For many entrepreneurs and business owners in the United States, the opportunity they see in China is one of potentially great rewards but also the chance for catastrophic risk.
As the world’s most populous nation, China tempts businesses with the lure of more than a billion consumers. But the risks are also front and center—China is rife with copycats looking to steal an entrepreneur’s invention, idea or innovation. The list of products and services targeted by Chinese counterfeiters is nearly endless: medical devices, movies, leather goods, watches, auto parts, software, shoes, batteries. And Chinese and U.S. companies have been in a near-constant state of competition over patents and trademarks.
Just ask Apple, which this summer lost a patent dispute with a small Chinese smartphone manufacturer.
Statistics on Chinese piracy of intellectual property show the staggering breadth of the problem. About 20 percent of all products sold in Chinese consumer markets are counterfeit, according to the U.S. Embassy in Beijing. And the problem persists outside the Chinese jurisdiction; China was the top one source of counterfeit products seized at U.S. border stops in 2015.
But China does not have to be a minefield for new business entries, according to advisers. As long as a business owner methodically completes several steps, it’s possible to make a successful run in China without having your assets taken from you. Perhaps most importantly, the Chinese government wants this to happen, as it tries to help its economy evolve from a manufacturer or distributor for businesses in other countries to becoming a leading innovator, says Karen Wong, an attorney at Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif.
“Healthcare, consumer electronics, you name it—they’re all eyeing China as a market,” she says. “They’ve put so much emphasis on innovation and entrepreneurship, and they want to know that their product is protected in China.”
The issue for many companies is that a huge part of their value is tied up in the form of intellectual property, which by definition is an intangible asset. A patented invention, trademarked content or an innovation in industrial processes—all these fall in the category of intangible property or an intangible asset, says Dan Harris, an attorney at Harris Moure in Seattle and author of the China Law Blog.
“This includes everything about your business that has value that cannot be reduced to a physical asset or to a monetary cash flow,” except for accounting tools like goodwill or marketing concepts like a brand’s reputation, Harris says.
The issue is that, in the 21st Century and the era of online communications and social media, many companies’ primary assets are intangible.
“Consider the stars of the modern business world: Apple, BMW, Microsoft, IBM, Boeing, Siemens, Nestle, General Electric, Dow Chemical, Starbucks, Amazon and SAP,” Harris says. “Huge portions of their value are in their intangible assets.”
"Before any U.S. entrepreneur tries to do business in China, his or her first move should be to register their product, invention or concept with the appropriate Chinese government agency."
Thus, setting up shop in China is a different beast than hanging out a shingle in America. Before any U.S. entrepreneur tries to do business in China, his or her first move should be to register their product, invention or concept with the appropriate Chinese government agency, Wong says. After all, intellectual property rights are nation-specific and don’t follow their owners across international boundaries.
“Having a patent in the U.S. has no bearing in China whatsoever,” she says.
Patent applications for both core and ancillary technologies should be filed with China’s State Intellectual Property Office, according to the U.S.-China Business Council. Applications should be translated into Chinese. For trademarks, companies should register their English name, Chinese character name and Chinese pinyin name with the China Trademark Office.
The U.S. Embassy in Beijing warns business owners to not be fooled into thinking it’s not necessary to take these steps because of China’s involvement in global IP-protection initiatives. After all, China is a member of international IP protection organizations, such as the United Nations’ World Intellectual Property Organization, and it’s an official party to international IP agreements, including the Berne Convention for the Protection of Literary and Artistic Works.
But the problem is real. Look no further than the name of the website of the U.S. Department of Commerce’s International Trade Administration, which hosts webinars to advise businesses in IP protection in China: www.stopfakes.gov.
Perhaps because of the reputation that it has developed for IP piracy, the Chinese government has taken steps to show that it’s trying to fight counterfeit products. Customs agencies from both the United States and China in 2015 signed an agreement to exchange resources to track counterfeiters, such as sharing information on commodity descriptions and shipping container numbers. The two nations also have the U.S.-China Joint Commission on Commerce and Trade, which was formed in 1983 and issues yearly recommendations on how to improve trade and IP protection.
Cross-border cooperation, in fact, seems to be one of the best defense measures that can be taken to stop fake products. One such example was a venture formed in December 2015 by Lyft, the U.S. developer of smartphone applications for finding car rides, and its Chinese counterpart, Didi Chuxing. The two companies had an IP arrangement allowing consumers to use Lyft to order cars in China, or use Didi to order cars in the United States without one company infringing on the other’s patents.
“Those are global operating efficiency improvements,” Wong says
(The Lyft-Didi partnership has since come into question after Uber announced this summer that it would merge with Didi.)
There are still plenty of trap doors for the U.S. entrepreneur. Chinese counterfeiters have become much more sophisticated, even as the U.S. and their Chinese partners improve their own business practices. Chinese copycats have become more adept at exploiting procedural loopholes and invalidating legitimate patents and trademarks, according to the U.S.-China Business Council. They have also developed advanced methods of reverse engineering to effectively co-opt a patent or trademark.
Intellectual property theft is also a concern in other Southeast Asian countries, though not necessarily to the extent of China’s problem, Harris said. Taiwan, like China, has a highly advanced economy that’s based in large measure on manufacturing products for international companies that hold the actual patents.
“Taiwan has a better legal system than China and for that reason actual IP theft is less of a problem there,” Harris says. “But the failure to register for protection is every bit as much of an issue there as in China.”
The message, then, is clear that U.S. companies can’t fly blind when it comes to using intellectual property when doing business in China. Whether a company wants to tackle the market by itself or in partnership with a Chinese company, it must register with local authorities, Wong says.
“If you don’t have IP protection in China, it’s almost a turnoff for a Chinese company to collaborate with a U.S. company,” she says.
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