Piracy is Annoying, but Consider it a Wake Up Call

Thursday, July 13, 2006 21:06

It is sometimes said that “imitation is the best form of flattery.” However, the flattery is certainly not appreciated when a company’s bottom line is affected by the piracy of its products. Such is the case when Nokia launched its lawsuit against Chinese manufacturers for flattering Nokia a little too much (for more background, read China law blog, Mobile Gazette, IPcommunications.com).

But, why revert to piracy?
The main reason Chinese manufacturers “borrow” the look of leaders in their respective fields is that the manufacturers are only manufacturers. A manufacturer knows how to manufacture products, but they have not yet figured out how to design desirable consumer products, let alone how to create and manage a brand.

First hand accounts of how quickly Chinese manufacturers can produce an exact copy, if not a more technically advanced version, of a market leading product is both astounding and scary. Every branded company should take notice and be wary.

With a majority of the world’s top brands outsourcing their product lines to China, China can undoubtedly produce top quality products. Today, Chinese companies are copying because they have not deciphered the magical and highly lucrative brand. However, the Chinese are very astute learners. It will not be long before Chinese companies learn how to create the brands to conquer their own markets and ultimately global markets.

Risk adverse, for now…
When offered international product design consultancy services, almost all Chinese manufacturers realized they needed help, but were not willing to pay for the services nor willing to create a product that risked being rejected by consumers.

The business strategy of many manufacturers is very clear and very short term, offer a copy of the market leader at a fraction of the price. In China’s large consumer market, not everyone can afford an internationally branded product. Thus, there is a significant market for affordable products that are inspired by international brands.

The strategy of offering a market leading product at a fraction of the price works as long as the market is neither too discerning nor flooded with other manufacturers using the same strategy. As competition increases, manufacturers will change their strategies if they do not focus on a new market altogether.

As soon as one manufacturer makes a significant profit from creating a product or brand that addresses a market need, others will be quick to follow. Since Chinese manufacturers are producing products for their own market, a market they should understand better than foreign competitors, it will not be too long before we start to see some successful cases.

Chinese Manufacturers Suing Others
It is inevitable that China will follow the same course of Japan and Korea moving from a market supplier to a market leader. So it is only a matter of time before we see a Chinese equivalent of SONY purchasing international music and movie assets. And perhaps not too much longer after that before we see a Chinese manufacturer suing others over IP issues.

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3 Responses to “Piracy is Annoying, but Consider it a Wake Up Call”

  1. chinalawblog says:

    July 14th, 2006 at 4:08 pm

    Chinese companies sue other Chinese companies all the time for violating IP rights. The big deal though was recently when a Chinese company sued an American company in a U.S. court for this. For more on that, go here: http://blogs.wsj.com/law/2006/02/21/chinese-company-sues-us-firm-for-patent-infringement/

  2. Gordon Housworth says:

    July 27th, 2006 at 9:28 am

    “Piracy” has become a very imprecise term in describing the risks and impacts to Intellectual Property (IP). In response to Rich’s request for comment, I submit the following:

    We track a four tiered model of IP violation that is marking the progression of newly industrializing states:

    (1) Simple piracy (copy with no effort to hide piracy – the audio/video model that applies to anything replicable from CD and DVD)

    (2) “Badged” substitute (pirated or stolen Intellectual Property used to create a product masquerading as a legitimate offering by a legitimate supplier)

    (3) Substitute product (pirated or stolen Intellectual Property used to create a “no name” or “new name” product competing with a legitimate offering, usually on price)

    (4) Supplier substitution (original legitimate supplier is forced from the market, replaced by the copier)

    While all four are IP theft, we have bowed to convention in the popular press to describe the first as piracy while reserving the other three as IP theft, especially as the theft is masked such that the sellers have distanced themselves from the theft.

    For a working term, we call this the second industrialization model, the first being textile manufacturing. Although the French perfected looms, their output was craftwork for a limited clientele. It was left to the English to turn looming into a mass production affair. The US purchased old, discarded looms, copying them down to their eccentrically worn bobbins to commence the colonial industrialization. Nation after nation subsequently followed suit.

    Normally nations in a position of strength, specifically in innovation – part of which is acquired without royally, do not want IP protection laws as they are either independently innovating, thereby able to sell at a premium; producing more efficiently, thereby driving down costs over competitors; or imbedding surreptitiously acquired IP and thereby terminating the revenue streams of competitors. Nations tend to seek or support IP protection when they are in decline by some combination of an ebbing of innovation, emergence of lower cost producers, or new producers harvesting their IP and ending expected revenue streams.

    The postwar Japanese model tracked this progression and is only now promoting IP protection laws in the face of Korean and Chinese successes in former Japanese core industries. The Chinese are expected to accelerate the model significantly. The downside for firms and industries affected is that China (and I started my commercial visits in 1980) is unique among developing nations in having a “first world” mentality even as it had a “third world” industrial capacity, i.e., from its “reopening” in the 1970s, it closed off industrial penetration and investment that it did not like (which most other industrializing nations could not or would not do) as it turned a benign eye on virtually any domestic industrial effort that nurtured growth, revenue and industrialization. How it achieved the IP required to do that was never questioned.

    As is widely known among skilled China watchers, edicts on IP infractions, or anything else, often rarely leave Beijing as provincial, city and enterprise zone mangers do largely as they wish and are tolerated so long as they bring growth and revenue without significant embarrassment to the Party (CCP).

    Firms that do not understand this landscape and industrial progression are sitting ducks for IP harvesting. Moreover, legal remedies are largely ineffectual and the rewards moot as the IP is already lost and all expected downstream revenue is attenuated. Readers may wish to examine Low cost is not low risk for some realities in IP loss.

    Gordon Housworth, ICG

  3. Learn Chinese says:

    July 2nd, 2007 at 9:17 am

    Chinese manufacturers develops based on low cost and high quality labor force.