The Chinese business environment has reached a level of
attractiveness that hasn't been seen for few decades. Why?
They master in the art of providing amazingly cheap
products, in all industries. We all know that this is
possible because of their low wage labor force, but we
often forget one other reason. China has often been the
source of complaints concerning the theft of Intellectual
Property (IP), especially coming from the United States.
In some industries IP theft seemed to be a crucial part of
China's comprehensive low-cost advantage, more significant
even than cheap labor. The true harm comes from Chinese
companies acquiring world-class technology at little or no
cost and then, once enriched, leveraging considerable
competitive positions, to the discontentment of the IP's
originator (who took several years and spend few millions
of dollars to manage such a breakthrough). China's
telecommunications giant, for example, Huawei Technologies,
grew into a multibillion-dollar competitor by "borrowing"
the technology of advanced rivals, which had only their
eyes to cry. Huawei seems to have never admitted anything,
but when reaching a certain size it began settling with
those same rivals (Cisco Systems) to enter new markets!
American telecommunication firms now compete with Huawei
all over the world.
This phenomenon also metamorphoses in a trade barrier. Why
do many companies avoid the Chinese market? Because of the
fear of losing their most valuable assets: their
intellectual property. That fear prevents American
businesses from immersing themselves into the world's
fastest growing economy with valuable products they would
otherwise be enthusiastic about selling.
One new mechanism, that dissuades many of joining the
Chinese miracle business center, is the so-called CCC
safety certification. Every electronic component or piece
of equipment to be sold in China must be submitted to the
Chinese government body overseeing the CCC certification.
The process requires the foreign manufacturer to give
Chinese officials full access to engineering drawings and
schematics and to provide a complete finished product for
evaluation. In addition, the applicant companies must pay
for Chinese officials to visit and inspect their factories
outside of China.
"This is a function of China's no-cost technology
environment," William J. Jones and chairman of
Cummins-Allison said. "At every stage of the supply chain
you have companies that do not have the technology costs
American firms have. Chinese companies run counterfeit
software, reverse-engineered machines, and other
proprietary processes they need not pay for. So by the time
a Chinese company assembles a product from Chinese parts,
there is a big savings that has accrued all along the way.
We have to pay for parts that are made in places that pay a
lot for their technology, so naturally we pay more."
What would improve if the amount of IP theft in China began
to diminish? First, IP protection would chip away at
China's low-cost manufacturing advantage. Second, it would
create a large market for America's high-value technology
and entertainment products, leading to new business
perspectives for many.
Since many global protests have come out, the Chinese
government had to act to satisfy Western issued complaints.
Announcements of stepped-up enforcement against pirates and
counterfeiters were made. So yes, China will probably
launch very public campaigns against knockoff polo shirts
and handbags. But there is no sign that its more
sophisticated policies designed to facilitate technology
transfer, such as the CCC regulations, are up for change.
China has had access to "material" property for less than
thirty years, so one can easily understand to what extent
Chinese people and authorities consider Intellectual
property.
China's extremely loose intellectual property regime has
been a key element in the country's development. From the
perspective of Chinese leadership looking to increase the
wealth, health, happiness, and global competitiveness of
1.3 billion people, "borrowing" intellectual property looks
like a nice fast track out of the Third World.
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Tim Lyons is Executive Director of Manage China. Manage
China is a company that helps foreign firms who are
interested in doing business in China.