This post is part of our ongoing series on Doing Business in China. You can find the introduction to this series here.
In our past posts we have tried to walk a diplomatic line, highlighting the importance of commercial rather than political considerations when entering the China market. But in this post we are going to be more direct, our topic here is Intellectual Property (IP). The truth is that every company in China who wants to partner with a US company wants their IP, everything else is at best secondary, and usually just lip service paid.
We do not think this will shock or offend anyone in China. People there tell us this regularly, and it is a clear subtext (if not the explicit message) of much business press coverage there. We imagine this brutal truth will sound a little harsher to those here. “Surely, our JV partner is different.”, “They see the big picture.”, “Our relationship is Win-Win.” Actually, we imagine that anyone doing business in China is already aware of this reality, but there are still arguments we tell ourselves to avoid staring into the abyss.
This does not mean you should drop anchor and give up on China, but it does argue for an extremely sober assessment of how you approach the China market, and most of this assessment should be inward-focusing.
First, some background. The term ‘IP’ gets bandied about a lot, but it merits closer inspection. IP does not mean patents. They have those already. It does include trade secrets and in-process R&D. There has been a lot of talk recently after the Journal’s story about Equifax’s claims that it was worried about Chinese spies. We suspect that this practice is probably more widespread and less effective than the headlines suggest. And this only covers a portion of what JV partners seek. Perhaps the best way to think about this is to understand that the other side wants to capture whatever it is that you do that makes a profit. This is both a bigger problem than just thinking about patents, but also one that is actually much more manageable.
Also, this discussion needs a bit of historical perspective. All too often, the narrative we see in the press about China’s attempts to capture Western IP is couched in some very negative stereotypes (with the word ‘inscrutable’ only implied). But the truth is IP migration has always been a major part of economic development. If IP protection were perfect then the only country with agriculture today would be Iraq, and the rest of us would be nomads gathering roots and berries. More to the point, we remember our grade school history classes when Samuel Slater (and others) were lauded as American heroes for stealing the English secrets for designing water mills and thus bringing the Industrial Revolution to the US. More recently, we know one major Western networking equipment vendor which is notorious for ‘adapting’ the designs of its suppliers for their own internal sourced modules. Theft is theft, but let’s not pretend any country has a monopoly on this behavior.
Chinese companies know that they need to work their way up the value chain. For all the perceived State control in China, domestic markets there are intensely competitive. This level of gloves-are-off competition seems remote to our genteel business practices, and are often more reminiscent of Dickensian England, but competition in China is brutal. Admittedly, there is a political aspect to this, with a fair amount of National Pride in China staked on it’s ability to nurture global technology leaders. But every company everywhere needs to advance its ‘IP’ to maintain and grow profits. China, like many countries before it, sees the fastest way to doing this as learning from foreigners, where ‘learning’ is both literal and a euphemism for ‘by any means’.
Our point here is that Chinese companies are not acting irrationally. They face an immense amount of pressure to learn or get swallowed by competitors. The one big difference in China is that often the government will put its finger on the scales and pressure foreign companies to ‘share’.
In our next post, we will explore ways to contend with this reality.