How to Stop Intellectual Property Theft in China

America's most innovative industries are being robbed every day on the floors of Chinese factories. Here's how to make it stop.

William J. Jones has money worries. Of course, all CEOs worry about money, and as chairman of Cummins-Allison, a business that's been in his family for three generations, Jones frets about keeping his customers, paying his 1,000 employees, and financing his company's plans to keep growing. But Jones also worries about money itself, the physical stuff you hold in your wallet or let jingle in your pocket. He worries about how to tell the real stuff from a profusion of fakes, and he wonders whether his customers are using the best ways to check and count the money they collect. He worries that the United States isn't doing enough to ensure that the money that runs our economy is secure from the machinations of rogue foreign governments and crime rings that work every day to undermine the integrity of the dollar with counterfeits. Cummins-Allison is America's only domestic producer of advanced currency processing machines. These are the machines deployed by banks, casinos, big retailers, and the U.S. government to count and verify currency. Jones believes, with reason, that his company makes the most advanced currency processing machinery in the world, and he sees his primary job as making certain that Cummins-Allison has the culture of innovation to keep its lead.

And therein lies Jones's biggest money worry of all. Every day the company sees evidence that its competitors around the world will go to nearly any length to copy or to finagle a transfer (that is, a theft) of its core technologies. "Cummins survives," says Jones, a lean, scholarly man of 49, "by protecting our intellectual property." Jones knows he's not alone in his worries; his peers in every manufacturing sector feel the same pressure. Jones fears that America's weak efforts in taking on the world's intellectual property pirates will, over time, gut the American economy.

Jones wasn't able to make it the first time we were to meet. That was in Beverly Hills late last year at Senator Tom Coburn's hearings on China's intellectual property practices. I was invited because of the arguments I made regarding the IP issue in my book China, Inc. Coburn was interested in hearing what I had learned since the book was published last year. I went to Beverly Hills to say that the problem is one of the most serious challenges to American competitiveness and is growing worse.

The World of No-Cost Competitors

Beverly Hills had the honor of hosting the hearings because to date the entertainment industry has been the most outspoken critic of China's policies. Dan Glickman, CEO of the Motion Picture Association of America, reported to the committee that for all its success around the world, America's entertainment industry makes almost no money in China. He noted that nearly any movie available in U.S. theaters and video rental shops is for sale on pirated DVDs in China. Glickman and other witnesses offered a sobering picture. Much of American industry has seen its trademarked, patented, copyrighted, and otherwise proprietary products get copied in China. Globally, the trade in pirated and counterfeit goods rakes in more than $500 billion annually. Chinese factories are responsible for as much as 70 percent of the world production of bogus goods.

Word was that William Jones had some chilling tales. Candor in this area is unusual; public silence is the preferred stance of most companies that have problems preserving the integrity of their intellectual property. In preparing for the Beverly Hills hearing, I talked with an executive at the Society of the Plastics Industry, a trade organization whose members tend to be smaller, owner-run firms. This executive told me that one of the group's members was recently negotiating in China with a potential partner. The Chinese partner simply refused to offer any assurances that the American company's proprietary goods and methods would be safe. When I asked for the name of the aggrieved American company, I was told it would be too dangerous to the company to have its name mentioned at the hearings. The perception is that complaining loudly about anything that pertains to the Chinese government will lead to penalties, overt or otherwise, that will place companies at a disadvantage in present or future dealings with China. Jones was willing to be a lone voice because he had concluded Cummins-Allison was better served by staying out of the Chinese market. There is a price to his advocacy, however: displeasure among the significant number of American executives who believe public criticism of China hurts American business interests broadly and helps more accommodating foreign competitors gain favor with Chinese officials.

China's telecom giant, Huawei Technologies, grew into a multibillion-dollar competitor by stealing technology as its rivals stood by outraged and helpless.

Jones would have been at the Beverly Hills affair, except that he was stuck in Texas at a hearing for a suit Cummins had brought against an alleged Japanese infringer. (The Japanese company settled for $20 million.) His absence in Beverly Hills left the spotlight on the entertainment industry. Its concerns are legitimate and merit action, but the harm it suffers is but a small part of the damage being done to the American economy. The true harm comes not from Chinese consumers buying cheap entertainment but from Chinese companies acquiring world-class technology at little or no cost and then, once enriched, going head-to-head with foreign competitors that remain saddled with paying the legitimate cost of technology. China's telecommunications giant, for example, Huawei Technologies, grew into a multibillion-dollar competitor by stealing the technology of advanced rivals, which stood by outraged and helpless. Huawei has never admitted anything, but when it reached a certain size it began settling with those rivals--it settled with Cisco Systems when it decided to open shop in the U.S. American telecoms compete with Huawei all over the world today.

IP theft also serves to throw up a trade barrier. How many companies avoid the Chinese market because they fear they could lose their most valuable assets, their intellectual property? That fear prevents American businesses from wading into the world's fastest growing economy with valuable products they would otherwise be enthusiastic about selling.

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