Trade secret theft real danger for firms doing business in China

After 50 years of friction, China and the United States have had the most expanded trade relations ever for a little more than a month.

The open trade relations benefit U.S. companies in two major ways. China’s nearly 1.3 billion people provide the United States with a huge export market that manufacturers are eager to tap. Companies can slash overhead by moving operations to China, where wages and working environments fall far below U.S. standards.

These benefits, however, are saddled with drawbacks. International business attorney David Lee of Chrisman, Bynum & Johnson in Boulder, said that until the mid-’90s, China had no patent laws, and that even today, companies outside of China “have very little protection

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from copyright violation in China.”

Lee knew of someone, for example, who visited China and was able to buy a pirated copy of Microsoft Windows 2000 for $2 before it was legally for sale.

Referring to China’s intellectual property laws, Lee said “A disaster is an understatement. Intellectual property is something the Chinese have never had and don’t understand. They don’t see anything wrong with using someone else’s idea or original work.”

This cultural difference impacts manufacturing as well. Consider a chemical company developing a new product. Its formula is so top-secret that it is not even patented for fear that someone will “steal” it by altering the original mixture only slightly.

While a U.S.-based company may fear corporate espionage, a China-based company can virtually count on it. The combined influences of cultural differences, low wages and

non-loyal, transient workers creates a scenario where espionage is expected.

“Most Americans haven’t a clue as to how the Chinese mind works. Culturally, they are very fundamentally different,” Lee said.

Lured by wages higher than they can earn in the countryside, peasant Chinese come to the factories and live in large dormitories. Working 10 to12-hour days with low compensation, they work for six months or so, then return to their homes. Although generally stable and hard working during their six-month stints, rural Chinese easily can be tempted to share company secrets with someone who can offer more money.

Management does business differently, too.

A Chinese manufacturer may offer a very attractive price; however, the finished product will differ greatly for its first or second run, said David Hill, also of Chrisman, Bynum & Johnson. “It’s very common to have the first shipments be unsatisfactory, despite your specifications. This is because they’re trying to make the cheapest thing they can.”

While the American mindset is “bigger, better, faster,” the Chinese mindset seems to be, “smaller, less expensive, more efficient.” Fortunately, many Chinese companies won’t require payment until your product suits you.

“They don’t do cost accounting in the same way we do,” added Hill. A

Chinese businessman) “will quote prices by a gut feeling. You don’t know if they’re making money or going broke.”

While these cultural differences may seem daunting, both Lee and Hill agreed that they are not insurmountable. “If you want to manufacture,´ said Hill, “find a very good intermediary in Taiwan or Hong Kong, unless you’re going to build over there.”

After spending more than 150 years under British colonial rule, Taiwan’s laws and culture are more closely aligned with the United States than with China. Taiwanese laws are also more fairly enforced when US companies are involved. By using Taiwan as an intermediary, U.S. companies can reap the benefits of lowering overhead while avoiding many of the cultural snafus

of dealing directly with the Chinese.

Hill advises a visit to the Chinese factory, even with a Taiwanese go-between, to hasten the process of getting the product the way you want it. Hong Kong, also heavily influenced by Great Britain’s laws, provides U.S. businesses with intermediaries to China.

As a general rule, “If you go to court in China, you won’t be satisfied,´ said Hill. As for enforcing contracts, he said, “The Chinese haven’t gotten there yet.”

Perhaps in time, as China becomes more closely woven into the international business tapestry, the country will adapt to Western business practices. In the meantime, Lee advised, “It’s a matter of who you know, and ‘Can I trust the person I’m dealing with?’ “