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Low cost is not low risk: realities of IP Loss
- Gordon Housworth [ 6/1/2006 - 13:09 ] #
This note builds upon the Intellectual Property (IP) protection series. Readers are encouraged to review:
The US supply base is undeniably concerned about IP loss in China; trade issues, protection of intellectual property and the opening of China's market to foreign products were high on the US agenda during Chinese president Hu Jintao's recent visit to North America. While certain assets are likely targets inside China, the key is to think "asset" instead of "country". Risk cannot be based on countries or "risky areas" but rather wherever a sufficiently valuable asset is accessible at any tier in any country - as the collector will move to the least defended point that contains the IP. We currently see, for example, collection efforts on the US west coast against electronics assets long before they are transferred to a presumably risky country in Asia. Commercial and dual-use technologies are high on the collection list.
The idea of trying to isolate "risky countries" with respect to IP migration remains unworkable due to the revenue loss and market share erosion that occurs when IP is withheld plus the fact that nations such as China demand that you be there in order with competent products in order to do business.
The three key areas of vulnerabilities remain the same: Pricing model compromise (supplier outsourcing, subcontracting, etc.), Data citadel attack (R&D hives and data warehouses), and Human resources (HR) churn. All three are critical, yet we find that HR too often gets scant attention even though collection effectiveness is high while risk and cost are low.
Yes, all technology migrates over time but most firms assume risk by default in (a) not identifying what is already compromised, (b) identifying what assets need to be protected and (c) the amount of dollars and effort needed to realistically protect those assets - wherever they occur in the supply chain. If a collector obtains a critical IP asset, the owner's entire ROI justification collapses along with the expected revenue stream. And when the IP asset is the core of a system or subsystem that often contains more mature, less competitive technology, the entire system revenue stream truncates.
Many of the risks to suppliers as well as OEMs were inadvertently demonstrated in a recent 2006 SAE World seminar, Lessons Learned in China: The Automotive Supplier Perspective distilled from "more than 50 interviews and surveys with executives of global automotive suppliers located in the U.S."
A firm expert in supply chain analysis and logistics, PRTM, had surveyed these global suppliers, distilling the collective supplier wisdom on attempts at IP protection as "To protect critical IP, choose components wisely, break up assemblies, select partners carefully and exploit all legal options." Unfortunately, all are ineffective in protecting IP as none of the four offer protection against even modest collection efforts. They are even less effective against an Asian style method of collection.
It validated our assessment that commercial supply bases have no effective protection whatsoever and whatever attempts that are being made at a 'solution' to IP risk are only lulling the targets into a false sense of security. Following is the text of the original PRTM IP protection slide from their survey followed by our commentary pointing out the weaknesses of each approach. (I hasten to note that PRTM was only presenting a collated supplier response, but I fear that the longer those efforts are allowed to stand without challenge, the more likely it is that PRTM will be associated with these de facto "best practices.") PRTM text is in italics and was transcribed from PRTM handouts:
Above these risks to IP, PRTM found that "the majority of North American automotive suppliers sourcing from China are not realizing great savings," that "over half the participants in [the PRTM] study achieved less than 40% of their savings goals" for their Chinese operations:
Given the substantive IP transfers inherent in joint ventures, it was interesting to note the ebbing of JVs:
Even these brief comments does not do the problem justice. We see otherwise skilled firms adopting an IP protection posture involving amateurish methods and unimplementable good intentions, often buttressed by the erroneous belief that US legal remedies are applicable on a global basis. Other firms violate the rule of "Absence of evidence is not evidence of absence." When no legitimate Vulnerability Assessment has been carried out, it is tenuous at best to claim that no penetrations have been made, or that no threats of collection exist.
Leave it to the English to be candid:
US and EU IP is being harvested at an intense rate by a hierarchy of collectors. In the case of China, Chinese firms are being pressured for increased margins while Chinese scientists and researchers are being pressured for national breakthroughs that create native Chinese advances not subject to foreign control and/or royalty payments.
Edward Tse's China's Five Surprises offers a fine structural analysis of points that most, if not a wide majority, of US and EU firms are not taking into account in planning their response to China. Even this aggressive posture as outlined by Tse is not enough to satisfy CCP goals for growth, thus the pressure on Chinese scientists to acquire foreign technology as part of their research.
In heated competitive atmospheres such as this, it is all too easy to view foreign IP as harvestable assets. Changes in Chinese law are reducing even the modest IP protection for foreign firms save for the efforts offered up to redress audio and film piracy. We have reason to believe that there is also an assumed feeling of impunity on the part of collectors in the face of feeble or ineffectual responses from targets.
We expect visibility of offshoring, outsourcing and IP theft to rise in the US 2006 and 2008 elections. It is a basic tenet of attack strategy that the attacker (collector) will step up activities in progress if they feel that a heightened security posture is imminent. What is belated good practice and awareness on the target side will be met with accelerated collection on the adversary side.
We recommend early adoption of prudent, non-adversarial business practices now to identify current exposure and to combat the forthcoming surge in collection efforts. Beware ineffectual IP protection tools and processes such as the mechanisms flagged above or IP protection pyramids that, while desirable, are fuzzy and leave the client without the tools to achieve its IP goals. We have achieved success with strategies drawn from proven Counterterrorism (CT) practices applied to Intellectual Property risk evaluation and remediation. We know from experience that these processes can be taught and that they are easy to embed as company best practices performed by its employees instead of an outside consultant. Properly done, IP protection becomes a crucial business attribute, like quality, lean manufacturing or robustness.
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In a Scientist's Fall, China Feels Robbed of Glory
Chip fraud in China becomes embarrassing setback
Automotive Sourcing in China & Cost Savings [Title from weblog - may not be the paid subscriber title]
Study Reveals: Auto Suppliers Find No Cost Guarantee in China Sourcing
Study Reveals: Auto Suppliers Find No Cost Guarantee in China Sourcing; OESA and PRTM Management Consultants' Survey: More Than Half of Companies Studied Achieved Less Than 40 Percent of China Sourcing Targets
Enter the Dragon? - Lessons Learned in China Sourcing
Competition and trade in the U.S. auto parts sector
Don't jump in without testing the water
GM Eyes Asia for Cost Cuts
INTELLECTUAL PROPERTY THEFT IN CHINA AND RUSSIA
OE Auto Parts Supplier Strategy for the Next Ten Years
A "China Price" For Toyota
Sourcing in China not a sure bet
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