THE MAGAZINE

China's Pirates Move Up Value Chain

By John Barham

China’s rock-bottom production costs have turned it into the world’s workshop and powered an economic boom. But that growth has also fueled a multibillion dollar counterfeiting industry consisting of high-margin but relatively low-tech fake products, such as Louis Vuitton luggage, golf clubs, DVDs, pharmaceuticals, and industrial components.

Seventy-five percent of all counterfeit products seized by U.S. Customs and Border Protection in 2006 (the most recent data available) were shipped from China and Hong Kong, according to a 2007 study on global counterfeiting conducted by the Paris-based Organisation for Economic Co-operation and Development (OECD). To boost profits, counterfeiters are moving up the value chain. As a result, safeguarding a company’s sensitive technology is becoming a far more challenging task than just shutting down producers of fake handbags. 

“Counterfeiters are gaining skills. The quality of their products is improving,” says Bill Thompson, managing director at International Risk, a Hong Kong-based investigations firm. “They are becoming more sophisticated in manufacturing and exporting these products.”

Patrick Huipeng Wang, head of security in greater China for Nokia, agrees. “Now there is more investment in R&D by the pirates.” For example, no-name phones that look just like Nokia phones now have more advanced features than real Nokia phones, says Wang. Chinese counterfeiters have achieved this by copying some features from Apple iPhones and grafting them onto Nokia look-alikes.

To fight the counterfeiting problem, Western companies impose tight access controls in their R&D facilities, screen researchers more carefully than employees in less sensitive areas, and deploy specialized software to track critical documents and programs.

But sometimes employees with proprietary knowledge quit the company and start their own businesses or join a competitor. “It’s the most common risk that we have,” says Wang.

In the United States, companies use nondisclosure agreements (NDAs) to prevent employees from taking proprietary information to competitors, but that’s not easy in China. Chinese-style NDAs require companies to pay a former employee’s salary for a year before starting their new job. That’s expensive, and because NDAs are hard to enforce in China’s legal system, few companies bother.

However, the Chinese government is becoming more active in cracking down on counterfeiting. Local courts are willing to authorize raids faster than ever, and convictions are rising.

Legitimate Chinese companies are also becoming tech savvy and are joining the push for government action against counterfeiters. “Approximately 3 percent of the 15,000 intellectual property cases filed in courts in China involve foreigners,” says Dane Chamorro, regional general manager greater China/North Asia for Control Risks.

Chinese law enforcement is also working with corporate investigators to target the heads of criminal organizations rather than individual production facilities. “Getting the fake stuff is not important. You need to get to the top people and smash the network,” says Thompson.

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