Intellectual impropriety

Civitas, 11 November 2010

During Prime Minister David Cameron’s visit to China, big names in British industry have been publicising the achievements that they hope the trip will deliver. One such voice is that of Sir Anthony Bamford, the chairman of JCB who has called for stricter measures to be taken against ‘unscrupulous Far Eastern competitors’ that exploit Western intellectual property (IP).  This issue is about more than simply a loss of revenue and pride: without a crackdown, the Western world’s competitive advantage in high-tech production could soon disappear.

‘Knockoff’ products have been around for ages, with Western designer and basic goods copied and exported on the cheap. In almost any market worldwide, there will be a stall selling ‘Adidos’ or ‘Naik’ clothing. The sophistication of ‘knockoffs’ has rapidly increased in recent years – it is now possible to buy ‘Tphones’ and ‘Polystation 2’, which may not be as reliable or powerful as the original, but their low prices often meet demand.

These products are IP theft in action, but how has it been possible for China et al to develop them so quickly? Simple. With Asia now seen as the ‘workshop of the world’, Apple and other companies are using its cheap labour force to manufacture their complex products. It is not long before the secrets of what makes these goods tick is known and distributed, ripe for unscrupulous copycatting.

Does this mean the Western companies themselves are to blame, effectively sacrificing IP monopolies in return for cheaper production quid pro quo? It shouldn’t be the case, because and in an ideal world, IP protection would be enforced worldwide.

The blame must lay with the Chinese authorities.  Ultimately, these companies pumping out ‘knockoff’ goods are not all clandestine about it. They own factories, export and presumably are registered somewhere. It is unlikely that the Chinese Government is unaware of their existence, and therefore the Government seems to be turning a blind eye.

A continual criticism of China has been its reluctance to import more than the minimum it requires. With its low value currency, China’s trade in goods is a one way road out of the country. IP violations are an effective route to maintaining reduced imports by enabling imitation products to be produced domestically. Bamford complained that fake JCBs are produced in China, and it is a no-brainer for Chinese consumers to choose the fake over the real product – the cost of the lookalike is cheaper (i.e. minus the logistical expense of importing) and it basically does the same thing.

The growth of China’s wealth and burgeoning middle classes will create a soaring demand for these fake goods so without immediate enforcement of IP rights, the problem will only get worse. Does it matter? Of course – many companies have been eyeing up the Asian markets for their future expansion with the aim of tapping into new revenues. Their ability to do this is much hampered if their product is effectively already on the market.

Another, long-term problem is that as companies producing knockoff goods succeed on the back of other companies, there will come a point at which innovation in  Western firms is  compromised. There is little point going to the expense of R&D if another firm will steal the idea without having to pay the initial development costs. The West’s competitive advantage is firmly based in high-quality, innovation-based products and the loss of this will lead to stagnation.

The Chinese Government, knowingly or not, is allowing an unappealing situation to ferment that is neither good for Western companies, nor China in the long-term: investment will decline if theft rather than innovation is rewarded. It is therefore in everyone’s interests to clean up the IP situation and this should take the form of dual responsibility: companies recognising the fraud and then the authorities doing something about this. Bamford provides a role model by highlighting to the Chinese Government the infringement of JCB’s patents, but it is now up to the Government to do something about it. If nothing is done, prepare to ‘upgrade’ to the new ‘Tphone’ soon…