China rule change raises IP theft concerns

The threat from China’s theft of intellectual property is expected to grow worse over the next seven months, as the country begins lifting restrictions on what indigenous companies can export. Meetings were under way this week in Beijing and Washington, D.C., between industry groups and government officials in both countries to develop a plan to combat the problem. But executives involved in those meetings are skeptical that the problem will be solved anytime soon.

The problem, many say privately, is that China is far from a single political entity. Tough laws can be implemented at the national level and be ignored at the local level, where enforcement is supposed to occur. And unlike Taiwan and Japan, which had their own IP theft problems in past decades, China is so vast that enforcement is a daunting problem. “They will put great things on paper,” said Tim Trainer, president of the International AntiCounterfeiting Coalition, a non-profit industry group based in Washington. “China is making verbal commitments about what it will do between now and the end of the year for copyrights, trademarks and patents. But industry is waiting to see. We have not seen a lot of criminal actions to deter criminal activity.”

Trainer said that until now, the Chinese government had a lock on which companies could export. He said that when those restrictions are removed, the big fear among large companies that have been doing business in China is that theft of intellectual property will now become a global issue instead of one that stays within China’s borders.

“The central government can make laws, but implementation at the provincial level is the problem,” Trainer said. “If they don’t clean it up, industry will have to make some hard decisions. They will have to consider alternate locations.”

One area that has been gaining consideration by electronics manufacturers is Eastern Europe, particularly those countries that are slated to become part of the European Union, where intellectual property laws are extremely well defined and enforced. But controlling IP theft by moving operations or building new ones in various locations is only part of the problem with China.

Once China begins opening the doors on indigenous exports, the supply chain is expected to become flooded with counterfeit parts.

Two years ago, the industry got the first taste of that problem with counterfeit chips and faulty capacitors. Sorting through what’s legitimate and what’s not will add to the cost of doing business in a global market, and it will make it far more difficult for end product companies to control quality throughout the supply chain.

Dan DiMase, president of independent distributor SemiXchange and a director of the Independent Distributors of Electronics Association (IDEA), said the list of knock-offs goes well beyond just electronics. He said the list of products being counterfeited ranges from golf clubs to toilets to motorcycles. But electronics components may be the hardest to identify because of their small size.

“The problem is that now they’re getting access to global markets,” said DiMase. “They’re getting rid of the government agencies that oversee this and privatizing it.”

IDEA believes at least part of the problem can be dealt with by implementing best practices. The group has developed a six-page document on how to combat counterfeiting, and it has asked its members to submit their receiving and shipping procedures for review. But controlling the problem costs money, because it requires vigilant inspections of all goods that are bought.

“Now you have to verify the source,” said DiMase. “It’s a lot more time-consuming. And you have to verify that the shipments are good in the first place.”

He noted that his group has been trying to get electronics manufacturers involved, but so far they have resisted because they don’t want to get involved for reasons ranging from quality control to bad publicity.