China’s Intellectual Property Theft

Intellectual property (IP) is often the major distinguishing factor between one company and its competition. Product quality, manufacturing methods, fidelity of environmental awareness, brand recognition, and numerous other factors come into play as brands evolve, but a company’s IP fuels innovation, drives profits, and enables the organizationto do things in a way that is perceived, conceptually and legally, as uniquely their own. This is exactly what makes IP so valuable and such an appealing target for theft.

The theft of IP is certainly nothing new, but the internet has offered new ways of accessing valuable trade secrets, and threat actors are taking advantage of the opportunity. However, the internet isn’t the only access point and, at least for the last year or so, the main offenders have been companies based in China, due in large part to the laws the Chinese government has in place regarding trade with foreign companies. The CNBC Global CFO Council found just under one-third of U.S. companies report being victims of theft from Chinese firms, while one in five note this theft has happened in the last year. With Transparency International giving China an index score of 39/100 in its 2018 Corruption Perceptions Index–a decrease of two points since 2017–it’s clear the situation is not improving.

This business landscape creates a significant risk for U.S. companies, especially those with business interests in Asia. As the current U.S. trade war with China continues, the challenge will only continue to grow, and it will be up to individual organizations to safeguard against the possibility of an IP compromise.

Two Distinct Ways of Accessing Intellectual Property

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Theft of American and other foreign-made goods by China has been a facet of the global consumer goods economy for years. Stolen films and software still flood the entertainment market while products such as low-quality pharmaceuticals and knock-off luxury goods (watches, handbags, etc.) also find their way into consumers’ hands. Somewhere along the way, as Professor Paul Goldstein shares with Stanford’s SLS Blogs, Intellectual Property became a part of this trend and neither the U.S. government nor the Chinese government acted quickly enough to mitigate or regulate the effects properly.

Jump ahead to today, and American companies are facing the loss of IP in two ways:

1. Theft, and especially cyber theft, remains a problem and is difficult for American companies to fight once it has occurred. Copyright violation can also loosely be added to this category, as Chinese companies knowingly violate copyright laws while the Chinese government is not always complicit in combating these violations.

Perhaps the most infamous example of IP theft is demonstrated in the charges leveled against the years against the Chinese smartphone and technology manufacturing company Huawei. In addition to the most recent charges of fraud against the company and the related arrest of Chief Financial Officer Meng Wanzhou in December 2018, Huawei’s rise to global technology domination is punctuated with accusations of IP theft.

Accusations include unauthorized photos and the stealing of physical components from T-Mobile, software code theft from Cisco in 2003, and attempts to gain trade secrets from Apple suppliers involved in the production of the Apple Watch. However, the company is quick to deny these accusations and, though some believe this behavior is encouraged by Beijing, the Chinese government is often insistent they do not condone IP theft.

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2. Technology transfers required for entry into China put foreign companies at risk. Though the Chinese government has remained mostly tight-lipped on technology transfer requirements until early in 2019, the U.S. and other foreign businesses are often required to partner with state-run Chinese firms to gain access to the country. There is a potential global upside to this requirement, but U.S. companies report the technical expertise they hand over in good faith is being subsequently utilized by Chinese competitors without authorization.This subject, however, is complex because the technology transfer is only required of companies looking to do business in China. In other words, there is a tacit implication that U.S. companies have chosen to exchange sensitive information for market access. This is not to say abuse of this information is warranted, but that from a legal or regulatory standpoint it’s somewhat unprecedented due to the character of the ostensibly mutual exchange.

Keeping Your IP Safe and Secure

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Taking steps to guard your intellectual property is essential in striving to maintain your company’s competitive advantage. Guarding against the electronic theft of valuable information should be central to your cyber security preparedness planning. From network security to employee training and policies on personal device use, developing company-wide cyber awareness will help you avoid a potential data breach while demonstrating to employees and customers a commitment to security. If you already have robust cyber security policies in place, ensure a regular review of these policies and practices is part of your process, and if your organization is just beginning to take these critical steps, it’s essential to consider some core best practices.

When faced with a technology transfer request, however, due diligence is essential and may be your best option. You should strive to know as much as possible about your Chinese business partner and its leadership. Unfortunately, due diligence in China remains difficult as the language barrier is high for non-native speakers. In addition to being an exceptionally challenging and time-consuming language for English speakers to learn, Chinese characters and Romanization variations in the written language complicate internet searches. Additionally, different versions of the language are used in different regions with, for example, Simplified Chinese used in mainland China and Traditional Chinese used in territories such as Hong Kong. Finally, the Chinese government exploits this complication by making documentation intentionally difficult to search.

Though it is normally a best practice to engage an experienced team of people who know where to look and what technology to use when performing due diligence, Chinese languages complications further highlight the value of outside expertise. There is no way to completely guarantee your valuable information won’t be stolen by a nefarious third party–truly the flagship risk of pursuing otherwise lucrative business in this region–but a rogue smartphone photo or a faulty Chinese character shouldn’t become the Achilles’ heel in your plans for Chinese expansion.