Unraveling the mysteries of China’s intellectual property policies

Israeli companies that are seeking to manufacture or sell in the world’s most populous nation could find the experience rewarding, although it is rife with danger, say experts

Zvi Shalgo, chairman of the PTL Group (Photo credit: Courtesy)
Zvi Shalgo, chairman of the PTL Group (Photo credit: Courtesy)

Anyone who wants to do business in China had better have his eyes wide open — and eyes in the back of his head, as well. If you’ve got an original product or technology, expect someone you’re doing business with to try to copy or duplicate it, using their local connections to promote their version of your idea. And getting away with it, too.

But still, says Zvi Shalgo, chairman of the PTL Group and chairman of the Israeli Chamber of Commerce in Shanghai, it’s worth getting a foothold in the Chinese market. “If set up properly, an Israeli or other Western technology company can do quite well in China. It’s just a matter of ensuring you are protected.”

Western companies doing business in China need to protect themselves from having their ideas and technologies ripped off, and that protection is the job of Shalgo’s organization. The PTL Group ensures that the novice Israeli start-up looking to make a deal with a Chinese company dots all their i’s and crosses all their t’s on registration forms, corporate paper filings, and, perhaps most importantly, patent claims. Unlike in most Western countries, you really do need a guide when entering the Chinese market, which, he told The Times of Israel, was akin to the situation in the US a century ago.

One of the biggest problems is well known to thousands of Westerners who have tried to do business in China: the country’s respect, or lack thereof, of the intellectual property (IP) rights of holders of technology patents. “There were laws about IP on the books, but there was little enforcement, just like in China today.” It’s a bit of the Wild West in the 21st century, and without a “guide to the IP wilderness,” the great idea an Israeli start-up is seeking to bring to market by doing its manufacturing or development in China may fall into the wrong hands — hands that will claim them as their own and produce products or technology based on the same idea, essentially cutting the Israeli inventors out of the picture.

And while things are getting better, much caution is still needed, Shalgo said. “They see themselves following the same pattern as Japan, which started out in the 1960s and 1970s doing the same low-level manufacturing work now being done in China, before moving on to technology design. The Chinese are doing everything they can to move beyond the manufacturing phase,” and as a result, the temptation to “cut corners” in IP is very tempting. “When the Chinese see a technology they like, they set their minds and policies to bringing it home on a large scale,” said Shalgo, with engineers and experts reverse-engineering products and technologies in an attempt to understand what makes them tick.

Not that China is any different from any other developing country. “The truth is that even in the West they do this. The problem arises after a patent or technology claim has been violated,” with the technology assigned to a Chinese company for development and marketing. In other countries, the government or agency involved would ensure that the local company licenses the patented technology, or figures out a way to accomplish the same thing without violating existing patents. That’s not the case in China, though, where the technology is often just duplicated.

That’s a scenario that numerous Israeli companies have faced, and several of them recently told their stories at a special seminar on IP issues in China, sponsored by the Tel Aviv and Central Israel Chamber of Commerce, said Ze’ev Lavie, chairman of the Chamber’s International Relations Division. “Everyone has heard the stories about having their technology or ideas stolen, but companies that expect to survive really have little choice but to learn to work with China,” Lavie said. “According to the International Monetary Fund, 60% of world trade will be with Asia by 2050, so companies that want to thrive are going to have to go where the action is.”

Fortunately, though, China has begun to realize that failing to enforce IP rights will end up hurting the country in the long run, said Lavie. “There is no doubt that China, until very recently, was a country where intellectual property was respected a lot less than in the West. But they realize they need to move away from the low-tech jobs and technologies that they were able to easily duplicate, because they cannot keep wages low enough anymore. They actually are looking to Israel for guidance in how to set up a ‘start-up nation,’ checking out our institutions, programs, and methods.”

The desire to connect with high-tech powerhouses like Israel — cooperating with companies in cutting-edge industries — is incentive enough for China to clean up its IP act, said Lavie. And they know they have a problem. “Last year, I heard the premier of China make a long, serious speech about the importance of respecting IP rights. I have yet to hear Prime Minister Netanyahu, President Obama, or any other leader make a similar speech,” said Lavie. “It’s true that enforcement on the ground is still problematic, but it’s clear which way the policy is going. It could be that China will never reach the level of the West in guarantees for IP protection,” said Lavie, “but it won’t be for lack of trying.”

Shalgo agrees — and, according to him, helping China to “learn the ropes” on respecting intellectual property will not only be of benefit to Western companies, but to the entire world. “We helped Matrix, Israel’s largest information technology, research and development firm, set up shop in Changzhou, a city near Shanghai that is promoting itself as a high-tech center. We wanted to find talent that was good, but not too expensive, and we found it very difficult.” In the end, Matrix opened a training program run by staff from its John Bryce Training Centers in Israel, said Shalgo.

The John Bryce program has been very successful, so much so that Shalgo is seeking to connect between Israeli and Chinese colleges to open more training programs. “The government really does want to bring the Chinese people up to a Western standard, in all ways,” he said. “Israel can have a serious role helping to make a difference. The more Israeli companies in China, the faster I believe China will reach its goals of becoming Westernized, in all meanings of the word.”

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