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 user 2005-03-05 at 10:45:00 am Views: 46
  • #10682

    Whose Patent Is It, Anyway?

    Foreign Companies Confront China on Rights to Intellectual

    GUIYANG, China (March 5) — Each shift, 200 workers, most
    of them women in smocks and bibs, labor in a factory tucked away in hilly
    farmland outside this city assembling a single product, one-inch hard

    As China’s emerging industrial centers go, Guiyang is an
    obscure outpost, bearing little resemblance to the booming factory towns of the
    east coast. And yet, as much as any other place in China this hard drive
    assembly may be at the front line of an intense global struggle to dominate
    high-tech manufacturing.

    The tiny storage device this factory churns out is the
    heart of one of the world’s hottest consumer electronics items, the mini version
    of Apple Computer’s iPod. Sales to Apple represent a huge triumph for GS Magic
    Stor, an offshoot of a struggling state-owned carmaker that is so obscure that
    even in China few are familiar with the name. The problem with this ringing
    success story, according to a better-established rival, Hitachi Global Storage
    Technologies, which has factories in China and also supplies miniaturized drives
    to Apple, is that the Chinese company stole crucial elements of the design.

    GS Magic Stor denies this charge, which Hitachi has made in
    a suit filed in Federal District Court in Northern California. In a recent
    online forum the company’s president ridiculed Hitachi’s claim, likening it to
    someone’s asking carmakers to pay design rights to the inventors of the horse
    and buggy. A Hitachi official, who refused to comment further, said that GS
    Magic Stor could characterize the Hitachi patents however it wished, “but the
    plain and simple matter is they haven’t expired.” Hitachi’s highly technical
    complaint specifies several areas where it says its designs were infringed by
    Magic Stor.

    Apple, which was not named in Hitachi’s suit, would not
    comment. Even if Hitachi wins the suit, that would do nothing to stop Magic Stor
    from continuing to produce its miniature hard drives in China, although some
    analysts say that Apple would be forced for image reasons, if nothing else, to
    drop Magic Stor as a supplier.

    For Western companies competing with China as well as those
    doing business here, the issue goes well beyond the fate of one obscure company
    or of a single technology, however valuable. In one sector after another,
    companies warn that China’s swift industrial rise is being greased by brazen and
    increasingly sophisticated theft of intellectual property.

    The issue of intellectual property theft has been a fixture
    on the trade agenda between the United States and China for years, with visiting
    American officials routinely stopping at the famous Silk Market in Beijing to
    highlight the sale there, like all over China, of cheap knockoffs of toys,
    clothing, software and DVD’s.

    The Chinese government has recently razed the market, but
    the counterfeit activity has been moving relentlessly upscale, with General
    Motors, Cisco, Sony and Pfizer, just to name the most high-profile companies,
    complaining that their designs or formulas for everything from cars and
    PlayStations to routers and Viagra, have been violated.

    “Until recently, when China began putting intellectual
    property laws in place, for the past 40 years, all patents were owned by the
    government, and could be shared by any company that was willing to use them,”
    said Paul Gao, a Shanghai-based expert on consumer electronics and automotives
    at McKinsey & Company. “The Chinese government actually encouraged this, and
    that has left a deep impression on companies that intellectual property is there
    for anyone to use it.”

    Experts say the practice of copycat production is also
    fueled by the fierce competition among Chinese companies and provinces to join
    the global economy. “With the extreme fragmentation of industry, you see a lot
    of subscale players that are trying to survive in the market on their own,” Mr.
    Gao added. “They don’t have the budget for research and development or the scale
    to compete. If they pay a licensing fee, they consider they are essentially
    imposing a death penalty on themselves.”

    Like many people on the receiving end of accusations of
    intellectual property theft here, GS Magic Stor’s president, Zhu Baolin,
    fiercely denies his company has done anything wrong, and goes so far as to say
    that the lawsuit is an act of desperation by a foreign enterprise unable to
    compete with his Chinese company.

    “We don’t blame Hitachi for what they are doing,” said Mr.
    Zhu, a 25-year electronics industry veteran. “We just want Chinese people to
    know we created our own product, and that we face a lot of pressure. This will
    happen a lot in the future in the knowledge industry, but we will still work
    hard to grow.”

    Beyond the case of Hitachi versus Magic Stor, many Chinese
    legal experts simply deny there is any special problem with theft of
    intellectual property in China. “It may look like it’s a China problem, but it’s
    a worldwide problem, just like piracy on the Internet, and it exists in America
    as well,” said Zhang Ping, a law professor at Beijing University, and one of
    China’s leading experts on intellectual property rights. “There are many
    problems with fake products, with low levels of technology. These can’t be
    counted as intellectual property violations. They are just cheap fakes.”

    Like many people professionally involved with this issue
    here, Ms. Zhang denied that China was a leading violator of intellectual
    property rights, which she acknowledged was still a relatively new concept in
    China. She also said that the country’s efforts at improving enforcement, though
    steady, would require more time to reach the standards of intellectual property
    rights in many advanced industrialized countries.

    Lawyers who represent Western companies embroiled in
    intellectual property disputes in China, however, point to major loopholes in
    Chinese law and in the country’s trademark and patent system as parts of the
    problem. Many Chinese patents, for example, are granted without any examination
    of their originality, making it easy for local companies to claim others’
    innovations as their own.

    While foreign experts also point to progress in the
    country’s courts and especially in the richer provinces along the country’s east
    coast, they say that local and provincial governments, eager to bolster their
    economies, sometimes subsidize patent filings for local companies and provide
    pointers to them on how to beat foreign claims of infringement. Even the
    Shanghai government speaks of building a “great wall of patents” to protect
    local companies.

    “Once upon a time, the counterfeiters in China ran away
    when you came after them,” said Xiang Wang, a lawyer specializing in
    intellectual property rights at White & Case in Shanghai. “Today, they don’t
    run away. Indeed, they stay put and they sue us. More and more Chinese companies
    are taking a so-called legal approach, taking advantage of serious weakness in
    the Chinese legal system.”

    One of the most problematic areas, experts say, are joint
    ventures between foreign and Chinese companies, which are legion. When the joint
    venture dissolves, or sometimes even while it remains active, the Chinese party
    makes use of the technology or manufacturing processes illegally. A perennially
    told war story in business circles here involves the foreign factory owner who
    makes a wrong turn while driving to his plant only to discover an exact copy of
    his factory on the other side of the mountain.

    Although this story might be apocryphal, Mr. Wang said he
    saw cases all the time that are not so different in their details. “We have a
    client in the power business who found that one of his key employees had quit
    and joined a competitor, revealing confidential information to him straight
    away, and filing patents of these materials which were literal copies of the
    original technology,” he said. “When our client warned he would sue over patent
    infringement, the Chinese company said it was also planning to sue. ‘And by the
    way,’ they asked, ‘what patent are you talking about? This is our patent now.