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Copycat China? Yes Or No.

Posted in China Business, Legal News

Maybe.

Michael Zakkour wrote an interesting article for Forbes on China IP and China innovation, entitled, Copycat China Still A Problem For Brands; China’s Future: Just Ask Apple, Hyatt and Starbucks. The article begins with a great story on China copying:

In 2006 I had to leave Beijing for a brief business trip to Dongguan, a major industrial city in Guangdong Province. My assistant asked if I wanted to stay at the Hilton or the Hyatt.  I told her the Hyatt would be fine.  When the taxi pulled up at the hotel I was happy to see it looked new, modern and welcoming and was topped by the familiar green Hyatt sign on top.  Or was it? At first I thought it was because I was tired, but a second look confirmed that the big green sign actually said “Hiayatt”.  It was a Shan Zhai hotel. An entire hotel! After many years in China I had grown accustomed to fake phones and apparel, imitation KFC restaurants and even the “Sunbucks” coffee shop in Shanghai.  But this was a whole new level of fake.

What has happened to the hotel since then?  Did it get shut down?  No. I visited Dongguan in February, and it’s still there. Not only that, but as an April 28th article in the New York Times by Julie Weed explains, there has been a proliferation of fake Hyatts, Peninsulas and Marriotts in China. Apparently the Haiyatt Dongguan was ahead of its time.

Just about everyone who has done business with China can tell their own fascinating China copycat story. As a China lawyer, my personal favorite are the fake law firms that focus on collecting money from American companies to register their trademarks in China. Of course, once the money is paid, nothing happens.  I wrote on this years ago in China: Where Even The “Law Firms” Are Fake.

Zakkour’s thesis is that copying in China is as rampant as ever and that it is harming both foreign companies and China itself.  I agree with 98% of that.

Zakkour goes on to note that “there has been some movement in recent years toward increased respect for and enforcement of IP and and innovation in technology, product development  in China” and then he cites WeiboWeChatShanghai Tang and Lenovo as Chinese companies that “create new technologies, cutting-edge products and wickedly smart and effective marketing strategies.” But he describes these companies as “exceptions to the rule.”  I agree with that.

Zakkour then goes on to quote from Yua Hua’s book China In Ten Words, which puts copycat on its top ten word list:

Once copycat cell phones had taken China by storm, copycat digital cameras, copycat MP3 players, copycat game consoles and other pirated and knockoff products came pouring forth. Copycat brands have rapidly expanded to include instant noodles, sodas, milk, medications, laundry detergent and sports shoes, and so the word “copycat” has penetrated deep into every aspect of Chinese people’s lives. Copycat stars, TV programs, advertisements, pop songs, Spring Festival galas, Shenzhou 7 space capsules and Bird’s Nest national stadiums have all made a splash on the Internet, each revealing their own special flavor and gaining instant popularity.

Zakkour sees “Copycat China” as threatening “both foreign companies and China itself” in the following ways:

  • It reduces foreign investment into China.
  • It causes some foreign companies already in China to leave due to IP theft.  Equally important, it causes foreign companies not to bring in their most IP-sensitive products.
  •  It makes foreign firms reluctant to use China-based service companies and technologies, especially in IT outsourcing, for fear of losing IP to such companies.
  • China’s lack of an innovation culture and reliance on borrowed ideas means China is not creating products the rest of the world wants and needs.

Again, I agree.  Zakkour sees all of the above as reducing China’s competitiveness and preventing it from “moving from being the factory to the world to being a real innovator, hurting overall growth.” Again, I agree.

Zakkour then quotes me on how China is still copying and how that copying stifles innovation:

According to China lawyer Dan Harris, an expert on China IP “over the last ten years, my firm has seen little change in terms of our client’s IP being copied by Chinese companies. If anything that copying has only increased as interaction between foreign and Chinese companies increases.”

“China copying will continue to negatively impact China’s economy. When companies find it easier to copy than to innovate (and this is generally true in China) there is little incentive to innovate. Copying reduces the incentive to innovate for the companies that copy and for those that were contemplating innovation. Why innovate if someone is going to copy your innovation and get away with it?”

Again, I agree.

Where I disagree with Zakkour though is in his failure to give enough play to how things have changed for the better in China in terms of protecting IP.  Seeing as how this is my blog (and I can write what I want to) I am going to say how I really feel about IP in China, as follows:

  • China does copy. Like crazy. But it is not as bad as some countries and it is getting better. Slowly. The level of copying in China is all over the map. My law firm has some clients who barely need worrying about copying (airplane manufacturers for example — not parts, but airplanes) and some who need worry about it constantly (clothing manufacturers, for example).
  • China does copy and one typically need not go far to see evidence of that. But the level also varies by city and the seriousness of the enforcement powers therein.
  • There is copying and there is copying. The $10 fake Gucci purses that everyone knows are fake are not as big a deal (sorry Gucci) as fake medications or fake airplane parts. I get the sense that China understands this.
  • Foreign companies are not without blame. If they are not registering their IP in China and using good contracts with their Chinese counterparties, they to a large extent have no reason to complain. Just a few hours ago I got an email from someone who had drafted his own NNN Agreement in English and calling for arbitration in English in China. That is so far from being the optimal way of preventing someone from using your trade secrets that I would ascribe fault to him if his trade secrets are exposed.
So yes, China is still copying, but its IP registration system is improving (for instance, its new trademark laws are likely to increase trademark protection) and its courts are getting tougher on violators. So overall, things are getting better not worse.
Do you agree?

UPDATE:  In a post entititled, Fake Government Busted in China, the Wall Street Journal reports on a recent incident of copycatting involving fake government — yes fake government!

  • http://www.qualityinspection.org/ Renaud Anjoran

    Let me add one reason why “foreign companies are not without blame”. Many times, a company notices a cool new product in its own country (outside of China), buys a few pieces, sends them to Chinese manufacturers, and ask for counter-samples and quotations. When necessary, they say “just change this detail, or use a similar but not exact material”, so they can avoid legal risks.
    No wonder Chinese manufacturers are cynical about IP rights!

  • Vino Collapso

    Shanghai Tang isn’t and never has been a Chinese company. It is owned partly by David Tang (British, but based in Hong Kong) and Richemont (Swiss). They have always had international, mainly European financing – not Chinese.

  • Phil H

    “copying in China is as rampant as ever and that it is harming both foreign companies and China itself.”
    I’m not sure I see either of them. I would think that a consumer who has experience with a shanzhai phone is more likely to buy a real iphone. They are better, you know! And if they’re not better… then we shouldn’t cry over their failure to sell. And the same goes for all the other products: the shanzhai versions are stepping stone goods for consumers who don’t yet see the point in spending 5000 yuan on a phone/camera/night in a hotel, but will later. And on the supply side, you get a generation of Chinese engineers/managers/whatever who have gone through the process of building and running brands, and watching exactly how they succeed and fail. They don’t teach this stuff at Harvard Business School, and they certainly don’t teach it at Nanping Agricultural College of Business.
    Where there is theft of technology, I can certainly see the harm to western companies. But if the theft allows the market to expand, then that’s good in aggregate.

  • rightways

    No, those who say copycat China are themselves copycat t.

    Look, all basic science technologies like rocketry, gunpowder, compass, paper,
    ship building compartmentalization, etc, etc were invented in China
    and copied by the West. As a matter of facts, all technologies are copied by each other and improved continuously by human beings not by race or nations.

    China is now more advance than Europe and Russia, parallel with USA in the field of ultra hypersonic technology:
    http://rightwaysrichard.blogspot.com/2014/01/china-successfully-tested-new-ultra.html