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How To Protect Your China IP. Don’t Go There?

Posted in China Business, Legal News

Your enemy won’t do you no harm Cause you’ll know where he’s coming from Don’t let the handshake and the smile fool ya Take my advice I’m only try’ to school ya.  ”Smiling Faces,” by the Undisputed Truth

Must-read article out today in the Pittsburgh Tribune-Review. The article is entitled, “Apple tries to avoid Motorola’s mistakes in China” and it is about how Apple is trying to avoid letting Chinese companies get its secrets. I say it hardly needs to worry and that is one of the reasons I have had a disproportionate amount of my investment assets with Apple for many years.

I will first discuss the article and then explain why Apple, more than perhaps any other computer/gadget company, need not worry too much about China.  

The article does an excellent job describing how Motorola allowed its technology to be compromised in China. I have no idea if the Motorola history set forth in the article is accurate, but it certainly sounds like it is and it certainly fits what I have personally “observed” happen to other companies. The article seeks to explain how Motorola has gone from being the largest foreign company in China (in 2001) to being an also-ran. The following are two absolutely classic quotes from the article: 

  • “In China, Motorola thought it found a loyal friend. But clearly, this demanding friend held a different idea of loyalty.”
  • “We had the majority (ownership) of those ventures. We didn’t see it was a problem,” Younts [of Motorola] said. “We were probably a little naive.”

But the key takeaway of this article (and the reason for the song quote above) is that it is your employees and those closest to you of whom you must be most cautious. The article nicely highlights this: 

“Motorola was used as a training ground for all the competitors in China,” Roberson said. “A person might work for you for six months or a year, then go over to a Chinese competitor. … 

Roberson said the Chinese gained valuable intellectual property because the government insisted Motorola shift more R&D to China. A Chinese engineer would work at Motorola as long as it took to learn the technology, he said, and then would quit to work for a competitor.

“Though the Chinese wanted to be trained by Motorola, they wanted to work for Chinese companies,” he said. “Most were small at first, but there were a dozen of them. Then they started to get muscle. And the Chinese government gave them support that the government didn’t give Motorola.”

*   *   *   *

Chris Jones, principal analyst at Canalys, a high-tech consulting firm, said Motorola “got squeezed. … Companies that used to be Motorola suppliers are now competitors.”

The article then describes the various Chinese companies that have been built with Motorola employees and technology.  

Apple is playing it cool. Apple is doing things right in China and I said this back in 2009, in a post entitled, “Apple In China (Again) And Why SMEs Usually Do Better Faster,“ back when it was getting all kinds of criticism for moving “too slow” there:

Yesterday I did a post on Apple’s alleged iPhone failure in China, entitled, “The iPhone In China: Ain’t No Mountain High Enough.” I say “alleged,” because though iPhone sales have not soared in China, I remain confident Apple will do just fine there.

After I ran that post, I received a couple emails with “inside knowledge” of how Apple is messing up in China, largely because it is trying to do things “its way” in China, rather than the “Chinese way.” I also received a fairly large number of comments saying pretty much the same thing, all of which I accidentally deleted (sorry!).

And though those who emailed and commented are probably right to say that Apple has so far not done as well as expected in China, I, even as a shareholder, say (in the largest font I can muster), SO WHAT.

Then in early 2010, I posited that Apple was now doing so well in China because it had refused to bend its core principles for China:

Here’s my own, more concise explanation. Apple stuck to its knitting. Let me explain. Just about whenever I speak on China or am on a China panel, and am asked what it takes to succeed in business in China, I emphasize the need to stick to your business’s already established principles. To me the key explanations from Paul’s post are how Apple refused to go into China with its iPhone unless it would be free to make it a real iPhone in China, just like everywhere else and on how China waited until China’s consumers could afford its products, rather than giving them a cheap substitute in the meantime.

Google has come in for a lot of criticism of late from Monday morning quarterbacks (including from the just released book, In the Plex: How Google Thinks, Works, and Shapes Our Lives, but I view these things very differently. I applaud Google and Apple for emphasizing the big picture and for refusing to bend for just one massive country. By not bending, these companies gain respect worldwide, from both consumers and, perhaps more importantly, from their employees. Without naming names, I can tell you that I know of a ton of people from a Google rival who have left that rival for Google or who talk of doing so because they simply do not like working for a company that they see as being willing to make peace with immorality. I even heard that at one point this employee dissatisfaction on this score had reached such a level that there was a committee formed to deal with this one issue.

