Copycat China: It Just Keeps on Going

From the New Yorker In Copycat China Still A Problem For Brands; China’s Future: Just Ask Apple, Hyatt and Starbucks, Michael Zakkour begins with a great story on China copying:

In 2006 I had to leave Beijing for a brief business trip to Dongguan, a major industrial city in Guangdong Province. My assistant asked if I wanted to stay at the Hilton or the Hyatt.  I told her the Hyatt would be fine.  When the taxi pulled up at the hotel I was happy to see it looked new, modern and welcoming and was topped by the familiar green Hyatt sign on top.  Or was it? At first I thought it was because I was tired, but a second look confirmed that the big green sign actually said “Hiayatt”.  It was a Shan Zhai hotel. An entire hotel! After many years in China I had grown accustomed to fake phones and apparel, imitation KFC restaurants and even the “Sunbucks” coffee shop in Shanghai.  But this was a whole new level of fake.

What has happened to the hotel since then?  Did it get shut down?  No. I visited Dongguan in February, and it’s still there. Not only that, but as an April 28th article in the New York Times by Julie Weed explains, there has been a proliferation of fake Hyatts, Peninsulas and Marriotts in China. Apparently the Haiyatt Dongguan was ahead of its time.

Just about everyone who has done business with China can tell their own fascinating China copycat story. As a China lawyer, my personal favorite are the fake law firms that focus on collecting money from American companies to register their trademarks in China. Of course, once the money is paid, nothing happens. See China: Where Even The “Law Firms” Are Fake.

Zakkour’s thesis is that copying in China is as rampant as ever and it is harming both foreign companies and China itself.  I mostly agree with that.

Zakkour goes on to note that “there has been some movement in recent years toward increased respect for and enforcement of IP and and innovation in technology, product development  in China” and then he cites Weibo, WeChat, Shanghai Tang and Lenovo as Chinese companies that “create new technologies, cutting-edge products and wickedly smart and effective marketing strategies.” But he describes these companies as “exceptions to the rule.” I mostly agree with that.

Zakkour then quotes from the book, China In Ten Words, which puts copycat on its ten word list:

Once copycat cell phones had taken China by storm, copycat digital cameras, copycat MP3 players, copycat game consoles and other pirated and knockoff products came pouring forth. Copycat brands have rapidly expanded to include instant noodles, sodas, milk, medications, laundry detergent and sports shoes, and so the word “copycat” has penetrated deep into every aspect of Chinese people’s lives. Copycat stars, TV programs, advertisements, pop songs, Spring Festival galas, Shenzhou 7 space capsules and Bird’s Nest national stadiums have all made a splash on the Internet, each revealing their own special flavor and gaining instant popularity.

Zakkour sees “Copycat China” as threatening “both foreign companies and China itself” in the following ways:

  • It reduces China FDI.
  • It causes some foreign companies to leave China due to IP theft.
  • It causes foreign companies not to bring in their most IP-sensitive products.
  • It makes foreign firms reluctant to use China-based service companies and technologies, especially in IT outsourcing, for fear of losing IP to such companies.
  • China’s lack of an innovation culture and reliance on borrowed ideas means China is not creating products the rest of the world wants and needs.

I agree. Zakkour sees the above as reducing China’s competitiveness and preventing it from “moving from being the factory to the world to being a real innovator, hurting overall growth.” I agree.

Zakkour then quotes me on how China is still copying and how that copying stifles innovation:

According to China lawyer Dan Harris, an expert on China IP “over the last ten years, my firm has seen little change in terms of our client’s IP being copied by Chinese companies. If anything that copying has only increased as interaction between foreign and Chinese companies increases.”

“China copying will continue to negatively impact China’s economy. When companies find it easier to copy than to innovate (and this is generally true in China) there is little incentive to innovate. Copying reduces the incentive to innovate for the companies that copy and for those that were contemplating innovation. Why innovate if someone is going to copy your innovation and get away with it?”

Again, I agree.

Where I disagree with Zakkour is in his failure to give enough play to how things have changed for the better in China in terms of protecting IP.  Seeing as how this is my blog (and I can write what I want to) I am going to say how I really feel about IP in China, as follows:

  • China does copy. Like crazy. But it is not as bad as some countries and it is getting better. Slowly. The level of copying in China is all over the map. My law firm has some clients who barely need worry about copying (airplane manufacturers for example — not parts, but airplanes) and some who need worry about it constantly (clothing manufacturers, for example).
  • China does copy and one typically need not go far to see evidence of that. But the level also varies by city and the seriousness of the enforcement powers therein.
  • There is copying and there is copying. The $10 fake Gucci purses everyone knows are fake are not as big a deal (sorry Gucci) as fake medications or fake airplane parts. I get the sense China is beginning to understand this.
  • Foreign companies are not without blame. If they are not registering their IP in China and using good contracts with their Chinese counter-parties, they have little basis to complain. Just a few hours ago I got an email from someone who had drafted his own NNN Agreement in English that called for arbitration in English in China. That is so far from the optimal way to prevent someone from using your trade secrets that I would ascribe fault to him if his trade secrets are exposed.

So yes, China is still copying, but its IP registration system is improving (for instance, its new trademark laws are likely to increase trademark protection) and its courts are getting tougher on IP violators. So overall, things are getting better. Slowly. Very slowly.

Do you agree?

UPDATE:  In a post entitled, Fake Government Busted in China, the Wall Street Journal reports on a recent incident of copycatting involving fake government — yes fake government!