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Get Four
|  | JANUARY 31, 2005
By Joyce Barnathan By Fighting Fakes, China Wins, Too Rampant counterfeiting discourages both foreign and domestic outfits from investing in its economy -- and that hurts growth Counterfeiting is big business, but China needs to protect an even bigger one: Future investment in its economy, both foreign and domestic. Always thinking ahead, Beijing's leaders want state-of-the-art investments from foreign companies to keep the country's economy powering forward. And though China seems to be getting its fair share of Western businesses willing to open research and development centers and build factories producing high-tech goods, rampant piracy rightly gives many potential investors pause. At the same time, a growing number of Chinese concerns are investing heavily in R&D in an effort to become global brands. The last thing they need is massive rip-offs from domestic counterfeiters. Foreign and Chinese investors alike should get together and step up the pressure on Beijing to forcefully crack down -- or risk damaging the nation's competitiveness. PLUNDER AT WILL. Tremendous damage has already been done. Some industries in China, such as software, publishing, music, and film, are so decimated by counterfeiters that they have no choice but to take action if they want to see any profits at all. Popular Chinese films, for instance, often have illegal copies being hawked on the street even before the movies hit the big screen. A Chinese colleague told me that renowned director Zhang Yimou, at the preview in China of his hit movie Hero, had everyone in the audience check all bags, cell phones, and other electronic devices so that no one could secretly record the film. But such measures will go only so far in a system where pirates have been able to plunder producers and distributors of intellectual property at will. Western business executives based in China have started reaching out to beleaguered Chinese counterparts to form a coalition that could help push the authorities to take the issue seriously. That would be a powerful lobby indeed, since the Chinese already have plenty of brand equity to protect. BANKROLLING R&D. Budding Chinese multinationals are spending sizable amounts in research to gain the lead on competitors. Appliance maker Galanz started out making microwave ovens for the domestic market. It now produces 15 million units a year for foreign corporations. According to Harvard Business Review, the Chinese outfit has invested $100 million in R&D and has 600 patents in microwave technology. And Galanz isn't alone in that industry. Should you be shopping for a small refrigerator or wine cooler at Wal-Mart (WMT ), you'll undoubtedly find one made by another Chinese home-appliance giant, Haier, which is investing heavily to gain the edge in the global refrigeration market. Even smaller outfits, from Pearl River Piano to rural manufacturers making neckties, are improving their technology, says Harvard Business Review, and they're seeking Western help with design and quality. These legitimate Chinese businesses don't want to fall prey to counterfeiting any more than Western and Japanese companies do. SHARED INTERESTS. The Chinese government has assets to protect as well. Beijing invested $33 billion in 2002 on "scientific and technical activities," according to the State Statistical Bureau. Of that, $16 billion was set aside for R&D. Beijing Founder Electronics and other government-linked businesses that research products don't want to hand over their hard work to the counterfeiters for free, either. Right now, Chinese enterprises are reluctant to join hands with disgruntled foreign outfits when it comes to taking on their own government and prodding officialdom to act. "The Chinese do not want to be seen with foreigners," says one Western executive based in Beijing. Maybe so, but they share very common interests, and Beijing should take note of them. Even though some Western companies are earmarking money for research centers in China, many are still on the sidelines. China is "losing in terms of attracting real R&D resources," says another exec. In the old communist days, Chinese leaders always thought in terms of five-year plans. They should get back into the habit of looking ahead five years and realize the future will be determined by the strength of their own companies -- and of those Western investors that are helping to fuel China's growth. Counterfeiting may be good for business now, but it's bad for China's future.  Barnathan is an assistant managing editor of BusinessWeek Edited by Chris Power
BW MALL
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