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A tipping point in intellectual property protection?

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It would appear that the US is at a turning point in its treatment, or tolerance, of global intellectual property (IP) theft, although it is fair to say that our process is flawed:

  • Too much of the Administration's focus is on on-line piracy and counterfeit parts, often sold as unbadged copies of the original and where the impact is seen to go no farther than direct revenue loss, liability over presumed 'faulty' parts, and impact to the producers' reputations.
  • Too much of the Administration's approach is devoted to ineffective, and even counterproductive means, primarily legal remedies and policy guidance buttressed by industry lobbying to influence legal and policy changes.

It is revealing that the recent report that is underpinning the renewed Dept of Justice interest in IP, and is the report that AG Ashcroft reviewed with MEMA (Motor & Equipment Manufacturers Association), Congressman Knollenberg, and other US manufacturers is principally devoted to legal and criminal investigative remedies. Reading the AG's announced recommendations of that report reflects the same legal and policy approach. Although these remedies will not work, and will actually backfire, as Cisco discovered in its tiff with Huawei, there are quite workable alternatives.

What seems to be missing, or has been missing, is the understanding that:

  • The real problem of counterfeit parts is that the counterfeiters will gradually uncloak to produce badged products that directly compete with the producers from which they had expropriated intellectual property, and thus can undercut the original producers' pricing, i.e., the endgame is being driven from the market, not mere revenue dilution or 'faulty' parts.
  • Counterfeits pale in comparison to foreign competitors expropriating intellectual property specifically to produce badged parts that build an independent brand awareness for price and quality that quickly drive the original producer from the market.
  • The principal remedies on offer presume a working legal framework in the expropriating nations that reciprocate the legal protections that we have come to expect, and depend upon, in our Anglo-European legal systems, i.e., without this reciprocation, our legal remedies for adjudication and redress are ineffectual in the country where the expropriation occurs.

The problem is certainly enormous, and growing more so. I am already on-record with the following predictions:

  • Emerging Asian suppliers will displace less efficient US suppliers in US supply chains
  • US OEMs will continue their pursuit of lowest cost suppliers, abandoning historic 'domestic' suppliers in favor of new Asian suppliers

And if it is not too late:

  • After enduring growing losses, US OEMs and major manufacturers will use IP security as a key selector for suppliers in the critical path of their supply chains
  • Protective IP programs will be essential to a supply chain's critical path, and so the health of the supply chain. (The trajectory of IP protection will mimic that of the rise of part quality as a mandatory selection criterion.)

Two remarkable events have put intellectual property squarely in the limelight, GM's accusations of a Chinese automaker using stolen design data, and the national security review of Lenovo's purchase of IBM's PC unit by the Committee on Foreign Investments in the United States (CFIUS).

US Commerce Secretary Donald Evans publicly accused the Chinese automaker, Chery, of "using stolen design information from GM Daewoo Auto & Technology Co." to produce Chery's QQ minicar. The target was the Chevy Spark/Daewoo Matiz which cost GM $500 million to develop. Mathdata and 'other design information' of the Chevy Spark "were simply stolen from GM Daewoo." The impact was riveting as the QQ:

  • Reached market before Spark
  • Costs 33 % less than Spark
  • Outsells Spark by 6:1 in Chinese market
  • Has identical body structures, exterior and interior designs

Chery was then 20% owned by Shanghai Automotive Industry Corp - GM's main joint venture partner.

The Committee on Foreign Investments in the United States (CFIUS), an interagency M&A review panel on national security grounds has given notice of review of Lenovo's purchase of IBM's PC unit over the "concern that Chinese operatives might use an IBM facility for industrial espionage."

There is recent CFIUS precedent in the 2003 review of the bid by Hong Kong's Hutchison Whampoa for bankrupt Global Crossing, owner of one of the world's largest fiber optic networks. That review, which causes HW to withdraw, was based upon concerns "about control of a key telecom provider by a firm with close ties to the Chinese government."

IBM-Lenovo deal said to get national security review
By John G. Spooner
CNET News
January 24, 2005

US lashes out at Chinese piracy
(Asia Pulse/Yonhap)
Asia Times
Jan 15, 2005

Report of the Department of Justice's Task Force on Intellectual Property
Department of Justice
October 2004

Gordon Housworth



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