Intellectual Property Concerns Aren’t Keeping Firms Out of China

Protection of intellectual property remains the biggest challenge for foreign companies doing business in China, according to executives who spoke at Wharton’s China Business Forum.

 

“If you asked me, ‘In your early trips to China, what was your standard theme with every government official you met,’ I would say it was the need for better intellectual property protection,” said Charles Holliday, chairman and chief executive of Wilmington, Del.-based E.I. DuPont de Nemours & Co. “Eventually, I realized that the laws there are pretty good but the enforcement mechanisms are less than perfect.”

 

DuPont currently operates at 22 different sites in China and reports $1 billion a year in sales from these operations. Nor has theft of intellectual properties such as patents and trademarks prevented other companies from entering the Chinese market, especially since intellectual property protection has been improved recently because of more aggressive government crackdowns.  

 

But in DuPont’s early days in China – it has operated there for 19 years – one violation was so brazen that it was almost comical, Holliday said. “When we were building our first plant outside of Shanghai, we had a contract worker who would hide in a shack every night and copy the plans by hand. It took him about two months, and then he offered to sell them to some of our competitors. One of them called us [to report this]. So I told our people there that if we didn’t have better controls, shame on us. That’s not China’s problem. That’s ours. So we put in safeguards just like we would here in the U.S.

 

Likewise, Mike McMullen, vice president and general manager at Agilent Technologies, which makes analytical instruments, remembers a trade show in Beijing where he saw “an awful lot of instruments that looked exactly like mine.” Only the insignias on them were different, and even those were similar. But as with DuPont, that hasn’t stopped Agilent, a Palo Alto, Calif.-based spin-off of Hewlett-Packard, from continuing to expand its business in China.

 

“Our strategy is to stay one step ahead in innovation,” McMullen said. That way, the copycats are always selling outdated technology. McMullen estimated that China is the world’s No. 3 maker of analytical instruments, tied with Japan, up from seventh or eighth place just five years ago. Agilent employs 800 people there.

 

For companies like DuPont and Agilent to push aggressively into China, Chinese officials will have to continue to improve enforcement of intellectual property laws, said executives on a conference panel on technology innovation. “China doesn’t need new laws,” noted Marcus Chao, supplier quality director for Delphi Automotive Systems. “The standards are well specified by the World Trade Organization. China just needs to follow the procedures. Besides, there will never be enough laws to stop those who want to break them.”

 

Chao’s company, a Troy, Mich.-based auto-parts maker, has 15 plants in China. Its sales there, growing at about 30% a year, have reached a total of about $700 million, he said. Two-thirds of the products of its Chinese plants stay in China, which has become the fourth largest car market in the world.

 

Yu-Sheng Zheng, a Wharton professor of operations and information management who moderated the innovation panel, had a contrary take on China’s intellectual-property challenges. Chinese companies aren’t copying their foreign competitors, he argued. They are learning. “You learn from the people who have done things. You don’t want to repeat their mistakes. You take a shortcut because you’re a late comer. I think if you were Chinese you’d do the same thing.”

 

“Copying is fine,” responded Chao. “But make sure you keep your business ethics. You can’t just copy everything but the name.”

 

A Fragmented Market

Panelists also shared their guidelines for success in China. Like Agilent, Delphi continues to bring cutting-edge technology into China, despite its intellectual-property concerns, Chao said. “Our strategy is a long-term commitment. We’re emphasizing heavily training local employees.

 

“There’s a gap between perception and reality about doing business with China,” he added. Too many businesspeople, for example, assume it’s a homogenous market, despite its enormous population and large geographic area. In fact, he said, it’s fragmented, as any large country would be. Companies, therefore, need to develop multiple product lines to satisfy multiple markets.

 

Too many businesspeople also assume that good relations with government officials will solve all problems in China. “Relationships are important but they don’t resolve everything,” he said. Instead, the key, just as in the United States or Europe, is technological competitiveness, which keeps both officials and consumers happy.

 

Of course, companies shouldn’t ignore their relationships with politicians. Consider another experience from DuPont’s early days in China.

 

“We had a project in the Shanghai area that didn’t initially require approval of the state planning commission because it was too small,” Holliday said. “But it went over budget by $1 million so it had to go to the commission for approval. We saw the commission as a rubberstamp and just tried to ram it through. The commission didn’t see it that way, and it took us two years to get our approvals. The lesson I stress from that for our people is, understand what the local officials are trying to do and listen to them.”

 

Overall, however, Holliday said he has found Chinese officials, especially top leaders, to be pragmatists. “I got to know the premier when he was mayor of Shanghai. I remember meeting with him once when we were trying to site a plant. His folks wanted us to go one place, and we wanted to go to another and were threatening to leave.

 

“So I met with him, and he asked, ‘How many plants have you sited like this?’ I told him. And he said, ‘Aren’t you the leader in this technology?’ And I said, ‘Yes, we are.’ And he said, ‘You probably know more about where to site the plant than we do, so put it wherever you want. But if you ever think of taking it somewhere else, you must call me first and discuss it.’”

 

Like Delphi, both DuPont and Agilent believe in investing in local talent and, as much as possible, buying materials locally. And both companies have found that China’s reputation for making only high-volume but low-quality goods is unfounded. “We have found that our manufacturing defect rate is lower in China than in the U.S.,” McMullen said.

 

DuPont, for its part, originally saw China as merely a huge market for its products but increasingly it is buying materials from there, too. “Last month, we were trying to source a heat exchanger for a plant in Alabama, and we found we could do it for less from China,” Holliday said.

 

Holliday has been impressed most by the zeal and quality of the people whom DuPont has been able to hire in China. “I visited our office in Beijing when we had only six employees. At my first dinner that night, I asked everyone why they had joined us. When I got to the woman sitting on my right, she said, ‘Because my mother told me to.’ I said, ‘What’s your job?’ She said, ‘I’m the receptionist.’ I said, ‘What’s your training?’ And she said, ‘I’m a medical doctor.’

 

“She had been an outstanding medical student and had received a scholarship to study in the U.S. just before Tiananmen Square. But after that, her visa was revoked, and she couldn’t finish her training,” Holliday said. “Her mother had heard the name ‘DuPont’ and said, ‘That’s a good company. Go work for them.’”

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