China Intellectual Property Theft. The Statistics Are Damn Lies.
PC World Magazine has an excellent article on the costs of intellectual property (IP) violations in China. The article is entitled, "US Panel Looks at Intellectual Property Violations in China," and what it essentially says is that the value of China's stolen IP has been grossly exaggerated.
The PC World article was written on the heels of a recent meeting of members of the U.S. International Trade Commission (USITC) on "how to measure the effect of copyright and other intellectual property infringement in China." The article starts out by pointing out the central flaw flaw with typical industry numbers:
The estimates of monetary damages released by many U.S. industries often assume that a pirated copyright of a product like software or a music CD blocks the sale of an authorized copy, when that may not be the case, said Fritz Foley, a professor in the Harvard University business school.
"It seems a bit crazy to me to assume that someone who would pay some low amount for a pirated product would be the type of customer who'd pay some amount that's six or 10 that amount for a real one," he said during the first day of a two-day USITC hearing on the impact of Chinese intellectual property infringement on the U.S. economy. "Be careful about using information the multinational [companies] provide you. I would imagine they have an incentive to make the losses seem very, very large."
Let's get things straight. The woman who pays 70 RMB (approximately USD$10) for a badly made fake Gucci purse is not the same person who contemplates paying USD$1,750 for the real thing.
The article then discusses movie pirating and how that may actually help the United States:
Although the U.S. movie industry is hurt by copyright infringement in China, the U.S. may benefit in other ways....Some U.S. workers may be employed by companies counterfeiting products in China, some U.S. companies may sell raw materials used by counterfeiters, and some counterfeited U.S. entertainment products may spread democratic ideals in China....
Counterfeiting in China is a huge problem, but let's get the numbers straight.
Comments (18)
Read through and enter the discussion by using the form at the endmister skedge - June 23, 2010 8:43 PM
"Although the U.S. movie industry is hurt by copyright infringement in China, the U.S. may benefit in other ways....Some U.S. workers may be employed by companies counterfeiting products in China, some U.S. companies may sell raw materials used by counterfeiters, and some counterfeited U.S. entertainment products may spread democratic ideals in China"
Right, and unemployed bankers are building my new condo on that piece of lunar real estate I bought online from of all places, China.
David - June 23, 2010 8:46 PM
I don't know the details of the discussions that happened at the panel. Did it suggest an alternative way to calculate the damages? It's obvious that multinationals exaggerate the numbers and I can think of several estimates that are better. It's just annoying that these companies don't come up with better ways to calculate these damages themselves.
Shaan - June 24, 2010 3:04 AM
I suppose you could argue that the woman who buys a 70rmb knock-off Gucci could be the same person who buys a $1700 Gucci, IF she had the means. Not sure how true it is, but I've read that Chinese women would absolutely choose the real thing if they could afford it.
Such reasoning might not apply to films and music, however, since the knock-offs are almost indistinguishable from the real thing.
James G - June 24, 2010 6:56 AM
Absurd. As if Disney or Warner Brothers exists to "spread" democracy."How much does democracy pay? Is this what we've come to with journalism in the U.S.? That entertainment companies exist as the propaganda arm of the U.S. government? That a professor would say that is amazing, and that the article's author (and editor) would let it see the light of day is even more amazing.
As for the idea that people who buy pirates of some software wouldn't pay full price, that is certainly indisputable for big ticket items. But apart from software, would anyone be so accepting of counterfeiting in other areas? Counterfeit food and pharmaceuticals are a big problem and a even bigger health and safety concern in China. Doesn't a culture of "wink and nod" counterfeiting contribute to this?
Maybe some companies are fudging the numbers to make themselves look more ripped-off than they are. But that hardly means there is this robust and healthy side to counterfeiting... except some immediate gratification for consumers who buy this stuff.
Why do people feel that it's okay that Microsoft gets ripped off because their software is "too expensive"? Should fake Apple products be everywhere, or pirated version, because the price of an iPod or iPhone is out of reach of most Chinese? I mean, Sun's Open Office Suite is completely compatible with Office, and you can get the full suite in simplified Chinese. It's wonderfully simple to use. So really, the idea that anyone "truly" has to have a pirated version of Office... it doesn't fly.
There are a lot of other illegal or "look the other way" industries (use your imagination) that employ Americans, and lucratively so. Is this the cornerstone of a healthy economy, any job is a good job?
Horrible article.
Rick Martin - June 24, 2010 9:03 AM
There was a report earlier this year by the US Government Accountability Office that also cast doubt on inflated damage claims of copyright owners:
"Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods" (google docs link: http://bit.ly/GOAreport )
Chris - June 24, 2010 6:49 PM
Overlooked in all this is the impact of counterfeiting on domestic industries. With pirated books and DVDs (plus all the online pirated content), domestic media and publishing are having a difficult time developing. Bookshops appear full of people browsing but very few buying. Where consumers are buying, it is via heavily discounted online portals such as dangdang.com. Cinemas are doing well out of a small number of blockbusters (mostly imported) for which consumers are willing to pay in the occasional splurge. On most of my cinema visits, very few people are watching. With DVDs at RMB5 and online content free, and with pirated books on every streetcorner (99% of which are ripoffs of local books), it doesn't look like domestic cultural industries are turning over than much cash (relative to size) or that culture taking its rightful % of GDP.
