The great China tech rip-off

Published in Business Spectator (Melbourne), 24 June 2010

There is no doubt that China’s resilient economic growth has prevented the economic crisis from becoming an economic catastrophe for the world. Yet among the dark sides of China’s rising economic power is an astonishing disrespect for intellectual property. Strong manufacturing nations like Germany are painfully realising how difficult it is to respond to this problem.

The West German city of Solingen is world famous for its cutlery. Since the Middle Ages knives, scissors and razors made in Solingen have enjoyed a reputation for excellence. This hard-earned reputation is coming under an increasing threat from China. Cut-throat competition in cutlery manufacturing is not more violent than elsewhere, but even in a business like knife manufacturing Chinese plagiarism has become a major problem.

Family-owned company Böker Manufaktur Solingen GmbH is a good example. The iconic cutlery maker prides itself on being the world market leader for sportsman’s and collector’s knives. For several years, Böker has been fighting a flood of cheap imitations. Sometimes just the design of their products is ripped off. At other times even Böker’s logo is depicted on the copied article. Even more worryingly, they also found knives carrying their logo which bore no resemblance to any of their actual products.

“At first sight, it is often very difficult to differentiate the copy from the original,” Böker admits on its website. Yet quality and safety differences can be huge – as is the difference in price. Producing high-quality knives is an expensive process depending on sophisticated technology. Copycats only superficially imitating the design can sell their products at a fraction of the price.

The damage for companies like Böker is twofold. Apart from the obvious loss of revenue, it is their brand value that suffers when cheap copies bring a centuries old brand into disrepute. What is even more frustrating for the company’s management is their powerlessness in dealing with the issue. “There are increasing cases of piracy in online auctions,” says Böker product manager Marc Götzmann. “But since they often do not name the knife and only show a picture of the logo it’s very hard to systematically search for product copies on the internet.”

Böker’s experience is not an isolated case and the problem is getting increasingly serious. In the 1990s, German customs authorities only intercepted a few hundred cases of product piracy every year. This figure now stands at about 10,000 cases a year. Almost half the pirated products originated from China and Hong Kong.

It is somewhat ironic that Solingen is nowadays not only associated with its cutlery industry but also with Germany’s first museum of industrial piracy. At the Museum Plagiarius, visitors can get a hands-on experience of everyday plagiarism, for example no fewer than 139 different copies of Germany’s traditional paper handkerchief brand Tempo.

For the past five years, the Plagiarius curators have awarded prizes to the boldest design copies on the market. Unsurprisingly, every year Chinese copies of German brands dominated the awards. Whether it was a designer ice cube container, a trolley suitcase, a set of salt and pepper shakers or a motorbike: No product category was safe from Chinese copycats.

It is hard to estimate the total damage of such activities but industry groups estimate the economy-wide losses to be in the tens of billions of Euros. Outright product piracy may just be the tip of the iceberg. More worrying are cases of technology theft and industrial espionage.

In its annual report, Germany’s secret service Bundesverfassungsschutz states that Chinese economic delegations have repeatedly been caught in spying activities. One such case happened when a South German company was visited by one of its Chinese business partners. He aroused suspicion as he was taking photographs of production facilities. Police were called in and arrested the Chinese visitor. The evidence found was sufficient to sentence him to a suspended prison sentence and 80,000 euros in damages.

Companies directly engaged in China are at the greatest risk. It is a threat that some German investors are not sufficiently aware of when making the decision to invest in China although there are enough cases to warn them. The most famous incident concerned the magnetic levitation railway system Transrapid.

Originally developed by ThyssenKrupp and Siemens, the German government sponsored the construction of a reference track of their maglev train in Shanghai. Only a few years later, the Chinese government announced the development of their own magnetic railway technology – much to the dismay of German politicians. They openly accused China of technology theft.

In the end, however, the Chinese abandoned their new maglev project. Not even a plagiarised version could economically compete with conventional high-speed trains. Unsurprisingly, China has developed these trains, too – benefiting from previous joint ventures with Kawasaki, Siemens, Bombardier and Alstom. Is it any wonder that the new Chinese trains look a bit like the French TGV or the German ICE trains?

The protection of intellectual property in China remains weak although there are occasional signs of improvement. Last year, a Beijing court awarded coach manufacturer MAN 20 million yuan in damages. A Chinese manufacturer had copied one of MAN’s most eye-catching models to the last detail and sold it at a third of the original’s price.

MAN’s case remains the exception, though. For as long as the cost and technology differences between western countries and China are substantial, the problem of product piracy and technology theft will not disappear. And worried about their countries’ economic relations, western politicians remain remarkably silent about the issue.

We can only speculate what Solingen will be most famous for in a few years’ time: its cutlery industry, or its plagiarism museum.