HOW THEY SEE IT Intellectual property at risk in China

By MICHAEL DAVID and KEVIN RIVETTE
KNIGHT RIDDER/TRIBUNE
Despite China's low wage rates and massive, fast-growing markets, more than 60 percent of companies responding to a recent survey by KnowledgeWharton felt they weren't organized enough to face intellectual property challenges in China. This result is not surprising, because China remains an intellectual property minefield, full of risks.
Although China has adopted intellectual property laws modeled on the international standards developed by the World Trace Organization's 1995 Agreement on Trade-Related Aspects of Intellectual Property Rights, and has signed most international treaties governing the protection of patents, trademarks, copyrights and other forms of intellectual property, in practice the laws are frequently ignored.
Little is done to protect intellectual property or enforce property-rights laws because China needs these processes, technologies and inventions to fuel its economic engine and maintain its push into global markets.
If companies are not careful, the risks can far outweigh the benefits. In fact, all manufacturing firms that take their business to China -- and even those that choose not to -- run the risk that their intellectual property will end up in the hands of potential competitors.
In view of this risk, U.S. companies need to ask some critically important questions before aggressively moving into the Chinese market. For example, how much of the company's global revenues would be jeopardized if a key product or process were ripped off? And how vulnerable to duplication are the company's products, operations and supply-chain?
Companies should not assume that the U.S. government will be able to persuade the Chinese government to adopt Western attitudes toward intellectual property protection or that U.S. agencies will go to bat for them if their rights are violated. Companies with enormous clout may be able to muster some action from Washington, but these efforts will not necessarily be successful. Most companies -- large and small -- should be prepared to fend for themselves.
Of course, it may be worthwhile to give up some measured amount of intellectual property in exchange for dramatically lower costs and huge markets. The challenge for corporate executives is to reap the benefits of playing the China card without inadvertently creating competitors that will use their companies' own technologies against them.
Rapid globalization
During this era of rapid globalization, every company doing business in China should have a strategy for protecting the processes, innovations and licensed technologies that are critical to its brand.
In fact, most companies doing business in China would be wise to establish an internal organization whose primary role, if not sole function, is intellectual property protection. When doing business in China, it is far better to prevent violations through scrupulous protection and vigilant monitoring than to seek recourse after a violation has occurred. After the proverbial genie is out of the bottle, it may be too late.
The internal IP organization should lose no time in registering the company's patents, both at the Chinese State Intellectual Property Office and globally. This may be the best defense against intellectual property theft.
This organization also should be charged with managing technology transfers with local partners and setting up a security system to guard against espionage and theft.
In the end, every company thinking of outsourcing to China will need to do a meticulous cost/benefit analysis of the trade-offs involved. A key element in this analysis should be a comparison of the risks in China with those in India, Mexico and other, comparatively low-cost countries. In some cases, the best option will be to keep certain operations at home, where intellectual property is easier to protect.
Fortunately, intellectual property is an endlessly renewable resource, fueled by innovation. But it is also extremely fungible.
X David Michael is a vice president and director of The Boston Consulting Group in the firm's Beijing office. Kevin Rivette is an executive adviser to BCG, based in San Francisco. Distributed by Knight Ridder/Tribune Information Services