The copycat culture popular in China is a major barrier to foreign companies looking to expand their international business. Spending considerable resources developing a valuable product, only to have local competitors reverse engineer it and selling replicas for a fraction of its original price within months is not an encouraging prospect.
However, choosing not to produce in China can have broader implications than simply missing the opportunity of more sales. If you sell labor-intensive, assembled products that can be produced in China for a much lower price, it might just be a matter of time before the Chinese take the competition to your home market. Simply put, winning in China is becoming imperative to your global success.
About Intellectual Property Rights in China
The government’s lack of action, in the past, regarding Intellectual Property (IP) theft has left a bitter aftertaste for many a foreign company, and it lingers to this day. However, new initiatives implemented since 2005 have started to turn the tide on IP protection in China.
China started recognizing IP rights in 1979 when economic reforms in the country began, and since then, it has adhered to such programs as the World Intellectual Property Organization (WIPO) and modeled its own IP protection legislation on existing international conventions.
National legal framework protecting trademarks, copyrights and patents were adopted in the early 90s. Despite this legal system and international cooperation, businesses worldwide are victims of counterfeiting in China.
The Chinese legal framework for intellectual property rests on three laws: i) a trademark law which protects trademark owners’ rights “with a view to promoting the development of the socialist commodity economy”; ii) a copyright law which implements the Berne convention; iii) a patent law identifying three types of patents: invention, utility models and design.
It is possible to enforce one’s IP rights through administrative authorities, or civil and criminal litigation. The first type applies when importing/exporting and sales are questioned, and are handled by local bureaus. Rights holders can also pursue suspected infringers in civil courts. These different options for enforcement could potentially allow swifter conflict resolution.
Entry mode in relation to your IP rights
Entering the Chinese market can be quite difficult for foreign companies. Obtaining business licenses and quality certificates involves lengthy procedures, and the added restrictions applied to foreign companies make entering the Chinese market a daunting prospect. Foreign companies most commonly opt for either a Joint Venture (JV) or Wholly Foreign-Owned Enterprise (WFOE).
Although the resources a Chinese partner can bring to the table are invaluable, the risks related to sharing IP information can make it a less than attractive option for high technology firms.
A WFOE would require a company to establish an entire supply chain, researching reliable suppliers and customers and starting from scratch. While this latter option can be manageable for large MNCs, it is less feasible for SMEs.
That being said, lately more options have opened up to foreign SMEs. Chambers of commerce have started providing services aimed at facilitating entrance into the Chinese market. Incubator agencies offer hosting and manufacturing services until a foreign company decides to incorporate a WFOE in China. Recently, the Shanghai Free Trade Zone opened its doors, promising advantageous reforms aimed at facilitating business registration and promoting foreign business development.
The Chinese government has done a remarkable job in modernizing such a large country with an estimated 1.3 billion people. It has had to rush the development of its cities and industries to cope with national and international demand. The legal system dealing with IP was similarly put into place, based on existing international IP rights conventions and not taking into account Chinese culture.
Are your IP rights safe in China?
The appeal of China to foreign businesses is its enormous market. It is also, however, its drawback. With such a large country to control, the government has seen fit to decentralize state powers. In regions where counterfeiting represents a substantial source of work and income, local officials will be more likely to turn a blind eye to such practices. As we have written about before, there are substantial differences between China’s cities and regions
Whereas the European system has had 150 years to evolve, the Chinese system is almost brand new. Whereas in the West, a rights holder may attempt to enforce their rights by resorting only to the courts, the Chinese system enables them to choose between different administrative organs. In theory, this second approach should allow rights holders to choose the enforcement method most appropriate to their pursuit. In practice, it is actually quite inefficient. Consequently, the need for a China-based lawyer should not be underestimated when doing business in the Chinese market.
One could hold the legal system largely responsible for the ease with which ‘copycats’ get away with counterfeiting, in spite of that fact, rights holders can also be attributed part of the blame.
Major sources of infringement issues in China are negligence and gullibility on behalf of foreign companies. Lacking expertise and knowledge, many such companies fail to register on time, and when infringed, do not have the right to enforce. Registering at Local Customs can help reduce the export of counterfeit products. Ignorance regarding IP protection in China leads foreign companies to take a passive stance in enforcing their own rights.
“If they [foreign companies] are not registering their IP in China and using good contracts with their Chinese counterparts, they to a large extent have no reason to complain.” – China lawyer Dan Harris
We therefore always advice our clients to register their trademarks and patents within China as soon as possible.
In manufacturing there are also alternative methods to prevent IP infringement. For instance, we work with a network of trusted suppliers for manufacturing. However, if production can be divided, we try to ensure that not one party has access to the final product. We assemble the product within our own secured assembly facilities and consequently decrease the risk of suppliers attempting to copy the product.
Moreover, if your product possesses highly advanced technologies, you can consider outsourcing basic component manufacturing to China and importing your advanced components.
Risks versus rewards
Despite the framework for IP protection, copycats in China have flourished. At one point in time, counterfeit Ipods incompatible with Apple software, or footwear bearing patterns disturbingly similar to that of Adidas products could be found at any fake markets. The trend continues, but to a lesser extent as legislation is amended, improved and, more importantly, enforced.
To learn more about counterfeit products in China, read our article on Shanzhai in China.
Despite popular belief, IP protection is not a problem reserved only for foreign businesses; local designers equally experience IP theft. “For every foreign company calling for stronger IP protection, there are really more Chinese companies calling for the same,” says Gary Locke, America’s former ambassador to China.
Now, those Chinese firms are also pushing for a firmer stance on IP protection, it can be expected that legal implementation will proceed at a faster pace.
The International Intellectual Property Alliance (IIPA) publishes a report every year analyzing which countries pose the most risks in terms of IP theft. Though China is amongst the 10-odd countries on the watch list, the 2014 report mentions government reforms aimed at expanding the enforcement powers of the State Intellectual Property Office which could potentially dramatically alter the counterfeiting landscape.
An interesting question put forward by Jack Perkowski in Forbes is whether businesses considering bringing their products to China can afford to miss out on the opportunity, despite potential IP theft? If a foreign business chooses not to manufacture and sell in China, how would it be affected once Chinese companies enter their home market, with lower, more attractive prices? Taking a risk in the China will give the company a very small measure of control over the local market and the opportunity to learn to compete with Chinese competitors.
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