For better or worse, this will likely be the first of many columns addressing IPR issues in China. In fact, the key reason for not doing software development in China has to do with IPR. It's not about English-language skills (even though they're much worse than most imagine; don't believe the hype from China's government or the drivel from American “tourist” executives fooled during visits to elite Chinese universities), it's not about technical capabilities (in hard skills sans apps integration, China can easily match India; only in soft skills like project management does India do better).
For our sector, there is an adequate supply of English-capable (I didn't say “fluent”) engineers. And, let's be honest, at the grad level, China's technical universities absolutely kick India's butt. (Once again, back to my “China vs. India” thread.) What about cost issues? I laughed when I read about Indian firms complaining about high costs in China. The joke is on them (re: TCS, among others), which I'll explain in a forthcoming column, “Why the Indian Globals Will Fail in China” (working title). Cost isn't an issue. It may not be as cheap in Beijing, Shanghai or Shenzhen as some American firms would like, but it's still cheap compared to numerous global alternatives, and let's not forget that BJ, SH and SZ are not the only options in China. So it's not about English or technical skills, or costs. It's really about IPR.
IPR: A Real Concern in China; “IPR Week”: A Total Sham
Fortunately, IPR protection is a recurring them in China's tech policy press: It's recognized as the greatest bottleneck to innovation in China. To some (re: many Americans), China makes a good living by copying others. But within China's tech policy community, there is an understanding that China can't continue to copy and must invent its own technology. China also knows that if it wants to attract FDI in high tech sectors, they need to address IPR issues, although foreign concerns are not the driving force behind advancements in IPR protection. So what's the driving force? Answer: Protection of domestic innovation, i.e., innovations by Chinese companies within China's borders.
“IPR Week,” on the other hand, is much more for show to Westerners. For example, there was a disproportional amount of coverage on “IPR Week” in China's English-language press (e.g., China Daily) versus in China's leading national and trade dailies. China's tech policy daily did mention “IPR Week” on its front page, but it was the shortest article on its front page; it was supplemented by a nearly identical article (written by a different author) buried on the last page of that particular edition. But CCTV showed a crowd of thousands interested in learning about IPR. Gotcha!! In fact, the camera showed maybe just a dozen or so ... at most. Hardly a pressing issue on the Chinese psyche.
However, there was one fascinating article on IPR protection that was the lead article in another edition of China's tech policy daily this past week (i.e., during “IPR Week”). It was a report on a conference session held in Beijing that featured five companies from south China. Their topic: How Western firms abuse IP laws to keep Chinese companies off their domestic turf!! Bottom line: According to the Chinese, foreign companies and countries bully Chinese companies by taking advantage of their domestic court systems, challenging Chinese firms with Section 337 actions. Well, this is certainly one way of looking at the world.
One problem with IPR protection in China is a lack of knowledge about IPR fundamentals. Often Chinese firms don't know what is legal, what is illegal. For example (as this is good one), many Chinese companies really don't know that they can't use existing technologies still under patent protection to create a newer technology without paying royalties to the patent holders of the existing/core technologies. This absolutely stuns the Chinese.
However, the biggest impediment to IPR protection has nothing at all to do with the WTO, WIPO, or the legal systems in China or the United States. Fact is, the greatest challenge to IPR protection in China is culture. The anecdotal consensus among mainlanders is that it will take a couple/three generations (yes, generations) for Chinese to fully appreciate IPR. The key problem is that Chinese people don't perceive that they're doing anything wrong when they use/borrow/steal someone else's IP! I give a lot of credit to the Chinese government for taking a gazillion steps in the right direction. But, sorry Beijing, you can't easily legislate cultural habits (although turn the clock back 40 years and maybe they think it's still doable).
Who Says That Watching “24” is a Waste of Time?
Want to enter the China market? Good for you. Think you can do it without using Chinese service providers? You're in for a big surprise. Sure, you can service MNCs in China without too much interference from some entity of the Chinese government. But if you have grander visions of broader market penetration, you might already know that there are unwritten rules to playing in the China market. (In some ways, India can be much worse. Think retail in India. But this column is about playing in China's sandbox.)
Some American firms believe that they can best control their IP developed in China by running a captive operation. Probably true, although not likely the best way to start. Either the captive operation would be too small to matter or there would be too much risk in launching a significant development operation. ODCs – offshore development centers – are a better way to go. Our firm does this: One of our offerings is to help American ISVs set up R&D or software development ops in China, starting with an ODC, often staffed with Tsinghua grads, coupled with a BOT (Build-Operate-Transfer) option that enables the ISV to flip a switch and turn the ODC into a CDC – captive development center. Enough of a commercial, though.
Regardless which route an ISV chooses, it's best to take Andy Grove to heart: Be vigilant, be paranoid. This is where the Jack Bauer analogy comes to mind. Security, security, security. Physical and data. Don't take any unnecessary chances. Chinese companies tend to rely on Rent-a-Cop guards and easily crackable access cards (I know, trust me) for the bulk of their security measures. Sorry, but this isn't enough.
Physical and data security is best ensured through a combination of CCTV video surveillance, biometric access control and verification systems, intrusion detection, perimeter protection, keyloggers, no removable media, restricted Internet access, document destruction, randomized polygraph testing, counter-eavesdropping and zero-day exploit shields. Sounds like something out of Ft. Meade? Perhaps. But most of these measures are a lot easier to implement than they may sound.
For the latest government developments on IPR protection, see my recent Tech China blog post titled, “China’s Action Plan on IPR Protection (or, Why I Have “12312" on My Speed Dial)”. A copy of “China’s Action Plan on IPR Protection 2007” is included in the post. The post mentions the new Blue Book as well.
NEXT: IPR: What Beijing Wants YOU to Know
Based in China, David Scott Lewis is SVP with Startech Global Corporation, the outsourcing hub for Tsinghua University (China's MIT). In addition to his bizdev/GAM responsibilities, he authors their Tech China blog.
Originally posted on 30 April 2007 on the Sand Hill Group "Letter from China" blog.
Image courtesy of MIT.
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