IP theft compels U.S. firms to terminate China venture
Fronetics Strategic Advisors' Frank Cavallaro suggests that IP protection is irregular in China, with weaknesses and biases against foreign IP in the Chinese legal and patent systems. As such, companies like Apple resort to onshoring, deciding that the best protection is to bring their production business back home.
Imagine that you ship your idea for the next great electronics product to China. You'll watch it flourish. The problem? Your name has been scrubbed from the product.
Though this does not happen in all cases, the frequent and blatant theft of intellectual property (IP) in China is making more U.S. companies turn to domestic markets for better protection, adding yet another dimension to the onshoring movement.
The Commission on the Theft of American Intellectual Property said in a 2013 report:
A core component of China's successful growth strategy is acquiring science and technology. It does this in part by legal means—imports, foreign domestic investment, licensing, and joint ventures—but also by means that are illegal. National industrial policy goals in China encourage IP theft.
Though some of its does occur via cyberspace, a lot of IP theft takes place in countries where the laws are lax and enforcement is haphazard at best. In fact, the report said, "Much of it occurs the old-fashioned way"—bribing, re-engineering, and physically stealing documents still rule in China.
In some instances, the Chinese government has even made divulging company technology a prerequisite for opening a factory. Further exposing carefully engineered properties to foreign supply chain partners is a risk some US companies are no longer willing to take. In a 2012 Hackett Group study, the protection of intellectual property ranked third among the drivers of strategic sourcing decisions, trailing only total landed cost and product quality.
The theft of everything from trade secrets, proprietary products, and parts to music, movies, and software costs the United States billions of dollars every year. Cyber espionage alone accounts for 500,000 domestic jobs lost annually, according to McAfee and the Centre for Strategic and International Studies.
For an individual company, the lack of respect for its intellectual property can lead to the demise of the entire operation.
Imagine the feeling of a company rep from a Midwestern firm that had outsourced to China as he was walking the floor at a tradeshow. A display showcased products that were more than familiar. Even the marketing materials were identical. A closer look revealed the Chinese company had stolen everything, right down to a promotional photo featuring the rep's own child.
Apple has tried for years to crack down on bootleg products and fake Apple stores across China, but few companies can afford such legal wranglings. They likely will go nowhere because of weaknesses and biases against foreign IP in the Chinese legal and patent systems.
Though Apple has not said so outright, it's a good guess the protection of IP played at least some part in its decision to bring back to the US the production of one line of Mac computers, as well as the assembly of other products. In any event, Apple is not alone.
- Frank Cavallaro
CEO & Founder, Fronetics Strategic Advisors