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IP and China: Basking in an Anti-IP Climate?

May 31, 2006
Paul Ward

Chinese piracy is at 90 percent, making it the third least friendly country for protecting intellectual property

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The visit of China's President Hu Jintao to the United States spurred considerable coverage by press and pundits reporting on China's increasingly critical role in the world. A clue to Hu's chief concern was the symbolism of his first stop: Hu dined with Microsoft's Bill Gates. The White House came third, after Boeing.

Clearly, commerce trumps politics.

But even though Microsoft was the first item on Hu's agenda, the Redmond-based software giant could be faring much better in China. Chinese piracy is at 90 percent, making it the third least friendly country for protecting intellectual property.

Microsoft has been able to mitigate its intellectual property rights (IPR) risk in China by closing deals for mobile applications with China Mobile and China Unicom. Embedded mobile applications are more difficult for consumers to copy illegally. Plus, the opportunity for Microsoft and other mobile players is huge: China controls two-thirds of the world's wireless market.

Global companies doing business in China face more than piracy by consumers. Cisco fought patent suits against the Shenzhen-based Huawei in 2003, eventually proving that Huawei, arguably the top Chinese provider of switches and wireless infrastructure, had copied the U.S. companies' firmware code line for line into its products. Huawei settled.

The disrespect for intellectual property seems to be moving beyond trials in individual court cases, though. And this is where the story gets stranger, as the recent case of Energizer Holdings demonstrates.

Energizer has for years ardently protected its patent on mercury-free batteries while still generously licensing the technology, even to big competitors such as Duracell. When dozens of foreign manufacturers, including nine in Mainland China and Hong Kong, were discovered exporting mercury-free batteries, Energizer took the case before the ITC, which oversees such disputes. After three years of wrangling between China Battery Industry Association (CBIA -- a Chinese government-sponsored battery trade association) and Energizer, the ITC recently upheld the Energizer patent and Energizer's right to pursue protection.

Unfortunately, the Chinese press reported incorrectly that the ITC had thrown out the patent, and that the Chinese battery makers were now off the hook. In a series of celebratory stories, CBIA touted its alleged victory to the press, creating confusion for the Energizer and concern among analysts. Energizer's new challenge was to balance the public relations efforts of Chinese battery companies working together, under the government's auspices and protected by a government-influenced press.

To Energizer's credit, it is working constructively with Beijing to resolve this misreporting, and it certainly is possible that trade association and the press genuinely misunderstood the ITC ruling. In any event, Energizer, and hundreds of thousands of other joint ventures that channel foreign investment into China, must take the long view, and work with Beijing.

For now, Chinese companies may be basking in this anti-IP climate. This must change, for China's sake. In the past, it has been China's desire to minimize the domestic social, political and economic trauma that may come from moving too quickly towards integration. But even Chinese companies are now filing patent applications. Considering Energizer's woes it is ironic that Nanfu Battery, reportedly the largest battery manufacturer in China, has been filing for patent protection because other Chinese companies are pirating their IP.

That IPR can work for China is obvious. With recent steps towards IPR reform, its domestic software industry is now growing at breakneck speed. We are encouraged, but China has a long way to go. Without further reform, Chinese business will learn first-hand just how hard it is to innovate when there is no reward.

And make no mistake, China's pace of reform matters to its future. IPR in India is getting stronger, leading to a rapid increase in patent applications, with a concomitant, explosive growth in India's technology sector.

Unless China acts more diligently to improve its IP enforcement as well as reform its protectionist culture, it could inadvertently undermine its own industries while remaining at a strategic disadvantage globally.

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