I see the criticisms of Google as a buy signal.  

I also see Apple as nearly untouchable by China because I do not see any Chinese company as being even close to being able to duplicate Apple. Sure, there are Chinese companies that can duplicate much of what Apple has already achieved by way of technology, but I do not see any Chinese company as being able to stay upp with Apple when it comes to new technology. Apple snarfs up market share not because its technology is so eye-popping, but because it is exactly what the consumer wants. I do not believe there will be a Chinese company even within ten years that will be so good at understanding consumers. I also do not believe there will be a Chinese company within ten years that will be so good at serving consumers or marketing to consumers. And what Apple lover is going to switch from Apple to a Chinese company’s rival product?  Come on.

Sure, there have been and will continue to be Chinese companies that make excellent product that people will buy instead of Apple product. And sure, those companies are competing with Apple and if they did not exist Apple would sell even more product. But they are not a worry and they are not going to have much impact on Apple’s sales growth going forward.  

A couple more things to note about some of the issues raised by this article.

The first is somewhat paradoxical and that is that even if you are going to get your technology stolen, it usually still makes sense to go into China. First off, you can get your technology stolen from anywhere and the Chinese can steal it from the Internet or from the United States as well. So you might as well make as much money off of it as you can in the meantime, while also always trying to stay ahead. I wrote more on this in a post entitled, “China’s Lack Of IP Protection: Overrated. Overrated” and in an article entitled, “In China, Piracy is no Excuse,” [go to the bottom of your screen for my article] in which I argue that China’s lack of IP protection is usually not a good excuse for not going into China. 

The second is that you are at risk from your employees everywhere, not just in China and not just from your Chinese employees. I have seen probably one hundred times where employees have started rival businesses while still working for my clients or done so right after leaving by using information they garnered from their old employer, but less than a handful of these involved China or Chinese employees. 

There are IP risks to doing business everywhere in the world and those risks vary depending on all sorts of factors. The smart business accounts for these risks and acts accordingly, just as it always has.

What do you think?

  • S.

    approach comes with facets. but yes- agreed.

  • Adam

    Apple is doing fine because it created a unique market niche where the consumers simply want their products. It is totally different from most markets where you have to compete on price/value. The Chinese consumers like cool stuff, just like Americans. They protect their IP by building a system, based on Itunes. It is not something you can Shanzhai from Shenzhen. But it is difficult for most other companies to do so. I see too many companies try to sell ‘packaged solutions’ but end up nowhere.

  • Thinker

    If rival Apple companies can sell their products at substantially lower prices than Apple, then the Chinese consumer will buy them. Chinese consumers feel suckered when they pay more for similar products. Besides, a lot of people don’t have the money for an i-phone but do have the money for cheaper versions.

  • sven

    How does this prevent the Chinese from getting jobs at Apple in the US and then stealing the tech they need and soon after returning to China to be a competitor? Just because they aren’t in China doesn’t mean the Chinese can’t just as easy get a job with Apple in the US especially since there are record breaking numbers of Chinese students being allowed to come to the US for further studies. If the US continues it’s policy of investing in foreigners first and neglecting it’s natives just because they might be able to get a few more dollars from international students then US companies will soon only have foreign students to choose from to employ many of which have no loyalty to their host country and just want to use them for a short time so that in the future they can return and benefit their motherland based on the generosity of these countries. What is worse it that once they return they will trumpet the indigenous innovation that is coming from out of their country when really it is all because of the knowledge from foreign universities and foreign secrets they acquired from those businesses. Of course this is not 100% of all examples but the majority sure are.

  • Tom

    @ sven
    do you have proof of any of this? that “the majority sure are”?

  • Falen

    I don’t know how Apple has any real “IP” that could be valuable to a Chinese counterfeiter, not in the way that Motorola is.
    Motorola is a much more engineering heavy place where individual components and parts IP as well as processes are by themselves valuable. Apple develops some custom solution purpose built for their product, but are not really extraordinary pieces of tech compare to off-the-shelf alternatives. There’s practically nothing to steal that would be instantly valuable.
    Let’s face it, Apple products are like LV, Prada, not Motorola: expensive tech jewelries. Take iphone 4 and peel off the apple logo and nobody would want to buy it.