China's economy is brutal and the capacity of any enterprise to maintain healthy margins threatened daily by pressure to commoditize every product. Piracy takes this to an extreme with price reduced to the price of the media plus a small markup.
Andrew - June 24, 2010 7:42 PM
There is a countervailing "benefit" to piracy -- if one takes a long-term view. It is a very effective form of viral marketing and brand-building. Microsoft, Disney, Warner Brothers, etc all became household names in China via piracy -- usually without spending a dime on marketing. Now that a new generation of Chinese consumers are loyal & locked-in the companies can A) start charging and B) block new competitors. Toy Story 3 is playing in Shanghai now -- and Pixar is benefitting (indirectly) from the first 2 films being so widely pirated.
There used to be a local Chinese competitor to Microsoft Office (ChinaStar, I think -- not 100% sure) but it was driven out of business by piracy. Now MS has the desktop space all to itself.
Jay (a different one) - June 24, 2010 10:42 PM
What ever happened to the economic principles of 'supply and demand' and so forth? I recall something about an inverse relationship between price and quantity, which was deemed pretty much universal (with the exception of Irish potatoes and some luxury goods). In other words, the lost revenue numbers don't fly. In my case, same principle, when movies cost $20-$90 to buy, $5 to rent, I consumed maybe one a month in summer, one a week in winter, rental only, occasionally fuming about the apparent rip-off. Now, I buy dozens of DVD every week at $1 a piece, because the price is right. I might still buy at $2 a disc, but that would make me more picky, buying less. Cheap #$%& is only attractive because it's cheap, not because it's #$%&. Economics 101. Or not?
Rogier Creemers - June 25, 2010 3:19 AM
One point that is often ignored or sidelined in these discussions is that political restrictions also influence these things, at least in the field of entertainment media. Most movies or television products cannot be lawfully distributed at the moment in China anyway, due to not having passed distribution "examination and approval". Consequently, even if all pirated DVD's disappeared in a big black hole tomorrow, the resulting benefits for Disney, Warner et al. would still be relatively low. And of course, there is a chicken-and-egg problem in this as well: few films are offered legally in China, leading to piracy, leading to less films being made in/exported to China, leading to, etc. etc.
Also, I think the point of the article should not be overstated. It merely points out methodological matters in calculating damages incurred through counterfeiting/piracy, and that the direct loss to the rights holder is only a part of the story.
Chris - June 28, 2010 9:14 PM
The very fact of the women buying the RMB70 Gucci bag cheapens the brand's "exclusivity" and thus ultimate value. Anyone who is going to pay RMB1700 for a hand bag (no matter the brand) is not doing so out of a utilitarian need. They are trying to show that they can afford it. The women who buys the RMB70 fake bag cheapens the overall value of brand name, and this losses to the brand holder.
Cornelius Mueller - June 29, 2010 9:07 PM
The discussion is, unfortunately, limited to knocked-off luxury goods, movies, software. I would agree, if someone outside China (and that's what should be discussed) is buying a fake luxury item (watch, handbag, pen etc) the original brand doesn't lose a customer - the buyer can't afford the real thing anyway. For movies, the market inside China for copied DVDs is large, since China will only allow 20 foreign productions to be shown, at the moment. Do the movie companies lose money? Nope, they won't be in anyway. And for the software, well, there are reports that MS and others are not too unhappy about the copies circulated in China, since the users will come to the real thing anyway.
But there is another aspect. A lot, really a lot, of products are copied which affect people's lives - pharmaceutical products, electronic products which are then used in security or safety related products, or car parts. They are then sold overseas, because there is a market for "cheap" things. Good chances are, that the a.m. products will fail when needed, sooner or later, and endanger the user's (and other's) life and safety. This business, money-wise, is much bigger than the usually discussed IP cases, and (on both sides of the spectrum) one will find very well organized hard-core criminals. There should be the real concern, not if Gucci is selling a few handbags more or less.
John - July 13, 2010 6:01 PM
Remember folks that revenue from counterfeit goods feeds into various groups, including terrorists.
Mark - July 21, 2010 6:09 PM
Everyone does this sort of thing. Do you think a lot of the whining about China these days from big companies is just their efforts to soften up the Chinese government? I think it is and I think it is working.
Mark - July 24, 2010 12:39 AM
I appreciate your speaking the truth on these things. So much of the media these days is just regurgitating what the corporations tell them. This is due to the media not being discriminating and not having enough people or money to really check things out. The role of blogs is to keep the media (and everyone else) on their toes. So thanks.
