Reconsidering China’s Market Allure

We should know by now that Google’s conflict with China isn’t about censorship. Instead, it’s about intellectual property. Google wants to defend and protect its intellectual property, whereas hackers based in China seem intent on plundering it.

Questions remain as to whether and how the hackers are affiliated with China’s government. We might never get complete answers, though circumstantial evidence suggests official approval for, if not direct complicity in, the illicit exploits.

It’s worth noting that Google wasn’t the only company victimized. More than 30 other companies were similarly breached, including notable technology vendors such as Adobe, Juniper, Symantec, Yahoo, and Intel.

Intel claims it wasn’t severely affected by what transpired. A spokesman for the company said: “To the best of my knowledge, no intellectual property was lost,” Intel has downplayed the incident, even though the company admits it was subject to a sophisticated attack.

Other technology companies have acknowledged being attacked, but have been reticent to say whether they suffered losses of intellectual property. Google, for its part, has conceded that its intellectual property was stolen by the hackers, but it hasn’t specified what was taken.

We do know that theft of intellectual property, depending on what was purloined, could have serious consequences for victimized companies. All of the aforementioned companies face competition from Chinese vendors who already have home-field advantage in their native market. What’s more, Chinese vendors often develop and produce commodity products at lower prices than their foreign rivals. The lower prices can confer competitive advantage in export markets.

If Chinese vendors were to gain illicit access to trade secrets and intellectual property of their Western rivals, technological differentiation would be more difficult for Western vendors to maintain. The edge these companies have over their Chinese counterparts is predicated on intellectual property derived from capital-intensive research and development. If that edge is mitigated severely or, even worse, eliminated by theft of intellectual property, the potential repercussions are manifold and profound.

Uncomfortable questions arise, but we ignore them at our peril. Arguably the biggest question is whether Western technology companies could lose more than they stand to gain from direct involvement in the Chinese market. The Chinese market, with its vast promise, is as alluring as a Siren song, but one has to wonder whether Google, Juniper, and others will meet the same fate as the shipwrecked sailors in Greek mythology. Ironically, the draw of Chinese lucre could result in the pauperization of companies that pursue it.

Some might charge me with exaggeration on that point, but I would ask that you turn your attention not only to the recent rash of hack attacks but also to Chinese policies regarding domestic government procurement and industrial practices.

A recent Computerworld story spotlighted the policy straitjacket China is tailoring for foreign technology purveyors:

U.S. business associations this week wrote a letter to the Obama administration requesting its help on China’s recent intellectual property rules, which the letter said give significant preference for Chinese government procurement to products whose intellectual property is developed and owned in China. The rules run counter to Chinese pledges to avoid protectionism and mark “an unprecedented use of domestic intellectual property as a market-access condition,” said the letter, which was posted on the Web site of the Business Software Alliance.

The new requirements would make it virtually impossible for foreign companies to win Chinese government contracts, said Xiang Wang, a Beijing-based intellectual-property partner at law firm Orrick, Herrington & Sutcliffe. To comply with them, multinational companies would have to change their global model for managing intellectual property rights, transferring ownership of the rights to their Chinese subsidiaries rather than just licensing rights to them, he said.

Tough regulatory issues are likely to increase for foreign companies in China as the country keeps rising economically, Wang said.

A recent item in the Financial Times addresses many of the same issues.

Taken together, these measures amount to a disastrous scenario for a range of foreign companies, including software makers, semiconductor companies and producers of telecommunications gear, computers and smartcards.

“The stuff the Chinese government is asking for is stuff we don’t give to governments,” says a US executive. “If we were to comply and it became known that we disclosed our source codes to Chinese labs, it would damage our standing in other markets.”

One way or another, it seems, China will get the source code and intellectual property it craves. Once China has what it wants, impoverished Western companies will fail to reap commercial benefits from China and the country won’t require that they have a presence there.

The U.S. and other nations seem to have no answer for China’s “indigenous innovation” policies. As a Reuters story points out, Washington has difficulty mounting a legal challenge to China’s indigenous innovation policy because Beijing has not joined the World Trade Organization’s government procurement pact.

As Mike Elgan wrote in Datamation, it makes one wonder whether China is the market paradise Western technology companies believe it to be.

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