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Cablegate: Ipr Enforcement in South China: Ustr-Led

DE RUEHGZ #9875/01 2550732
R 120732Z SEP 06





E.O. 12958: N/A
SUBJECT: IPR Enforcement in South China: USTR-led
Interagency Journey into the "Heart of Darkness"

REFERENCE: A) Guangzhou 20753; B) Guangzhou 15230

(U) This document is sensitive but unclassified. Please
protect accordingly.

1. (SBU) Summary: Following JCCT IPR Working Group meetings
in Beijing, a USTR-led delegation traveled to Fujian and
Guangdong provinces in late August to engage local leaders
on IPR issues and raise specific areas of concern. The
visits were part of the provincial review of China announced
in the Special 301 Report issued on April 28, 2006. Though
most of the Chinese officials stuck to Beijing's talking
points, the meetings revealed differences in emphasis.
Shenzhen budgets specifically for software procurement and
cooperates closely with optical disc industry associations.
Dongguan is more concerned with holding seminars than
developing criminal cases. Fujian officials would like U.S.
companies to more closely oversee their contractors and
assist in counterfeit verification. Guangdong acknowledges
that administrative penalties are not a deterrent and
encourages closer engagement with the U.S. Chamber of
Commerce. All of the Chinese enforcement agencies continue
to rely on short-term campaigns and initiatives, such as the
recently announced "100 Day Campaign" on copyrighted
materials, despite facing increasingly organized
counterfeiting rings. Visits to local counterfeit markets
and discussions with U.S. industry provided further evidence
that only a sustained, long-term coordinated effort will be
enough to reduce overall levels of piracy. End summary.

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Background on the Interagency Visit

2. (SBU) In an effort to pinpoint the problems in China's
IPR enforcement system and develop more effective solutions,
USTR has focused on regional IPR enforcement this year. The
2006 Special 301 Report spotlights Guangdong, Fujian, and
Zhejiang provinces and Beijing as IPR "hot spots" and
recommends more sustained, deterrent enforcement. The visit
by USTR, Commerce, and Patent and Trademark officials to
Fujian and Guangdong provided an opportunity for face-to-
face discussion with local enforcement officials, U.S.
business representatives, and first-hand glimpses of
counterfeiting markets.

3. (SBU) The Special 301 Report names Guangdong as the
center of large-scale counterfeiting in China for goods
ranging from low-cost consumer items to electronics. As one-
third of China's exports pass through Guangdong, it is a
crucial link in the global piracy chain. In Fujian, the
report highlights widespread production of counterfeit
athletic shoes, among other products. Nike, Reebok, and New
Balance are all engaged in long-running legal actions in
Fujian (Nike representative Bill Wei asked the Consul
General to raise Nike's concern during an upcoming trip to
Putian the week of September 11). Optical disc piracy is
common throughout Guangdong and Fujian.

4. (SBU) Attending on the Chinese side at most of the
meetings were representatives from the Intellectual Property
Office (IPO), Copyright Bureau, Culture Bureau,
Administration for Industry and Commerce (AIC), and Foreign
Affairs Office (FAO). No representatives from the Public
Security Bureau (PSB), Customs, or Procuratorate accepted
invitations to meet. Representing USTR were Stan McCoy,
Chief Negotiator on IPR, and Audrey Winter, Deputy Assistant
USTR for China. Lisa Rigoli, International Trade Specialist
represented the Department of Commerce; Tim Browning
participated for the Patent and Trademark Office. Guangzhou
Econ/Pol officers and staff accompanied the delegation.

Fujian Province: Shoe Central

5. (U) Bai Jingzhao, Director of the Fujian Copyright
Bureau, told the U.S delegation that Fujian has encouraged
IP protection through progressive legislation and strong

GUANGZHOU 00029875 002 OF 006

enforcement. Eighty percent of Fujian counties now have a
Copyright Bureau. All computer manufacturers in Fujian must
preinstall legitimate software. Copyright officials inspect
government offices to verify the use of legitimate software
and are just beginning to promote legal software use in
large private enterprises. Fujian has also implemented
national police campaigns, including the "100 Days Campaign"
against optical disk piracy, the "No Fakes" joint campaign
with retailers, and the establishment of one-stop IPR
Complaint Centers.

