If You Don’t Act Chinese Firms Can Copy, Register, and Profit from your IP

Sunday, March 18, 2012 22:40
Posted in category The Big Picture

Copying in China is nothing new, but as firms look to China as profit centers, protecting themselves becomes far more complex. It is a problem that is quite different than before as firms are now having to defend themselves locally, and enforce those judgements locally.  A whole different ballgame than finding an offender, taking them to court, and then locking them out of one’s home market.

Apple’s legal battle with Proview over the iPad trademark is perhaps the most talked about case these days, and provides a great example for why firms need to focus on being more proactive when China goes from “other income” to the firm’s second largest market in 5 years… But I came across a couple other cases this week that I feel highlight the dynamics even better than Apple’s “Silly” mistake.

Today’s USA today article Chinese copycats challenge U.S. small businesses for me highlights what will likely consume most firms.  A Chinese firm sees a product overseas that will work well in the China market, perhaps in other markets, and takes steps locally to secure the trademarks/ patents necessary to sell legally in China.. and keep the original firm out.  It is an article that for me was summed up in a single quote from the Chinese firm’s representative:

“The Wright brothers invented their plane, and now everyone produces their (own) model of the plane,” says Tang. SylvanSport was first “to make this kind of trailer, and we followed them to make a similar product. I don’t think we copied them.”

to which he adds:

While Wuyi Tiandi might not be able to sell its products in the U.S. because of SylvanSport’s patents, Tang says, “We can still sell our trailer everywhere else.”

The second article, China Corporate Espionage Boom Knocks Wind Out of U.S. Companies comes from BusinessWeek.  Following the difficulties that AMSC, a firm providing equipment and software to China’s wind turbine manufacturers, the article provides a great case study of how firms… even those with executives who have taken steps to prevent IP leaks… can find the wind knocked out of them.

AMSC’s opportunity in China

AMSC began packaging the electronic components and selling them to China’s small but growing domestic manufacturers, which had plenty of capital and cheap labor to make the turbines’ steel skeletons but lacked the sophisticated gadgetry to run them. The arrangement was working the way it was supposed to: China would turn out the commodity hardware — the turbines — and a U.S. company would retain control of the high-margin intellectual capital-end of the business.

The Steps ASMC to protect itself

Software was sequestered at the company’s research facility in Austria, which has a booming clean energy sector much like Germany’s. The source code to AMSC’s control system software sits on a secure server in Klagenfurt. To protect the code from hackers, the server isn’t accessible from the Internet.

How they got screwed

Han apparently had a different plan in mind. According to court documents, in 2010, Sinovel began recruiting Dejan Karabasevic, a Serbian software engineer who worked at AMSC’s research facility in Klagenfurt. In December, Karabasevic sent his existing contract with AMSC to Sinovel employees for review; by January 2011, Sinovel was hunting for an apartment for him in Beijing.

Once in China, the engineer was pressed to create software that could go on existing turbines as quickly as possible, using source code taken from AMSC’s server in Austria. For five days beginning May 10, Karabasevic said in a confession to Austrian police, he worked steadily in his Beijing apartment and then traveled to a wind farm with three Sinovel employees to test the code in working turbines. By June it was done.

How they found out they were being screwed

When AMSC investigators opened up a Sinovel turbine in a second location in July, they found that an AMSC power converter had been swapped out and replaced with a nearly identical one made by Guotong. It was running on a version of AMSC’s control system software obtained the year before by Sinovel and decrypted by its engineers. It looks like Han wanted to make Guotong Electric the Chinese version of AMSC.

In effect, what Sinovel realized was that it was cheaper, and easier, to convince a software developer to jump ship, then use that to create their own product, and once that was accomplished, they could sell that product into other firms (potential clients of ASMC).

In the past, when firms were focused on manufacturing for export, and when the major markets for products made in China were for export, my advice to firms was to make sure that they not only had their legal ducks in a row through patents (home and China), trademarks (home and China), and supplier agreements (with non-compete clauses), but that they aggressively scan the market and visit suppliers to minimize the risks for copied products (made by their suppliers) to end up in the global market.  Attending trade shows, scanning Alibaba, and setting up mock purchase calls.

And that advice goes double now, particularly for firms who think that China offers a market for their goods on ANY level going forward.

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One Response to “If You Don’t Act Chinese Firms Can Copy, Register, and Profit from your IP”

  1. Getting Shanghaied In The Land Of Shanghai Whether You Go There Or Not : China Business Leadership Blog says:

    March 19th, 2012 at 10:20 pm

    […] Rich put up a great post yesterday at All Roads Lead to China about two cases of foreign firms having their technology stolen in China.  See the whole post here. […]