  • http://www.foarp.blogspot.com FOARP

    @ Falen – Err, a search on the Thomson Innovation search tool (yes, I am commenting from work) shows that Apple is listed as the assignee in 9,488 patent documents (i.e., applications and granted) world-wide, and 521 Chinese patent docs. No “real” IP to infringe? Yeah, good luck with that.
    And hey, last I checked, LV and Prada are actually making good money on genuine sales through HK to mainland Chinese, and a hell of a lot of people are counterfeiting them. Hell, take one look at the way luxuries sell in Japan (i.e., a massive 25% of world-wide consumption) and you know how things could develop in China once proper IP protection comes on stream and people get enough money in the bank to lavish on luxuries. At one point in 1998, it was even estimated that “94% of women in Tokyo in their 20’s, owned at least one Louis Vuitton handbag”, and I can personally testify that pretty much every “Office Lady” I met in Osaka and Tokyo last year had at least one genuine luxury item – be it DKNY glasses, a CK watch, a YSL watch, or an LV bag.

  • Andeli

    This really does goes to show that branding is the only real protection against IP infringement. In the end no law or court can help you. Stay true to your product and the idea surrounding it.

  • Falen

    @FOARP : Great… now which of these Apple IP would you “steal” that you’d be happy to open up a Shanzai factory and make a quick buck with? Apple has patents on hand gesture input, how the hell is that Shanzai-useful?

  • LH

    I worked as a contractor/vendor to Motorola in the U.S. at the time that it began its big push into China, and by coincidence I came very much into direct contact with the process. Motorola had licensed source code rights to some advanced technology we had developed and used that license to transfer the technology to Chinese universities and businesses, as part of an explicit exchange of technology for market access that they negotiated with the Chinese. Many of the folks working at Motorola in the U.S. at the time were disturbed because it was so obvious to see where this road would lead. This was a long time ago — 1995 or so. I subsequently worked for another big U.S. electronics firm as a manager in Shanghai. I also applaud Google and Apple for sticking to their guns. Dan is spot on. Apple has such depth as well as breadth in its engineering / product design structure that it will take a long time for a competitor to genuinely rival it. It would take a company like, say, Sony or IBM to do so (or a Chinese equivalent). That’s not on the horizon in China so far as I can tell.
    One dimension of the IP story that I don’t see often discussed is that a LOT of the technology that was “transferred” to China from U.S. firms was developed with a substantial contribution of public money in the form of federally-financed R&D at university and gov’t labs. Boy does that look like a lousy deal in retrospect.

  • Richard

    The Motorola story is totally typical–technology transfer to Chinese companies/entities seems to have been a raw deal for basically every foreign firm entering China (they should have learned their lessons from Japan…).
    I do agree that Apple is different, however. You can steal patents and trade secrets but it’s much harder to steal brand cache and consumer insight. There are tons of fake iPhones/iPads/iPods coming out of Shenzhen factories with nearly the same technology as the genuine products, but they don’t offer the slick, user-friendly, aesthetically-pleasing experience that real Apple products offer, and do not pose a genuine threat to Apple’s market share, at least for the foreseeable future.

  • David A

    the article and conclusion about Motorola is basically wrong, I would say. Actually, the early success and growth for Motorola in China was due to that total commitment and investment and I would rather see Motorola as an excellent case of how to get things done properly in China.
    The reasons for Motorola’s rise and fall in China unfortunately has to be contributed to its arrogant management and awful execution and poor decision-making. If you compare with e.g. Nokia and Ericsson, who have taken similar approaches to China, their China business’ are still very successful.
    An example of bad decision-making and poor execution from Motorola was when the Ming-phones were at top of market (Moto basically had 50% of the high-end phone market in 2006-2007) was to stop the local development of the platform and move it to US and adding 3-4 layers of meaningsless and un-coordinated management which slowed down any new phone development as well as new features.
    In the network side, Motorola is not competitive globally. How would they then be able to compete locally in the most competitive and most difficult market to succeed in?
    Motorola hardly exists now in the Chinese market.
    Don’t blame Motorola fall due to their China strategy – that was a school-book strategy of understanding government, building extremely well-trained and good management (Nokia’s China former president, Microsoft China’s fmr president, Techfaith’s CEO – all ex-Moto China executives). Investing in local management is nothing wrong, it has to be done. And yes, you will loose employee to competitors, but that’s happening everywhere.