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Cablegate: U.S. South China Companies Review Weak Ipr Enforcement

VZCZCXRO8395
RR RUEHCN RUEHGH
DE RUEHGZ #0622/01 3080916
ZNR UUUUU ZZH
R 040916Z NOV 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1075
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0325
RUEHBJ/AMEMBASSY BEIJING 0857
RUEHCN/AMCONSUL CHENGDU 0262
RUEHHK/AMCONSUL HONG KONG 0334
RUEHGH/AMCONSUL SHANGHAI 0261
RUEHSH/AMCONSUL SHENYANG 0271
RUEHIN/AIT TAIPEI 0246
RUEHBK/AMEMBASSY BANGKOK 0066
RUEHNE/AMEMBASSY NEW DELHI 0021
RUEHGV/USMISSION GENEVA 0031
RUEAUSA/DEPT OF HHS WASHINGTON DC 0049
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC 0052
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0188
RHMFIUU/DEPT OF JUSTICE WASHINGTON DC 0046
RUCNFB/FBI WASHINGTON DC 0041
RHEHAAA/NSC WASHINGTON DC 0088
RUEAIIA/CIA WASHDC 0308
RUEKJCS/DIA WASHDC 0304

UNCLAS SECTION 01 OF 04 GUANGZHOU 000622

SENSITIVE
SIPDIS

State for EAP/CM; EAP/EP; EEB/IPE; EEB/TPP; EEB/CIP
State for INL - JVigil
USTR for China Office; IPR Office; and OCG
Commerce for National Coordinator for IPR Enforcement
Commerce for MAS - RLAYTON, SMATHEWS
Commerce for MAC - ESzymanski, SWilson
Commerce for MAC - NMelcher, JWu
USPTO for Int'l Affairs - LBoland, EWu
LOC/Copyright Office - STepp
Treasury for OASIA - Dohner, Winship
DOJ for CCIPS - MDuBose, SChembtob, TNewby
FTC for Blumenthal
FBI for LBryant
DHS/ICE for IPR Center - THipelius, TRandazzo, DFaulconer
DHS/CBP for IPR Rights Branch - GMcCray, PPizzeck
ITC for LLevine, LSchlitt
State Pass White House OTP Ambassador Richard Russell
NSC for JBader, JLoi, JShrier

E.O. 12958: N/A
TAGS: KIPR ETRD EINV PREL PGOV CH TW HK
SUBJECT: U.S. SOUTH CHINA COMPANIES REVIEW WEAK IPR ENFORCEMENT
PROBLEMS WITH SECRETARY LOCKE AND AMBASSADOR HUNTSMAN

Ref: A) Guangzhou 619, B) Guangzhou 611, C) Guangzhou 320, D)
Beijing 570

1. (SBU) Summary: Intellectual property right (IPR) infringement --
including counterfeiting, unlicensed technology transfer, hard-disc
piracy and unauthorized internet distribution of copyrighted content
-- cost U.S. firms in south China hundreds of millions of dollars in
lost revenue and pose a serious threat to future operations,
according to executives who met October 27 with Commerce Secretary
Locke and Ambassador Huntsman. Poor quality patents, the lack of
coordination of IPR enforcement, and public sector procurement
practices based on discriminatory indigenous standards are
additional challenges that companies face in the regional business
environment. Strategies for navigating IPR-hostile terrain proposed
by the business leaders include local registration of companies and
building positive relationships with relevant IPR authorities and
local distributors. Despite IPR challenges, the business potential
of the China market continues to attract U.S. companies.
Participants at the meeting highlighted the critical role the
Consulate's Foreign Commercial Service Office plays in providing
assistance to small- and medium-sized companies. End Summary.

--------------------------------------------- -----
WEAK IPR ENFORCEMENT A THREAT TO FUTURE OPERATIONS
--------------------------------------------- -----

2. (SBU) Pervasive infringement of IPR costs U.S. companies hundreds
of millions in lost revenue every year, and has forced some
companies to seriously consider relocating R&D activities outside of
Guangdong province, according to business leaders who met with
Ambassador Huntsman and Commerce Secretary Locke during their visits
to Guangzhou. Jim Sherriff, Chairman and CEO of Cisco China, told
the senior U.S. visitors, during a breakfast hosted October 27 just
prior to the Innovation and Intellectual Property Forum (see reftels
regarding the Forum and related meetings) by the American Chamber of
Commerce in South China (AmCham South China), that weak IPR
enforcement not only poses a threat to U.S. business operations in
the province, but also to Guangdong's stated objective of attracting
research and development (R&D) investment to develop innovative
technologies and move up the value chain. The principal source of
IPR problems, according to Sherriff and other business leaders, is
not so much the lack of IPR laws or regulations but, instead, uneven
enforcement between and among provinces and even cities and the lack
of severe criminal penalties that could deter illegal behavior.

3. (SBU) U.S. companies in the entertainment sector have been
particularly hurt by weak IPR enforcement. Hugh Stevens, Senior
Vice President of Time Warner Asia, explained that Guangdong was the
largest source in China of pirated CDs and DVDs, many of which are
exported overseas. The entertainment industry is also hurt by the
lack of a regulatory framework for internet distribution of
copyrighted content, which makes it easy for internet users to

GUANGZHOU 00000622 002 OF 004


freely download copyrighted movies and music without authorization.
In addition, Stevens pointed out that online and hard-disc piracy
was facilitated by the absence of an anti-camcorder law at movie
theatres and concerts.

