A recent cover story written for FOCUS magazine on IPR issues in China.
Once infamous for its production of fake handbags and knock-off watches, China is now taking copyright and trademark issues seriously as it bids to become a nation of innovation, says Tom Pattinson
When entering the China market British companies have a number of concerns, but protecting intellectual property rights (IPR) usually tops the list. In CBBC and BritCham’s 2011 China Business Climate Survey, over 80 per cent of respondents cited IPR as an issue of “significant importance to their business” – and with good reason. China’s vast manufacturing base has seen local companies copying patented products and ignoring trademarks, as well as producing counterfeit goods from luxury handbags to imitation whiskey and, more worryingly, fake drugs, car parts and airplane components. A series of well-documented cases cite luxury brands such as Burberry and Louis Vuitton suing counterfeit product vendors including those at Beijing’s Silk Market. Stories about fake milk, pet food and cooking oil have hit the front pages, and last year China was back in the headlines after officials discovered 22 fake Apple stores. The shops were so convincing that even the blue-shirted staff thought they were the real deal. IKEA and B&Q have both fallen victim to carbon-copy Chinese stores, and have undertaken lengthy legal battles to protect their IP and company image. “IKEA is one of the biggest home furnishing companies in the world,” IKEA China said in a statement. “Protecting IKEA’s intellectual property rights is crucial.”
And crucial it is for every foreign brand operating in China. Companies must be well prepared before entering the market to ensure their company secrets remain secret. However, the Chinese authorities are making a conscious effort to crack down on IP infringements with top-down pressure on local courts and a number of high profile campaigns.
Last year’s IP Special Action Plan called “Showing the Sword” seized a huge amount of counterfeit goods. Although critics have argued that the high profile seizures have limited long-term benefits, the message to both infringing companies and local law courts is clear; IP must be protected if the country is to innovate.
In November, Vice Premier Wang Qishan said that China will make its Special IPR Campaign permanent and will continue high-level involvement as well as increasing crackdowns on intellectual property rights infringement.
One British company that benefited from the recent crackdown is Strix, manufacturer of safety control systems for small domestic appliances. Strix was awarded RMB 9.1 million in damages after winning a landmark case against two Chinese companies who were found guilty of using their patented technology.
“This legal decision [is] a big step in the right direction for the Chinese judiciary’s [policy] regarding intellectual property, regardless of the plaintiff’s country of origin,” said Paul Hussey, Chief Executive of Strix.
In fact, foreign companies represent an increasingly small percentage of cases as Chinese firms register their own patents and IP. According to Tom Carver, Chief Rep-resentative of law firm Wragge & Co.’s office in Guangzhou, 94 per cent of cases consist of Chinese companies suing other Chinese firms. Of the cases involving foreign businesses, over 90 per cent of foreign firms win their cases. “Claimants generally don’t start actions unless they are sure they are going to win,” he says.
Wragge have won all of their cases on behalf of Dyson makers of the eponymous vacuum cleaner and blade hand dryer. Although the majority of firms stop producing when an injunction has been granted, “damages are not significant by UK standards,” says Carver. “In the UK if you say you’ve lost a million pounds in revenue then you’re likely to get quite a lot of it back. In China you won’t.”
Even with counterfeit case victories, infringing companies don’t always stop producing knock-off goods. “[We won a Dyson case] and they were fined US$7,500,” Sir James Dyson told the Guardian. “They didn’t pay the fine and they just carried on.”
However, China’s desire to become a country of innovation and technology will continue to improve their IP strategy. But even with a centralized plan, implementation remains challenging.
Chris Bailey, Deputy Country Manager for Rouse International, believes that as well as the difficulties of policing an enormous country with widespread counterfeiting, culturally Chinese companies may feel pressured to copy other brands even though they have their own quality products.
He mentions Chinese car manufacturer SAIC, who bought British car manufacturer Rover’s technology but didn’t acquire the brand name. “They created the new brand Roewe to sound like Rover but why bother?” he asks.
Despite the challenges, it is clear that IP issues in China are growing in importance. “Hu Jintao said IP is the basis for competition in the 21st Century,” says Bailey, an attitude reflected by the increase of IPR infringement court cases. According to the Supreme People’s Court (SPC), Chinese courts heard 52,708 new cases of intellectual property rights infringement from January to October 2011, up 42.2 per cent from the same period in 2010.
The growth of Chinese brands and changes in consumer attitudes are also helping turn the tide. Although China is yet to create a global brand that is truly Chinese, some of the country’s largest companies such as Lenovo, Li Ning, Haier and Huawei are investing more in branding.
As China’s economy and consumer disposable income grows, buyers are looking for respected brands that can guarantee quality. This is particularly visible in the mobile phone sector. In 2007, at least 20 per cent of all mobile phones sold in China were fake, but this figure had dropped to seven per cent by 2010. Most consumers are savvy enough to know that fake high-tech items such as smartphones simply don’t work.
The mood is shifting, and according to Grant Thornton’s China Britain Services Group, who advise on IP in China, while it may be tempting to wait until China offers a more secure environment for IP assets, the opportunity cost could be high. “The potential advantages are huge, and not only in terms of salary arbitrage and tax incentives. As China becomes a leading market for many products, companies able to develop products locally will have two advantages: they will be better at meeting consumer needs and they will be faster to market. Not only that, many companies say that the risks of doing R&D in China are becoming easier to manage. Most importantly,
China is a major source of R&D talent. Chinese students graduating with bachelor’s degrees in science and engineering may now exceed 1.5 million a year.” said Nick Farr, head of the group.
And with China’s top-down desire for innovation, a surge in consumer integrity and an escalating economy, the image of knock-off China.
