks.

So prepare to budget for cyber espionage and patent infringement topped with government-sponsored protectionism and subsidization. Makes you wonder why U.S. companies – especially tech companies - even bother with China. Oh yeah, don’t forget Romney’s campaign promise to nail China as a currency manipulator before warming the Oval Office chair.

China’s economic upside is intoxicating. Too many infrastructure contracts are available to help modernize a country the size of a small planet. Too many consumers are coming of age, with Western tastes and disposable income. With runaway growth rates “slowing” to 7.4 percent, the tech opportunities to outfit the world’s second-largest economy must be worth the risk.

China did not discover the art of intellectual property theft. They’ve just mastered it. According to the U.S. Chamber of Commerce, Taiwan, Hong Kong and South Korea captained the pirate ship of consumer electronics in the 1980s and 1990s. Apple would introduce a new computer, and Taiwanese knock-offs littered Taipei streets within weeks. But the Asian Tigers were minis, rounding errors of lost revenue compared to China. China’s black market and growth strategy are often one and the same, deeply imbedded in the consciousness of an entire nation.

As both wages and spending rise, this counterfeit culture is not a sustainable model and China knows it. China wants to graduate from imitator to innovator. With an aging population to support and a more educated workforce to leverage, they value creativity more each day. China has built this treasure chest of Western IP. And have embraced a plan for more domestic imagination called “indigenous innovation.” Together, failing to do much with it.

As for legitimate business, China’s reign as king of outsourced manufacturing won’t last forever. Companies hunting the cheapest labor are already finding partners elsewhere. In the meantime, adding genuine value to a product through design and development escapes China’s rigid behavior and policies.

Getting from sweatshop to Silicon Valley takes guts and brains. A problem when the communist government covets group success, and the culture fears failure. Innovation poses an even bigger problem because the Chinese education system focuses on the wrong side of the brain.

Count education as a reason for China’s rapid ascension. Over half the population boasts a high-school education, significant for a nation still developing in many ways. Strangely enough, some party leaders blame the school system for China’s innovation gap. Educators being hobbled by a weakness for rewarding rote memory and test taking skills. Not the DNA U.S. incubators look for in entrepreneurs.

When weighing the differences between U.S. and China universities one high-ranking official told The New York Times “in terms of innovation – really original, creative ideas – they’re (China) very weak.” China is even weaker in terms of Nobel Prize winners: one. And that was a writer named earlier this month. Not a physicist or rocket scientist. Turns out, the Nobel is the elephant in the room for a country that actually celebrates big thinkers like rock stars.

It seems innovators are slow cooked, as British textile companies in the 1870s labeled the U.S. an IP thief for lifting factory breakthroughs back across the pond. The U.S. Department of Commerce reported technological innovation has driven three-quarters of our annual economic growth since the mid-1940s. World War II serves as a good head start for U.S. ingenuity. And proves China has a lot of work to do.

They may die trying. Depending on your take, Japan and the Soviet Union failed in building a true innovation economy. There’s no five-year plan for injecting creativity into a nation of doers, not shakers. No guarantees China will ever build an innovation economy.

China’s patent system lacks fertility, too.

Whether the underlying U.S. patent system is broken or not, intellectual property in the West fosters some level of respect, even when it’s bastardized in a courtroom.

Respect, however, is altogether missing from China’s patent system, which appears broken by design. Most experts call Chinese patents junk. Namely, utility patents barely passing the smell test. And then further corrupted by a government desire for quantity over quality and incentives like better housing, tax breaks and government contracts for issuers.

More telling, global Chinese players seasoned by thousands of patents have been branded serial cheats and government puppets. Telecom giants Huawei and ZTE face deportation from U.S. enterprise for IP property theft accusations. Severe accusations crystallized in a recent House Intelligence Committee report. Either China can’t catch a break, or IP theft there is an epidemic ripe for reform.  

Mitt Romney’s tough talk, and President Obama’s more patient, bureaucratic approach to China’s IP problem are foreign policy stances worthy of more debate between now and Election Day. Regardless, more here and now issues like jobs and the economy will tip this election, not China. Because partisanship aside, it will take more than four years to smoke out China’s den of IP thieves.