Mark - July 27, 2010 6:45 PM
Where should we go for good statistics on this? Any ideas anyone?
Talia - August 8, 2010 6:26 PM
Even if the stastics are off (and I agree with you that they are), there is still a huge IP problem in China and I think the trend towards improvement has ended.
Wise Man - December 20, 2010 7:02 PM
Aren't you getting in the face of your clients by contending they're exaggerating their losses from China IP theft?
Roger Parrish - March 5, 2011 11:49 PM
The assertion that China's outright and blatant theft of American Intellectual Property (IP) has been exaggerated is absolutely ludicrous!
According to a Jan. 15, 2011 article in Germany’s Handelsblatt (Commerce paper), Beijing will launch Chinese Compulsory Certification (CCC) regulations in May 2010 that will require companies to submit their IC design blueprints or software source codes in exchange for approval to enter the Chinese market.
The EU Chamber of Commerce in China has strenuously objected to these new rules as it painfully obvious that this will make the theft of IP just that much more simple. Now those companies and governmental institutions in China won’t have to bother to “Reverse Engineer” the items that they choose to steal; they will have the plans and source code immediately available. A few “tweeks” later; not unlike the thought of taking the insignia off a Ford car and sticking on new chrome emblems with your own name and calling it a “AutoRog” as an example, then gaining a new Chinese copyright or patent.
Anyone who thinks that the theft of these copyrighted and or patented Intellectual Properties is overblown is truly foolish. One only has to witness the flood of off-loaded counterfeit articles that arrive from China everyday in each port of the United States, as I have living here in Southern California. Our U.S. Customs & Border Protection inspectors find dozens of shipping containers in each port, stuffed with everything from counterfeit Movie DVDs from Hollywood, Software titles from Microsoft & Activision, Disney Plush Stuffed Characters & Mattel toys.
Chinese companies steal everything they can get their hands on. When the Chinese aren’t stealing the IP, they are manufacturing products that are tainted with lead on toys & just about every other painted Chinese product’s surface. Chinese shipments of sulfur laden sheetrock emitting smelly, corrosive gases that has destroyed the homes plumbing, wiring and air conditioning thereby reducing the value of thousands of Florida homes.
Please don’t accept the bogus suggestion that Chinese theft is a “Non-Starter!”
Take the many different highly publicized cases of Military hardware theft that have been tried in American Courts over the last three years. Each one of these cases lead directly to the Chinese Government and its Ministry of State Security. These cases can only be seen as highly sensitive National Security issues. See STRATFOR, “Chinese Espionage Cases Uncovered in 2010,” for their chart depicting the multitude of ongoing cases involving the Chinese and their efforts to spy on the United States. According to David Axe writing for STRATFOR;
In 2010, 11 Chinese espionage cases were prosecuted in the United States, the highest number yet, and they featured a wide range of espionage targets.
Ten of the 11 cases involved technology acquisition, and five were overt attempts to purchase and illegally export encryption devices, mobile-phone components, high-end analog-to-digital converters, microchips designed for aerospace applications and radiation-hardened semiconductors. These technologies can be used in a wide range of Chinese industries. While the mobile-phone technology would be limited to Chinese state-owned enterprises (SOEs) such as China Mobile, the aerospace-related microchips could be used in anything from rockets to fighter jets.
Further Chinese Espionage activities, this time in France; STRATFOR; By Sean Noonan
Paris prosecutor Jean-Claude Marin on Jan. 14, 2011 began an inquiry into allegations of commercial espionage carried out against French carmaker Renault. The allegations first became public when Renault suspended three of its employees on Jan. 3 after an internal investigation that began in August 2010. Within days, citing an anonymous French government source, Reuters reported that French intelligence services were looking into the possibility that China played a role in the Renault espionage case. While the French government refused to officially confirm this accusation, speculation has run wild that Chinese state-sponsored spies were stealing electric-vehicle technology from Renault.
The Chinese are well-known perpetrators of industrial espionage and have been caught before in France, but the details that have emerged so far about the Renault operation differ from the usual Chinese method of operation. And much has been learned about this MO just in the last two years across the Atlantic, where the United States has been increasingly aggressive in investigating and prosecuting cases of Chinese espionage. If Chinese intelligence services were indeed responsible for espionage at Renault it would be one of only a few known cases involving non-Chinese nationals and would have involved the largest amount of money since the case of the legendary Larry Wu-Tai Chin, China’s most successful spy.
Read more: Chinese Espionage and French Trade Secrets | STRATFOR
Read more: Chinese Espionage and French Trade Secrets | STRATFOR
If these examples of Chinese theft, product contamination and provable government sanctioned espionage aren’t enough to convince the average American of Chinese ill will toward their number one trading partner, then I bid you all a good life.