Friday, July 31, 2009

Chinese Industrial Policy of Piracy

Capitalism divorced from any ethics or morality, this is the Chinese way.

Sun Danyong, the 25-year-old suicide victim who worked at contract cellphone maker Foxconn International's massive gray and white factory complex in Dongguan, had 16 prototypes of Apple's new fourth-generation iPhone in his possession, according to the Taiwanese company. When one went missing, Foxconn's security guards raided his apartment, according to a report in the People's Daily. The phone didn't turn up. A likely answer, according to security experts, is that the device ended up in the hands of Shenzhen's notoriously entrepreneurial counterfeiters.

"The copying of prototypes certainly happens a lot in the electronics and IT industries," said Dane Chamorro, a regional general manager with Control Risks, a corporate investigations consulting firm. "You don't have to steal them, you just have to borrow one for a day." In an earlier interview with the New York Times, Foxconn's general manager for China said that Mr. Sun had previously lost products "several times" before getting them back again.

Apple computer, whose popular iPhone is widely copied in China, isn't the only foreign handset maker to suffer at the hands of counterfeiters. Knock-offs of Samsung, Nokia and Motorola products are all sold openly throughout China.
According to U.S. Customs and Border Protection, 81 percent of all counterfeit goods seized at the U.S. border were from China. The value of those goods rose 40 percent in 2008, to $221.7 million.

"Mainland China is the riskiest place for foreign firms to introduce their leading-edge technologies," said Steve Vickers, president of Hong Kong-based FTI-International Risk. "It remains a major problem."

A recent visit to the Golconda Cyber Plaza, a sprawling electronics mall in Shenzhen, suggests the scale of the challenge. Hundreds of vendors were showing off their knock-off mobile phones, including counterfeit Nokia and Samsung handsets, and the latest Apple iPhone, which was selling for about US$63, far cheaper than the US$579 charged on Apple's Hong Kong online store. "The iPhone quality is good and quite steady," said Li Jinhui, a salesperson with Shenzhen Guanghui Communication, one of the phone sellers, pointing at one of the counterfeit phones on display. "The real phone price is too expensive, so many people buy this instead."

The copying takes several forms. In some cases, companies copy phones already on the market. In others, local suppliers of foreign companies run extra shifts and sell the surplus goods on the side. Then there are the designs that get stolen even before production. This last form may be the most damaging, since it undermines costly efforts to build anticipation about upcoming products.

Theives have become adept at exploiting weak points in companies' security arrangements. According to Nicholas Blank, an associate managing director with security firm Kroll, the typical Chinese factory is protected only by guards who check the IDs of employees entering the facility.

"Unfortunately, in most of these schemes where intellectual property is stolen from a factory, it's not someone breaking in," said Blank. "It's usually an employee or a contractor who already has access to the facility." Even where internal security is more elaborate, counterfeiters may be able to identify which employees have access to product samples and bribe them. "If you wanted to know what a company's next design would be, you can pretty well target those in the OEM organizations who are holding the prototypes," said Chamorro. "It's not rocket science to throw money at them."

China's legal system hasn't helped matters. Intellectual property cases are hard to bring and even harder to enforce, according to attorneys. One problem is that China's criminal code specifies a minimum value for seized goods in order to trigger criminal action -- seizures worth less than 50,000 yuan ($7,330) aren't prosecuted by the police. Counterfeiters have responded by limiting the size and value of their shipments.

Another worry is that anti-piracy enforcement may have weakened during China's economic slowdown. According to a report by the International Anticounterfeiting Coalition, coalition members have been told by local police that they were under instructions not to pursue criminal cases against counterfeiters. "Overall, we've seen a deterioration," said one Hong Kong-based lawyer who declined to be named. "There's a lot of concern that the government has openly told local forces not to pursue as many cases because of the impact it might have on jobs and social stability."

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