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ICG Risk Blog - [ The second industrialization model - powered by IP harvesting ]

The second industrialization model - powered by IP harvesting

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"Piracy" has become a very imprecise term in describing the risks and impacts to Intellectual Property (IP) in what we call the second industrialization model. We track a four tiered model of IP violation that is marking the progression of newly industrializing states:

  1. Simple piracy (copy with no effort to hide piracy - the audio/video model that applies to anything replicable from CD and DVD)
  2. "Badged" substitute (pirated or stolen Intellectual Property used to create a product masquerading as a legitimate offering by a legitimate supplier)
  3. Substitute product (pirated or stolen Intellectual Property used to create a "no name" or "new name" product competing with a legitimate offering, usually on price)
  4. Supplier substitution (original legitimate supplier is forced from the market, replaced by the copier)

While all four are IP theft, we have bowed to convention in the popular press to describe the first as piracy while reserving the other three as IP theft, especially as the theft is masked such that the sellers have distanced themselves from the theft.

As a heretofore internal working term, we call this the second industrialization model, the first being textile manufacturing. Although the French perfected large textile looms, their output was craftwork for a limited clientele. It was left to the English to turn looming into a mass production affair. The US purchased old, discarded looms, copying them down to their eccentrically worn bobbins to commence the colonial industrialization. Nation after nation subsequently followed suit for well over one hundred and fifty years.

We see the codification of a new industrial model in the postwar period based upon "commercial on commercial" Intellectual Property (IP) attack. While the earlier "military on military" or state on state espionage remains vibrant, a significant focus has shifted to advancing dual use technologies which bring both military advantage and domestic commercial industrialization.

Within this model, nations in a position of strength, specifically in innovation - part of which is acquired without royally, normally do not want IP protection laws as they are either independently innovating, thereby able to sell at a premium; producing more efficiently, thereby driving down costs over competitors; or imbedding surreptitiously acquired IP and thereby terminating the revenue streams of competitors. Nations tend to seek or support IP protection laws when they are in decline by some combination of an ebbing of innovation, emergence of lower cost producers, or new producers harvesting their IP and ending expected revenue streams.

The postwar Japanese model tracked this progression and is only now promoting IP protection laws in the face of Korean and Chinese successes in former Japanese core industries. The Chinese are expected to accelerate the model significantly. The downside for firms and industries affected is that China (and I started my commercial visits in 1980) is unique among developing nations in having a "first world" mentality even as it had a "third world" industrial capacity, i.e., from its "reopening" in the 1970s, it closed off industrial penetration and investment that it did not like (which most other industrializing nations could not or would not do) as it turned a benign eye on virtually any domestic industrial effort that nurtured growth, revenue and industrialization. How it achieved the IP required to do that was never questioned.

As is widely known among skilled China watchers, edicts on IP infractions, or anything else, often rarely leave Beijing as provincial, city and enterprise zone mangers do largely as they wish and are tolerated so long as they bring growth and revenue without significant embarrassment to the Party (CCP).

Firms that do not understand this landscape and industrial progression are ripe for IP harvesting. Moreover, legal remedies are largely ineffectual and the rewards moot as the IP is already lost and all expected downstream revenue is attenuated. Readers may wish to examine Low cost is not low risk: realities of IP Loss for realities on the ground.

Next step in pirating: Faking a company
By David Lague
International Herald Tribune
APRIL 28, 2006

FBI Sees Big Threat from Chinese Spies; Businesses Wonder
Bureau adds manpower, builds technology-theft cases
Jay Solomon
Wall Street Journal
12 August 2005
Mirror

Manufaketure
By TED C. FISHMAN
New York Times
January 9, 2005
Fee archive
Html miror
PDF mirror

"The China Price"
Business Week SPECIAL REPORT
DECEMBER 6, 2004

Why China Is Making The Valley Fret
U.S. chipmakers worry that a new Wi-Fi standard puts their businesses at risk
By Cliff Edwards, in San Mateo, Calif., with Jim Kerstetter in San Francisco, Bruce Einhorn in Hong Kong, and Paul Magnusson in Washington
Business Week
MARCH 29, 2004

Car-Parts Piracy Has Auto Makers Spinning Their Wheels
By MURRAY HIEBERT
WALL STREET JOURNAL
February 26, 2004

The grille looks familiar …
Western automakers are torn between the lure of the world's fast-growing market and the dismay of seeing their intellectual property 'borrowed' by the Chinese
By Tim Querengesser
The Ottawa Citizen
May 07, 2004
May have scrolled off
Mirror minus the images

Intellectual Property Rights in China: Face it or Face off
China High Tech PR (ChinaHighTechPR.com) monthly newsletter
The Hoffman Agency
December, 2003

Nissan ponders piracy suit vs China's Great Wall
Reuters/Forbes
Nov 28, 2003

Master of Innovation?
China aims to close its technology gap with Korea and Japan
By Bruce Einhorn in Shenzhen
Business Week
APRIL 14, 2003

When Spies Look Out For the Almighty Buck
By DAVID E. SANGER
New York Times
October 22, 1995

Gordon Housworth



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