6. (U) An official from the Fujian AIC told the team Fujian
administrative authorities had transferred 26 trademark
cases to the police in 2005, reportedly the second largest
number in China (Note: this number did not match official
statistics published by the central government, which
indicated only 5 trademark referrals in 2005. End note).
Fujian officials reported that they had transferred 10 cases
involving U.S. rights-holders since the end of 2004, one of
which involved Nike. In response to questions about how to
improve enforcement against counterfeit athletic shoes, the
official noted that the shoe industry is difficult to
monitor because of the preponderance of OEM enterprises,
usually Taiwan- or Hong Kong-owned, that manufacture for
foreign companies. He recommended that U.S. companies or
industry groups more closely monitor their contractors and
also set up verification teams in Fujian to assist officials
in identifying counterfeit products.

7. (U) To highlight Fujian's stake in an effective IP
protection regime, Bai raised the example of Dehua, a Fujian
county of 300,000 residents that has a long history of
manufacturing ceramics and sculpture products. Dehua
enterprises hold numerous design patents and residents have
per-capita incomes higher than the provincial average.
Dehua enterprises have even sued Italian and Spanish
manufacturers for infringing their patents and copyrights.

8. (U) USTR McCoy encouraged Fujian officials to undertake
more ex-officio actions on behalf of U.S. rights holders,
particularly small and medium-sized enterprises, for example
Wisconsin ginseng farmers. He called attention to
counterfeiting of the athletic shoe trademarks of companies
such as New Balance. He also noted that the U.S.
delegation's visit coincided with the start of the fall
school semester, and urged local officials to crack down on
pirated textbooks. The U.S. team encouraged Fujian
officials -- and other officials in subsequent meetings --
to open a channel of communication through the U.S.
Consulate in Guangzhou to provide useful data on enforcement
and examples of successes.

Guangdong Province: We Know There's a Problem

9. (U) Guangdong Deputy Secretary General Luo Ou noted that
Guangdong IP officials have targeted specific cities for
enforcement efforts during the past five years: Guangzhou,
Shenzhen, Shantou, Jieyang, and Chaozhou. Civil IPR courts
in 21 municipalities and eight counties in Guangdong have
accepted an accumulated total of 2,800 cases. Luo noted
that some lower-level courts in Guangzhou and Shenzhen have
begun accepting IP cases in a pilot program to reduce case
backlog and that the province established three IPR
Complaint Centers. In addition, Guangdong has increased
budget funding for its court system.

10. (U) USTR McCoy emphasized that U.S. industry remains
concerned about a lack of counterfeiting and piracy cases
transferred to the police for criminal investigation, due in
large part to inconsistent standards of valuation for seized
infringing products. Luo acknowledged that in some cases
penalties for infringement are not severe enough to deter
counterfeiting, and agreed that the number of criminal cases
needs to be increased. With respect to copyright piracy,
Luo mentioned that a total of 200 optical disc production
lines have been confiscated by Guangdong officials since

GUANGZHOU 00029875 003 OF 006

copyright enforcement began in May 1996. He added that many
of the pirated CDs and DVDs sold in Guangdong are imported
from nearby Asian countries, such as Vietnam. McCoy called
on the provincial government to help address this problem by
encouraging the Shenzhen optical disc testing facility to
share exemplars with the international library maintained by
IFPI. He also raised copyright industry concerns about book
piracy and government use of software. McCoy encouraged
Guangdong officials to continue working with the U.S.
Chamber of Commerce on training and benchmarking initiatives
(see reftel A on a recent IP seminar co-hosted by the U.S.
Chamber and Guangdong authorities).

Shenzhen City: More Than Talk

11. (U) Li Ping, Deputy Secretary General of Shenzhen,
former head of the Shenzhen IPO, and current chairman of
Shenzhen's leading group on IPR, acknowledged that
Shenzhen's growing reliance on the high-tech sector meant
that the city must create an effective IP protection
environment. He mentioned that he personally read USTR's
Special 301 Report entry on China and was aware of foreign
industry concerns. Li noted that four of the nine heads of
IP agencies present at the meeting were educated in the
West, three in the United States. Li explained that
Shenzhen has unique legislative power because of its status
as a special economic zone, and its leaders have put into
place IP laws that are more stringent than national laws.
This is particularly in the area of software and optical
discs, which are the focus of enforcement in the city.

12. (U) Li said Shenzhen has a specific budget of RMB 14
million for the purchase of legitimate software in
government offices. (Note: This was the first time any of
the U.S. participants had heard of a specific budget for the
procurement of legitimate software. End note). He noted
that IPO and MOFCOM officials will be at the upcoming
Shenzhen High-Tech Fair to verify that all products are
legitimate, then will issue certificates to those who pass

13. (U) Li added that the number of cases transferred for
criminal investigation in Shenzhen has increased each year.
Su Huijian, director of Shenzhen's Culture Bureau, said his
office has transferred 145 copyright-related cases to
criminal authorities since 2004. All of cases were charged
under the illegal business law, because the Cultural Bureau
itself does not have the authority to bring charges under
IPR statues. Su expressed hope that future cases could be
charged under the copyright law if the Cultural Bureau's
operating authorities were changed. (Note: The illegal
business law includes tougher penalties for infringers and
is less burdensome in terms of evidence collection. The
Copyright Bureau is authorized to bring charges under the
IPR statues. End note).

