[A2k] FT: US warns China over intellectual property risks

Thiru Balasubramaniam thiru at keionline.org
Tue Apr 28 06:03:48 PDT 2015


April 22, 2015 3:09 am

US warns China over intellectual property risks

Lucy Hornby in Beijing

China <http://www.ft.com/china>’s weak intellectual property protections
and selective application of the law are hampering foreign investment in
the country, the US secretary of commerce warned, in spite of a push by
Beijing to reassure investors that their technology is safe.

Penny Pritzker said that although China’s drive to have an innovation
economy meant the country was genuine in its desire to protect IP, “the
real conversation needs to be not just about the laws on the books but also
about the court system and the broad and consistent application of these

IP theft has been a perennial grievance of international companies in
China. In recent years Beijing has moved to reassure investors but critics
say violations of rules are still rife.

Last week Premier Li Keqiang received Ms Pritzker and a delegation of US
clean tech companies seeking a windfall from China’s drive to reduce
pollution, where he highlighted China’s plans to set up a new IP tribunal.

Meanwhile, lawyers in China say foreign companies are already increasingly
willing to turn to the country’s arbitration courts, particularly in
Shanghai and the Yangtze valley, where they say courts are becoming more

But Ms Pritzker said that doubts over fair treatment in the country’s legal
system acted as a barrier to foreign companies, which did not want to risk
committing their best technology to the Chinese market.

This highlights a problem facing Chinese climate change negotiators, who
are pushing for transfer of cutting-edge technology from companies such as
General Electric of the US as part of richer countries’ commitments at
a climate
change summit
year in Paris.

China’s national plan to address water pollution
on Thursday included provisions for lower import tariffs on water treatment
equipment. Foreign companies see the new drive as a business opportunity.

Ms Pritzker advises smaller companies to seek advice from businesses
already in China — but their typical experience is not likely to reassure.

Large multinationals have tended to make an initial sale of equipment
produced overseas, then ramped up manufacturing in China with a Chinese
partner to which they finally transfer the rights to the technology. That
has worked as long as the rapid expansion of the Chinese economy has
created new markets for the foreign company to develop and sell the next
generation of its product.

But some companies have fallen foul of the model.

UK-based petrochemical producer Ineos last year launched a lawsuit against
joint venture partner Sinopec, China’s largest oil refiner. Ineos says
Sinopec replicated its processes in a new petrochemical complex without
paying licence fees. The case is still under way

Ineos is unusual because it was open about its dispute. More typical is the
case of Knowles, a US supplier of tiny microphones to Apple and Samsung. It
only went public about its civil case against a Chinese competitor and a
web of countersuits after its lawyers were locked out of a hearing at a
Shandong court.

Multinationals tend to have the “teams on the ground to navigate the
system”, says Luke Minford, chief executive of IP enforcement group Rouse.
“For the midsize investor with limited access to resources we are finding
it a huge challenge to convince them that the opportunities [versus the]
risks make it worthwhile.”

While debate in Washington focuses on the threat posed by hacking and cyber
security breaches, companies already operating in China have learnt to be
more careful of their own employees and joint venture partners.

Dan Harris, a lawyer specialising in Chinese business at Seattle-based
Harris Moure, says that in most cases, the foreign company’s IP is stolen
by an insider.

In one case, Boston-based AMSC sued its former client, state-owned wind
turbine manufacturer Sinovel, for expropriating its turbine operating
software after bribing a former AMSC contractor in Austria.

AMV’s case and a countersuit by Sinovel has been working its way
through Chinese
three years. Chinese wind industry sources say the government has quietly
sidelined Sinovel from participating in new tenders.

Few companies will publicly discuss such breaches for fear of damaging
their share price — but many executives in China privately admit to firing
employees who seemed too nosy.

“Hack attacks are usually not even necessary,” says Mr Harris. “Why go to
all the trouble of trying to bust in a barn door when so many American
companies still just leave it open.”

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