Friday, July 10, 2009

Copyrights in China.

Last week a friend of mine who spent a few years in Beijing and Chongqing approached me about a business proposition in China. A colleague of his plans to open a rather simple operation in China that involves drawing locals in to an internationally popular trend. The idea found success in the US and in Europe. This colleague has contracts around the developed world doing his business successfully and with minimal competition. His business, though not complex, is well-run and smoothly functions as a source of income for both him and the people with whom he does business.

My friend told me about the proposition because he knows I'm building a career helping businesses understand how to best approach initiating or improving their business in China. As he told me of this great idea that was already a proven, successful model in other free market economies around the world, he had a look of skepticism on his face. He said it was risky, and that China was different than the other countries his colleague mentioned.

I agreed. As he was telling me about the business model I could see one glaring flaw. Intellectual property rights in China don't function with the same level of legal support that they do in, say, France or Germany. Because the model was fairly simple and functioned as a way to bring people into businesses where they would spend money while participating in the colleague's organized association, it would be difficult to protect the idea as unique and copyrighted. What would prevent local entreprenuars from shamelessly copying the model, promoting it themselves at a lower price, and still making a great profit by delving deeper into the market than the original, western-owned business could have gone?

I didn't feel, and neither did my friend, that the colleague had a realistic understanding of the culture and buinsess environment in China. If his business proved successful in, say, Shanghai, it would only be a matter of months or even just weeks before a competitor popped up with a nearly identical, cheaper model that started stealing his business and cut off its expansion. Taking the issue to court would be difficult. Just look at Chery Automotive and GM as an example.

In 2000, Chery, a government-owned auto company from Wuhu, Anhui province, was in discussions to buy struggling Daewoo. The purchase was never made, but a year later Chery began producing the QQ, which looked like a carbon copy of the Daewoo Matiz, which was contracted for production by GM when it acquired part of Daewoo in 2003. In China, the GM Matiz was marketed as the Spark.

GM sued Chery in Chinese courts for copyright infringement. Chery claimed they designed the QQ independently, and the case was decided in favor of Chery even though GM showed that with no modifications, the QQ's doors could be transferred to the Spark with no modifications. Chery's QQ is much cheaper than GM's Spark, and is out selling the Spark by a large margin.

In addition to rip-offs and copyright infringement, there are specifics to Chinese copyright law that differ from US standards. For example, when McDonald's went into China, they copyrighted their logo for the restaurant industry and a few other food and food container related industries. They did not copyright their logo for the jewelry industry. So across the street from McDonald's on the famous and highly visible Wangfujing Street in Beijing, the Jewelry and Jade Garden popped up with its triple-arch logo. Whether they are copying McDonald's and diluting its brand recognition is irrelevent if McDonald's never registered its name and logo with China's jewelry industry.

China also has a vibrant knock-off fashion and pirated DVD industry. The government makes perfunctory displays of force in stopping the pirated DVD and rip-off fashion industries, but they don't make much of a dent. There is a reason for this. In some small towns, removed from the booming economies of Shanghai and Guangzhou, the DVD copying industry or faux Abercrombie rugby shirt industry might be the only production facility in the city. Without a legitimate business available, closing the DVD factory might thrust a large chunk of the population into poverty.

China wants a piece of whatever pie is available domestically. Its legal systems will look favorably on their own domestic businesses when challenged by the big or small international interests. It's important to get everything in writing and copyrighted long before entering the Chinese market. Once a company gets in and takes off, it should be prepared to defend its copyright in cities around the country. It should be ready to accept some dilution of its brand and some copying of its product by small knock-off operations and keep in mind when pursuing legal action may not be worth the expense.

Thursday, July 2, 2009

China's Western Development.

China's government, though extraordinarily stable in comparison to most of its tumultuous history, still faces challenges to its continued legacy.

There are restless people in the provinces of Xinjiang and Tibet. There are small riots over oil rights when small local governments ignore farmers' legally defensible claims because they know Beijing is too far away and too preoccupied. There are safety issues with coal mines. The Yellow River is nearly dry year round in the arid north. Pollution runs rampant. The poor remain exceptionally poor in comparison to wealthy entrepreneurs in chauffeured BMWs. One needs only jump on a train for 45 minutes from Shanghai to Anhui province to witness the stark transition from opulence to squalor.

The greatest challenge for the central government, however, has got to be the lack of infrastructure and stability. Migrant workers, as has been the case since the mid 90s, travel from cities and farms all over western China to work in construction and manufacturing on the coast. These workers move annually to cities around centers like Shanghai and Guangzhou to make quick money at stable jobs and send it home to their families.

As the recession hit, the central government faced a problem that needed immediate attention. Farmers from poorer provinces like Sichuan and Shaanxi returned from Shanghai this past Chinese New Year having been told that their jobs, and the factories they worked in, would no longer be in operation when they returned. This has happened with increasing frequency as the globalized economy that made China the world's manufacturing and assembly center suddenly stopped spending money. In addition to the slowdown and loss of work, the farmers returned to their homes knowing they could not farm their own land, which in many cases they leased out to larger local operators. The money they got from the lease was insufficient to survive on, and they needed work where there was none.

Over the past year or so, Chinese soldiers and police have been at the train stations every day, meeting these immigrants as they returned to their homes with no prospects and little hope, and asked them whether they had plans. If the answer came back "no", they were handed a shovel and told to take a job with the government building roads, upgrading train stations and tracks, helping with airport remodels and construction, or doing other infrastructure-related work.

China has chosen to combat the recession with a USD $586 billion stimulus package that focuses on development of its western and central regions. Moving development inwards has been long overdue. It will prove beneficial to the country for multiple reasons:

  • Locals who moved from cities like Chongqing and Chengdu to Shanghai to work in factories now have jobs closer to home.

  • As the infrastructure of these inner, second tier cities becomes more developed, China's well-educated, stable, land-locked cities will suddenly be less of a logistical nightmare.

  • The lower logistical costs of potential hubs such as Chongqing and Xi'an will make manufacturing for export overseas and domestically a reality.

Right now China's inner, second-tier cities are utilized more for domestic production and services outsourcing than for major export operations. Should China develop its interior to the point where jobs for less-skilled laborers become available closer to home, the country will hopefully see another boom. Opening up the interior and providing job stability and increased incomes for locals should help China's domestic economy shift from upper middle class development along the coast to blue collar across the interior. When this happens, domestic and foreign companies that have already positioned themselves in the west or at least have an entry plan will find themselves ready to reap the benefits of the next stage of China's development. In a USA Today article a few months back, Ting Lu, a Merrill Lynch economist stated:

"If you want to stimulate consumption, and persuade them to buy TVs, washers and fridges, you must provide electricity, running water and TV signals. (China) needs significant infrastructure investment in rural areas."

This stimulus package will be a great start. As cities like Chongqing, Chengdu, Xi'an and Kunming become more developed, the increased domestic wealth within provincial governments should bring infrastructure further out into rural areas