IP reality in China

I’ve had two questions come to me this week about tech in China—both about IP protection, really.First was a question in response to the news that Microsoft is lowering its prices (drastically) for Vista in China to compete with pirated copies. The new price of real software is about $65 USD; that’s about 65% less than what it was before. But even at that discount price its still about $60 more than what you can buy a knock off copy for here in Shenzhen—of course, I only know this because I’ve seen posted prices in shops; I wouldn’t buy one since I use Mac. But the question was—why is it so cheap there and can you buy me a copy (or 10) and mail them to me in the US?No, I can’t buy you a copy. Sorry. But I’ve got a better answer for why it’s so cheap.Without asking MS themselves, there are a couple of theories on fighting piracy. The first is to compete with piracy head on—push for enforcement and cut prices to make real products attractive enough that morally minded citizenry would buy the real thing (if its cheap enough). The second is the theory that piracy actually helps build brand recognition and MS will make a show of fighting it but can deal with loses in the short term for the development of market familiarity and the potential of the long term.I think that the first theory is doomed to failure in China as the ideas of Western morality are not common here. Chinese are not guilted into doing the right thing. They do it out of choice, force or shame. But not guilt. I think that the second is equally prone to failure, as MS can’t foresee what the future of legitimate software will be in China. Nor can it see the future competition. To bank billions of dollars on the hope that people will simply buy what they are familiar with instead of any other (currently unknown) option is pretty weak knowing how fast things in China change. Sounds too much like the old British pipe dream “if each Chinese would only add an inch to his shirt tails…”I think that the reality of China is much less sexy and much less strategic. The fact is that there is very little enforcement of IP laws in China. Indeed, I believe that there is a certain national promotion to catch up with the West at any cost. And until this reality changes, MS and others are left with little choice but to minimize loses as best they can. There may be a degree of brand development and certainly a lot of PR about enforcement, but the bottom line is profit—if you’re selling relatively few real copies of Vista now, more copies sold at less $ per piece is better than nothing.The second question I was sent this week was more practical: what can I do to protect my IP in China? This has been covered before by me (here) and by others (here). But in brief there are a couple of concrete steps to take and concepts to understand. First, if it’s worth protecting its probably worth stealing (obviously). Without much actual enforcement in China you can pretty much bet that you’ll get some “leakage” (as I heard it called here). So even before you come to China you need to asses the cost of doing business here—which will, most likely, include IP theft. If you can’t handle this, stay home (and if your product sells well someone will buy it, reverse engineer it and you’ll have “leakage” anyway—just latter than sooner). And remember, IP theft is not unique to the Chinese, although they may have found a way to mass-produce it.Second, if you decide that coming to China is worth the risk (and it obviously often is) than you need to file for all legal protections available to you in your home country BEFORE you come to China. Think this is a no brainer? You’d be surprised.Third, now that you’re legally protected in the international arena you should find a good law firm in China (I recommend Harris and Moore) and do the same thing here—file for all legal protections available to you in China. Now if there is not much enforcement in China, what’s the point? The point is that while there is not much enforcement you can take your case to court and you do have a chance of winning and the situation in China is getting (incrementally) better all the time.Fourth, there are physical steps that can be taken to protect your IP.•Build good relationships with your factories. If your relationship is worth more than stealing your IP you’re probably pretty safe—I personally think that this is your best defense.•Divide up the sensitive parts of the IP so that no one single factory has access to then entire product.•Have your own personnel on the ground looking after your interests here—this needs to be someone that can speak and read Chinese and maybe Cantonese if you’re in Guangdong.•Remove all molds and samples when projects or parts of projects are completed.•Sign contracts and then live by them and expect your factories to do the same. If you are lax on your contract enforcement they will be more than happy to be lax too. You can’t pull your contract out at the last minute before you ship and try to beat them over the head with it if you’ve been accepting and making changes for the previous few months.