Better IP protection promises bigger fortune for China-US firms

With intellectual property (IP) protection on the list of consensus and outcomes reached by China and the United States during President Xi Jinping's first state visit to the U.S., there is much that can be learned from the case of Dow Chemical Company, a U.S. plastics and chemicals giant -- one of those that is viewed by some as swimming with sharks.

Few U.S. companies want to miss out on the opportunities China affords, but while some cautiously dip their toes, with IP sharks being their biggest concern, some dive right in.

Dow Chemical is one of the latter.

IP rights are a concern of all multinationals, including Dow, in the Chinese market, said Yao Weiguang, the company's Asia-Pacific technology chief. "We are here because we see more opportunities than risks," he said.

Dow now owns eight local business centers and 17 manufacturing sites in China. The company has over 3,500 local employees, and with annual sales of 4.3 billion U.S. dollars in 2014 (up 14 percent from 2013) China is its second-largest market after the United States.

Acknowledging the vast talent resources and seeking to further tap into the market, Dow opened in 2009 the Shanghai Dow Center, its largest integrated R&D center, which now provides innovates for use not only in China but also for the rest of the world.

Although growth is shifting down a gear, China remains a dynamic market full of opportunities, striving to build an economy reliant on technology and innovation. Yao insists that better IP protection will benefit both foreign and Chinese companies alike.

Change is happening. Gary Locke, former U.S. Ambassador to China, has proclaimed that "for every foreign company calling for stronger IP protection, there are many more Chinese companies calling for the same."

Jiangsu Shenxi Machinery Co., China's largest maker of suspended platform, an equipment used for building construction and maintenance, is one of those.

Wu Renshan, founder of the company, said there were a lot of knock-off brands that copied Shenxi within China. "While we were confident to face and win an IP lawsuit brought by U.S. companies, we ran out of confidence to fight against a guerrilla of copycats at home."

The company was sued in U.S. by Secalt S. A. and Tractel, Inc., alleging that its product is infringing their IP in 2008, but the U.S. courts ruled in favor of Shenxi.

The case should be a lesson for domestic companies, especially for those keen to expand overseas, and they should invest heavily to develop and protect their original technologies, Wu said, adding that the country's progress on IP protection is providing the incentive for enterprises to innovate.

BETTER, NOT PERFECT -- NOT YET

China's IP regime is almost brand new. Prior to 1980, when China joined the World Intellectual Property Organization (WIPO), the concept of IP was almost unknown in China and the value of IP had yet to be recognized. Only in the 1980s did the country pass its first trademark and patent laws.

Since then, a lot has been done to improve IP protection: a national legal framework more in sync with the rest of the world; better law enforcement; tougher penalties for infringements; educating the public; and stronger adherence to international norms.

Three specialist courts in Beijing, Shanghai and Guangzhou now handle IP cases. Last year, more than 33,000 people were accused of IP rights infringements in 28,000 cases with a combined alleged damage amount of almost 3 billion U.S. dollars.

Unsurprisingly, online piracy and IP theft have kept pace with the brisk development of e-commerce, and it is simply very difficult for law enforcers to keep up.

Yao describes China's progress in IP protection over the past few years as "steady", encouraging Dow to increase R&D investment in China, but he says, "IP protection is a war, not a battle, and China still needs better legislation and more assured enforcement."

Yao is inarguably correct. The situation has got better, yes, but there is still a long way to go.

Many U.S. companies now have research centers in China, a sensible and profitable move, not merely because of the vast amounts of money and energy the central government is pouring into domestic innovation, but because products designed and developed in China will certainly be better suited to the immense local market.

If China genuinely wants to become a center of global innovation, significant improvements in IP protection are still needed.

PROTECT OTHERS BY PROTECTING YOURSELF

Yes, better IP protection is important to U.S. businesses in China, but it is absolutely essential to the thousands of Chinese startups devoted to making their fortunes through new ideas, new products and new ways of doing business.

"We are pursuing innovation-driven development and encouraging mass entrepreneurship and innovation. This requires that we better protect IP rights and ensure that there is a level playing field for all market entities," Premier Li Keqiang said as he met with business leaders at the Summer Davos Forum in northeast China's port city of Dalian.

After years of blistering expansion, China's growth has slowed, encumbered by a plethora of issues at home and woes in its major export markets. It seems likely that this year China will post its weakest growth in a quarter of a century.

New sources of growth must be found. China was perceived in the past as a mere manufacturer and exporter of cheap goods; now technological progress and domestic demand are seen as the engines of growth for the future. The country is betting big on innovation, and innovation requires IP protection.

According to the McKinsey Global Institute, a worldwide network of economic researchers, innovation could contribute up to 3 percentage points to China's GDP growth by 2025. By then, that could represent almost half of total growth.

The government has provided financial incentives to encourage Chinese companies to file patent applications and the effort is working: Last year, China was the only country to post double-digit growth in patent filings. Huawei and ZTE, Chinese telecom giants, were ranked first and third in terms of filings by the WIPO.

There is growing recognition among Chinese companies that IP protection is essential to their future. Domestic innovators suffer from IP theft just like any foreign business and it hurts them just as much. It is young, home-grown enterprises, with ideas and investments of their own to protect, who now stand at the forefront of the "war" alluded to by Yao Weiguang against IP theft.

Michael Bloomberg, founder of Bloomberg L.P. and former New York City mayor, said, "if you're going to invest in making a drug and you're going to put a few billion dollars into developing it and then get it approved by the government, and somebody can steal your idea overnight, nobody is going to make those investments."

And he was right.

In a recent interview with Xinhua in Beijing, Bloomberg said, "The best thing that could happen to China is lots of people coming here with new ideas and trying to make a career here. Countries that have reasonably open borders and lots of ability to find ideas from around the world and to be challenged; those are the ones that will have a great future."

COOPERATION, WIN-WIN

The IP issue, a long-term source of dispute between China and the U.S., the world's two largest economies, may become the basis for cooperation.

During Xi's visit to the U.S., China and the United States affirm the importance of developing and protecting intellectual property, including trade secrets, and commit not to advance generally applicable policies or practices that require the transfer of intellectual property rights or technology as a condition of doing business in their respective markets.

Both countries also affirm that states should not conduct or knowingly support misappropriation of intellectual property, including trade secrets or other confidential business information with the intent of providing competitive advantages to their companies or commercial sectors.

A consensus has also been reached: with counterfeiting gradually becoming globalized, it is crucial for the two countries to coordinate efforts to stop IP rights violations.

At this year's China-U.S. Strategic and Economic Dialogue, the two countries vowed to join efforts in detecting, investigating and prosecuting IP rights violators through the China-U.S. Joint Liaison Group.

In June this year, the two countries' customs agencies signed an agreement to work together to combat IP rights violations, which will help both countries to track IP rights violations, share information and monitor illicit importation, exportation or trafficking of counterfeit goods.

"There is great potential for cooperation between China and the U.S. in the area of IP protection," said Yang Xuri, head of Beijing Power-nation Intellectual Property Institute. "By cooperating, both sides will benefit."

Li Weimin, a researcher at the Center for IP Rights Studies in the China University of Political Science and Law, noted that the two countries should further enhance communication and coordination, calling for the establishment of a negotiation and dialogue mechanism to resolve IP disputes and expand cooperation.