14. (U) USTR DAUSTR Winter said she looked forward to
improved coordination between industry associations and the
national optical disc forensics lab located in Shenzhen.
The lab holds China's only complete exemplar library of
optical discs produced in China; it is the only lab housing
sound spectrogram and optical media "fingerprinting"
equipment to conduct forensic analysis. Though the lab did
permit a USG visit on May 19 (reftel B), U.S. industry
faulted the lab for a lack of transparency and its
unwillingness to contribute exemplars to a global database.
Li said the lab is under the authority of the central-level
Ministry of Public Security, and the city of Shenzhen has
minimal say in its operations, though he promised that the
IPO and Copyright offices would raise with lab staff and the
MPS in Beijing the issue of contributing to a global
exemplar library.

Dongguan City: Turning a Blind Eye

GUANGZHOU 00029875 004 OF 006

15. (U) Liang Bing, Deputy Secretary General of Dongguan,
commented that Dongguan's robust enforcement has meant
relatively low piracy. Since Dongguan intends to shift from
being a center of low-cost manufacturing to a "city of
innovation," it places great importance on IP protection.
He noted that Dongguan, in accordance with national
mandates, has set up an IPR Complaint Center and an
experimental lower-level court for IP cases. Lian Xibo,
head of the Dongguan IPO, commented that foreign companies
do not always follow correct procedures in filing
administrative cases. USTR McCoy responded that industry
has expressed concern that different localities in China use
different procedures for case filing, and a higher level of
transparency would help both sides. He also said that
Dongguan can improve its IP enforcement reputation with U.S.
industry by increasing the number of ex-oficio actions on
behalf of U.S. companies.

16. (U) The Dongguan authorities did not provide any data on
case transfers, but claimed the number of such cases is
increasing. Lu Jingna, head of Dongguan AIC, said the
number of criminal cases involving foreigners is "few," in
part because such companies are better at protecting their
own IPR by themselves. Liang said that Japanese enterprises
put together a catalog of major Japanese trademarks and
provided copies to enforcement authorities, helping them to
better protect Japanese marks. Liang opined that the reason
Dongguan sees few IP-related criminal cases is that few
infringers operate in Dongguan and little piracy takes place
there. Regarding optical disc piracy, Liang said Dongguan
does not produce any optical discs, legitimate or fake.

Industry Views: An Increasingly Complex Problem
--------------------------------------------- --

17. (SBU) In meetings with the U.S. delegation in Shenzhen
and Guangzhou, U.S. companies voiced their frustrations with
local IP enforcement authorities, whom they say routinely
partner with IPR violators, are susceptible to corruption,
are outmatched by increasingly sophisticated counterfeit
rings, and attach little importance to trade secrets cases.
Sam Ho, MPA's Director of Operations for Greater China, has
successfully cooperated with the Shenzhen and Guangzhou
Culture Bureau, but said Dongguan authorities are not
completely honest in their claim to low piracy rates.
(Note: Numerous industry contacts have told us that Dongguan
officials are guilty of local protectionism and are
notoriously corrupt. End note). Shenzhen in particular has
shown great improvement in recent years, but Ho noted that
optical disc warehouses have unfortunately begun to move
from Shenzhen to Dongguan. John Groves, Director of IP in
Asia for Emerson, said the situation has "deteriorated"
during that past two years, with counterfeiters moving up
the value chain by copying high-end products such as USD 500-
1000 petrochemical plant pressure valves. He said
authorities are generally cooperative, but lack resources
and expertise to deal with the problem. Emerson has applied
for certification as a "famous trademark" in China in the
hope that it will see improved responsiveness on IP issues.

18. (SBU) Several U.S. companies said they have been the
victim of employees who steal trade secrets or violate non-
compete agreements. A representative from HR management
firm Hewitt Associates said China's draft labor contract law
improves the situation somewhat, but does not provide
deterrent remedies. Moreover, few companies even try to sue
employees who steal trade secrets because of the low rate of
success in the court system. In the case of a bicycle
manufacturer (Dahon), police claiming that no harm had
occurred refused to get involved in a case in which a former
senior engineer blackmailed the company by threatening to
divulge data to competitors. Emerson currently has a case
pending in Shenzhen involving an employee who stole company
secrets and set up a competing enterprise.


