Industrial piracy and counterfeiting are among the major risks faced by companies doing business in China, according to a study on intellectual property protection by Roland Berger Strategy Consultants.
"Piracy of one kind or another is infused throughout the Chinese economy and it will likely get worse before it begins to get better," said Mahesh Lunani, a partner based in Roland Berger's Detroit offices.
No industry is immune, yet some are more afflicted than others -- automotive parts, for example. Surveys cited by Roland Berger found that 56 percent of vehicle users in China found counterfeit components in their vehicles. Most batteries produced in China, for example, are fake versions of established brand names.
The study, "Intellectual Property Protection in China," analyzes industrial intellectual property (IP) violations and protections, and focuses on engineered products rather than the entire gamut of goods subject to piracy. It includes a survey of leading multinational corporations (MNCs) operating in China from industries including automotive, sanitary products, chemicals, telecommunications equipment, semiconductors, batteries and construction machinery.
"Based on our survey results and our own experience, we recommend that companies employ multifaceted and ongoing protection processes to avoid serious and sizable losses due to piracy," said Eugen von Keller, a partner in Roland Berger's Shanghai offices. "We found that most MNCs commonly use the least effective methods for protecting intellectual property and often fail to keep aspects of their production processes secret."
The Roland Berger report notes that companies operating in China should not place their complete faith in any single remedy: "For those seeking that definitive checkmate in the IP game, let us be perfectly candid: there is no such move, and there will be no such move. There is, however, hope for progress. More than 80 percent of respondents expect the protection of intellectual property in China will improve in the medium to long term."
China's enormous and still growing industrial production capacity magnifies the global threat of intellectual property piracy.
The study points out that China's central government is working diligently to remedy a traditional lack of regard for commercial property protection. In recent years, for example, the government has modernized trademark, patent and copyright laws in line with international standards. Yet lacklustre enforcement by local officials in many areas, say the authors, has largely nullified these advances.
Additional findings of the study include:
* A majority of multi-national corporations recognize the importance of IP protection and have formulated protective policies.
* Most firms fear external rather than internal threats, yet the danger of a subtle pick-off of valuable intellectual property by a business partner also is seen as very high. Less worrisome to high-end manufacturers is the scenario in which an employee leaves the company with blueprints and opens a competing factory across the street.
* Multinational corporations in China recognize that the protection of manufacturing processes is often more effective than legal remedies or human resources incentives. Currently, high employee turnover limits the potential of HR incentives, and legal remedies lack both a culture of compliance and consistent enforcement.
* Most commonly, legal professionals or committees are placed in charge of intellectual property protection; in only a few cases does responsibility rest with top management.
Creating viable defences against IP piracy will involve the entire organization, Roland Berger suggests, rather than selected units. Roland Berger advises that top management take charge of protection procedures and delegate tactical responsibility in umbrella-like fashion throughout the organization.