---------------------------------------------
LABOR LAWS ALSO A CHALLENGE TO IPR PROTECTION
---------------------------------------------

4. (SBU) Already weak IPR enforcement in the region has been further
hampered, according to David Hon, CEO and founder of Dahon, a
leading bicycle manufacturer, as a result of new labor laws that
make it difficult to prosecute employees who steal company secrets.
Hon said that Chinese companies were currently offering to double
the salaries of engineers in leading R&D labs to entice them to walk
away with confidential material and marketable technologies. No
laws currently exist, according to Hon, to prohibit employees from
taking trade secrets to rival companies. In addition, companies
cannot compel employees to sign non-disclosure agreements or
standard agreements against working for a competitor for at least
two years, Hon said.

---------------------------------------
LOW-QUALITY PATENTS PART OF THE PROBLEM
---------------------------------------

5. (SBU) While many Guangdong officials respond to criticism of the
IPR enforcement regime by noting that the province leads China in
patent applications, according to Myron Brilliant, Senior Vice
President of International Affairs at the U.S. Chamber of Commerce,
the "first-to-file" incentive has resulted in a huge number of
low-quality patents, confounding enforcement efforts. Brilliant
also said that the lack of coordination among local IPR authorities
-- e.g., the Public Security Bureau, the Intellectual Property
Office, and Customs -- poses a separate challenge to IPR protection
efforts. The fact that local police often restrict their
intervention to confiscating counterfeit goods but not the equipment
used in their production was another example given of weak IPR
enforcement.

----------------------------------- ----------------
LOCAL REGISTRATION AND RELATIONSHIP BUILDING ARE KEY
----------------------------------- ----------------

6. (SBU) Daniela Riccardi, President of Procter and Gamble (China),
told the Ambassador and Secretary that her firm and some other U.S.
companies had decided to "learn to live with counterfeiting." She
said that, while 15% of Procter and Gamble's product lines were
counterfeited, the company had made progress in working with local
authorities to fight the problem. Riccardi attributes this progress
to the fact that her company is locally registered and is therefore
a significant source of tax revenue. Tim Wen, Vice President of

GUANGZHOU 00000622 003 OF 004


Allway Co., added that the best strategy for obtaining help from IPR
authorities is for companies new to the region to work immediately
on building cooperative relationships with high-level officials and
local distributors. Wen recommended face-to-face meetings with
officials to develop relationships, and said that local distributors
needed to be educated on the importance to industry of IPR
protection.

--------------------------------- ------------------------
STRICTER IPR REGULATIONS MAY COME AT COST OF MARKET ACCESS
--------------------------------- ------------------------

8. (SBU) Rampant copyright infringement affects U.S. small- and
medium-sized enterprises (SMEs) as much it affects large
multinationals. Jung Brannen, CEO of TRO, a health-care
architecture firm, told the Ambassador and Secretary, in a lunch
later on October 27 with U.S. SME executives, that local copying of
designs posed a significant challenge to his business. Fear of
copycat activity has led Fluidmaster, a U.S. toilet-bowl
manufacturer, to keep its R&D operation in the U.S., despite
localizing other aspects of its operation to China. President and
CEO Alfred Ng of Mammoth, an air-conditioning company, described the
need to rely on constant innovation to prevent Chinese competitors
from mimicking technology.

8. (SBU) However, John Chen, Chairman and CEO of an IT firm called
Sybase, argued that measures to strengthen IPR enforcement could
have a counterproductive effect. In particular, Chen noted that, in
the name of IPR protection new patent and copyright regulations
could be used to effectively discriminate against foreign companies.
Chen cited the development of indigenous standards for
information-technology products as an example of an onerous
regulation that, combined with inherently discriminatory
public-sector procurement practices, had resulted in decreased
market access for U.S. companies. In Chen's view, if the U.S.
pushes for too much legislation, the result could amount to winning
the battle, but losing the war on IPR.

----------------------------------- ----------------------
CHINESE MARKET POTENTIAL ATTRACTIVE DESPITE IPR CHALLENGES
----------------------------------- ----------------------

9. (SBU) Nevertheless, the growth potential of the Chinese market
continues to attract U.S. companies despite the challenges posed by
weak IPR enforcement. AmCham South China President Harley Seyedin
emphasized that 100% of the 1,600 AmCham member companies operating
in south China were profitable last year in spite of the global
economic crisis. Seyedin pointed out that 72% of the goods and
services produced by Amcham companies last year were destined for
the Chinese domestic market, up from less than 30% in 2003.
Riccardi of P&G referred to the company's China operation as the key
engine of future growth, noting that relatively low GDP per capita

GUANGZHOU 00000622 004 OF 004


levels in China represent significant growth potential. General
Manager Neil Wang of Covanta, a waste-to-energy producer, and
General Manager Howard Hou of LP Amina, a clean coal technology
provider, also highlighted the opportunities they see in China with
the government's increasing attention to clean energy and emissions
reductions, and the importance of staying tuned to the ever-changing
business environment.

10. (SBU) Representatives from Fluidmaster, Mammoth, and Suntech
added that success in the rapidly growing and evolving Chinese
market requires not only access but "localization," or adaptation of
products to local tastes and preferences. They noted that working
with local design institutes to adapt products developed abroad had
been critical to their success in China's domestic market. U.S.
SMEs in attendance emphasized the vital role the U.S. Consulate's
Foreign Commercial Service office plays in supporting their market
entry and expansion in the China market.

GOLDBECK

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