19. (SBU) Harley Seyedin, President of AmCham-South China,
said the emergence of large department stores in the area

GUANGZHOU 00029875 005 OF 006

has improved the IPR environment somewhat, as they have a
stronger interest in controlling the products they sell in
order to protect their own reputation. Nevertheless, he
said, "substantial underreporting" of IP infringement exists
because U.S. companies do not always initially see it as a
threat and because they fear damaging relations with
government officials. In addition, U.S. companies in the
region are faced with a host of other challenges that are
more pressing than IPR protection. AmCham-South China
recently released a survey of U.S. companies in the region
that found regulatory issues, local competition, and skilled
and unskilled labor shortages as greater challenges than IPR

Impressions from Market Visits: Business as Usual
--------------------------------------------- ----

20. (U) The U.S. delegation visited a number of markets in
Fuzhou, Shenzhen, and Guangzhou and found varying amounts of
counterfeit products present. Some of the markets
prominently displayed blatantly counterfeit merchandise,
others stored their fakes in back rooms but displayed non-
infringing plastic models of branded goods or offered
catalogs with the stock available within a few minutes.
Other markets appeared largely absent of fakes. Guangzhou's
leather market -- which fills a number of large shopping-
mall sized buildings on either side of a main thoroughfare -
- did not have its usual abundance of fake purses, wallets,
and bags on display. It soon became apparent, however, that
the vendors were expecting a raid by AIC that very day and
had hidden counterfeit products from view.

21. (U) Vendors at a nearby shoe market openly sold fake
Nike, New Balance, and Reebok products as well as those
sporting Disney and Sesame Street characters. Some of the
vendors were not interested in selling individual items,
preferring instead to deal with large, wholesale orders.
Fake Levi's, Polo, Guess, and Snoop Dogg clothes were widely
available at a Guangzhou clothing market. Some of the
clothing, particularly winter coats, appeared to be high-
quality, genuine products being sold at low prices. This is
likely the result of "third-shift" manufacturing, in which
factories produce extras to sell on the side. Also for sale
was clothing, particularly jeans, without brand labels. At
a nearby building, however, numerous stores are willing to
produce large quantities of counterfeit labels, buttons,
tags, and bags for customers.

22. (U) In addition, foreign buyers -- particularly
Africans, Middle Easterners, and South Asians -- work in
Guangzhou as wholesale purchasers and shippers for
enterprises in their home countries. This phenomenon has
broadened the global reach of China's counterfeiting
industry. Indeed, at one of many booths at a Guangzhou
watch market that openly sold fake Rolex watches, Mont Blanc
pens, and Sony MP3 players, a buyer from South Asia was
negotiating a purchase of watches numbering in the tens of

Comment: It's a Regional Issue

23. (SBU) This trip drove home the fact that IPR enforcement
in China is as much a regional issue as a national issue.
Even within provinces, particular cities and particular
agencies are more effective and engaged than others in IPR
protection. Shenzhen is an example of a city that
increasingly takes IPR enforcement seriously, for its own
sake as much as for its foreign enterprises. It faces well-
organized opposition that tracks visitors, including the
members of this interagency team, by photographing them and
comparing their photos to databanks of known enforcement
agents. This practice extends to other cities as well.
Shenzhen administrative enforcement agents have been
physically threatened by vendors at retail markets.
Dongguan, on the other hand, showed an unsettling degree of
nonchalance about IPR enforcement that seems to signal

GUANGZHOU 00029875 006 OF 006

systemic problems. Nevertheless, this visit by USTR, USDOC
and PTO undoubtedly brought home the message to local
officials in Fujian and Guangdong that the USG is closely
watching their IPR enforcement actions and will duly note
any improvements or failures.

24. (SBU) Chinese officials continue to rely on short-term
campaigns and initiatives to address what has become an
ingrained problem. An illustration of the challenge that
Chinese IP officials face was seen during the visit to Luohu
Market, in Shenzhen on the border with Hong Kong. At Luohu
-- which was specifically listed in the 2006 Special 301
Report and which Shenzhen Deputy Secretary General Li termed
"our headache" -- vendors do not openly display counterfeit
products but rather lead you to hidden rooms in nearby
buildings that are loaded with fake goods. In one instance,
a roaming vendor offered to lead the U.S. delegation to a
hidden store but was chased off by a security guard. Five
minutes later, the same vendor was back in the same place,
apologizing for the inconvenience and urging the group to
accompany him.

25. (U) USTR has cleared this cable.


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