In testimony before a U.S. House subcommittee last year, the General Accountability Office presented in no uncertain terms the growing risks U.S. intellectual property faces as firms grow increasingly global (see the February 2008 cover story, "The IP Wars," for a fuller examination of these risks). "High profits and technological advances have also increased the risk of IP infringement by making counterfeiting and piracy more attractive and easy to conduct," the GAO report says. "The seriousness of these risks has been exacerbated by weak enforcement in some countries, particularly China."
These risks have not stopped U.S. manufacturers from flocking to China, lured by both its booming economy and a low-wage workforce. And while completely eliminating the risk of IP infringement seems unlikely, certainly mitigating those risks is within reach. Tim Moore, director and CEO of Sagentia Hong Kong, a Hong Kong joint venture between product development company Sagentia and Chinese manufacturer AML, offers the following suggestions:
- "Consider Hong Kong as a starting point for entry into China. The legal and cultural framework in Hong Kong provides the most secure IP environment in China. While the Chinese government is following a more market-oriented social and economic policy, and has introduced legislation for the protection of IP, it will take longer to change the culture on the mainland.
- "Choose business partners immersed in the culture. Use the understanding and introductions that come from partnering with people -- either native or expatriate -- who are immersed in the local business culture. Companies that assist Western firms with manufacture, design and development depend on a reputation for IP security and staff experienced in the values and culture of their customers. Look for 'blue chip' brands on their client list; this can act as a safeguard. And, remember this is a partnership, so personal relationships matter, especially in China.
- "Understand the structure and potential pitfalls of relationships you enter with Chinese firms. Chinese manufacturers fall broadly into three categories -- OEM, ODM and OBM -- with each affording different protections. There is limited risk to your IP if you select the right OEM (original equipment manufacturer), with a business which depends upon securing outsourcing contracts from Western firms and offers the right systems and procedures for IP protection. With ODMs (original design manufacturers), which manufacture your product and assist with product design and development, you specifically pay for the design and development work and protect 'your' IP with appropriate contractual arrangements. An OBM (original brand manufacturer) is often a spin-out from an ODM, and produces and markets products under its own brand, sometimes basing the design on what the ODM has developed for Western customers -- so making sure you have contractual rights to all IP is essential in this instance.
- "Don't overlook practical measures to ensure protection. Such measures as excellent IT security and dividing work between firms or departments -- to ensure as few people as possible have access to a complete product design -- are sensible precautions which your supplier should have in place. Outsourcing manufacturing of components to a number of different companies in mainland China, and then assembling the completed product in Hong Kong, where the culture and the legal system provide stronger protection, is an option followed by many Western companies.
- "Address quality assurance and cultural considerations. Review training that is provided and keep an eye on staff churn, plus the measures in place to reduce it, e.g., knowledge training on IP for staff and partner companies. Keep quality and assurance in-house and don't squeeze budgets. Tight budgets can backfire and affect quality in a culture that says 'yes' when the answer should be 'no' and can lead to product quality problems."