Beating the Pirates: How to Protect Your Product in China and Beyond

It sounds like the plot of a suspenseful Hollywood movie: counterfeiting, piracy, spies. Yet the Organization for Economic Cooperation and Development (OECD) recently released a summary of their study that shows that these problems aren't fiction. In fact, piracy of U.S. products is a growing challenge to overcome around the world.

“The OECD study shows that the magnitude of counterfeiting and piracy is huge," Guy Sebban, Secretary General of International Chamber of Commerce (ICC) said. "Its impact is pervasive and the problem is growing.”

It's no wonder the ICC is taking notice. U.S. export sales to China alone are growing at double-digit rates. According to the Wall Street Journal, U.S. exports to China grew 240% between 2000 to 2006. Piracy is going to be a major concern for more and more businesses.

The ICC provides recommendations to take action against counterfeiting and piracy, but these are directed to government leaders. What can you do to proactively protect your business? How will piracy and counterfeiting affect your business if you ignore it? Vistage executive web editor Shelly Bowen caught up with Vistage speaker Dr. James Chan, who has been advising U.S. companies on doing business in China and other Asian countries since 1983, to ask these and other pressing questions. His answers are directed toward China, but can be applied universally.

Vistage: How do you know when your products or ideas are being pirated?

Chan: A few years ago, I worked with a scientific database company that invented a unique method to index global scientific literature. We traveled to China, gave seminars, and visited research and development institutes and top-ranking universities. Within 16 months, we started to get orders. Sales grew dramatically year after year for the next four years. Then, unbeknownst to us, sales began to plummet. The sales chart looked like an asymmetrical line that went up gradually, then plunged. I call it the “China Curve.” The appearance of the China Curve is often the first sign that your products are being pirated.

V: So what did you do?

Chan: First we interviewed our customers to uncover the weaknesses of our pirate-competitors' resources and products. The paper they used in the counterfeit books turned yellow and would decay within months. Also, pages, photographs, and charts were missing in their copies. Furthermore, as a prestigious Chinese institution, the leaders of the library could not bring themselves to let Western scholars and scientists see what they were using.

Based on what we learned, we started requiring that each subscriber to our database product submit the name of a contact person and subscribing institution and the institution’s complete mailing address. Having this information cut through the anonymity shield that import agents provide for their pirating clients. Our leverage to force the release of this information is that we would not provide updates or after-sales service if the importer did not provide the information.

V: Did you also emphasize quality of the original product in your marketing? Or did that not matter?

Chan: Yes, focusing your marketing efforts on quality and targeting the quality conscious segment of your China market definitely can help. It's usually not worth it to compete on price.

V: What about software? Is it possible to protect your software from being pirated?

Chan: You have to assume that your product or technology will be pirated, whether or not you export it. The more successful your product, the faster it gets pirated. But there are measures you can take to protect yourself. Consider traveling to China [or the country in which you are doing business] with a consultant or representative who knows the market and country well to study the weaknesses of the pirates -- such as their manufacturing resources and technological limitations -- and the real needs of your customers. Based on such field knowledge, design and improve your product and technology to stay ahead of the pirate’s capabilities. Also, educate your customers so that they know how your product is better than the counterfeit and they'll seek out the authentic product.

V: Is it impossible to protect your intellectual property [IP] abroad?

Chan: It's true that law enforcement in China is uneven and unpredictable. Fines are modest. Pirates consider such modest penalties as a cost of doing business. Some officials benefit from having companies in their localities which produce counterfeit products. They are either hardwired with the "pirates" or they get tax benefits from them or both. In a culture in which even the Chinese government admits to rampant corruption, who has the "moral superiority" to tell the "pirates" to stop?

Still, companies should take all necessary legal steps that are appropriate, including getting trademark or copyright protection, as well as finding creative ways to keep their own trade and technical secrets. China will enforce IP protection the way the U.S. does if and when it has IP itself that other countries want to steal in a big way.

Finding a trustworthy partner in the country you are doing business can also help. One of my clients, a precision-machined component manufacturer, has made its China representative a millionaire in U.S. dollar terms because of the company’s skills and tenacity in dueling with the pirates. For the last 23 years, the pirate-competitors have been unable to duplicate their quality.

V: How do the pirates get hold of the information they need? Is it as simple as buying a copy?

Chan: It can be, yes. But you can still protect yourself. I recently worked with a software company that received an unsolicited order from a customer in Taiwan. A couple of years later, the general manager of the software firm had an opportunity to lecture at a top-ranking university in China. There, he discovered that his company’s program—which he did not sell to China—was duplicated and sold to a nationwide network of Chinese polytechnic institutes.

His representatives in China and Hong Kong were unable to get the university to stop using the software. The university had purchased it from a Taiwan firm, who pirated and sold the counterfeit program without the U.S. company’s permission. We appealed to both the highest authorities in the U.S. government and the Chinese government in vain.

To protect itself in the future, the company now sends knowledgable representatives to China and other Asian markets more often. It has put in place additional restrictions on software shipped to China. It questions any discrepancy in communication or paperwork and holds orders or requests until it obtains clarification. It's especially diligent to check up on distributors and even its own employees in China and Taiwan.

V: China's buying power is increasing -- you mentioned US $55 billion worth of American-made goods before this interview -- but the cost of piracy is also sky high. According to the ICC, the total value of counterfeit and pirated goods worldwide is estimated at more than US $600 billion. Is doing business with China really worth it in the end?

Chan: I read in The Wall Street Journal that as much as 55% of China’s exports in 2004 were financed and operated by foreign-owned factories. Multinationals such as Nokia, IBM, Motorola, GM as well as the biggest names in the clothing, footwear and toy industries find it extremely worthwhile to take advantage of China’s low-cost labor to produce products for sale worldwide and within China, too. They are the clear winners. I believe small and midsize companies with products that cannot easily be pirated will find China a good export market.

Vistage speaker Dr. James Chan is president of Asia Marketing and Management and welcomes questions from the Vistage community.