VZCZCXRO2678
RR RUEHCN
DE RUEHGZ #0260/01 0950915
ZNR UUUUU ZZH
R 050915Z APR 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 3670
RUEHOO/CHINA POSTS COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 1199
RUEHUL/AMEMBASSY SEOUL 1412
RUEHSW/AMEMBASSY BERN 0040
RUEHGV/USMISSION GENEVA 0418
RUEAHLC/HOMELAND SECURITY CENTER WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEAWJA/DEPT OF JUSTICE WASHINGTON DC
RUCNFB/FBI WASHINGTON DC
RHHMUNA/HQ USPACOM HONOLULU HI
RUEKJCS/DIA WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 GUANGZHOU 010260 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM - KLEE AND EB/IPE - EFELSING 
USTR FOR CHINA OFFICE - AWINTER; IPR OFFICE - VESPINEL, 
RMEYERS; AND OCG - JMENDENHALL, SMCCOY 
USDOC FOR NATIONAL COORDINATOR FOR IPR 
ENFORCEMENT - CISRAEL 
USDOC FOR 4420/ITA/MAC/MCQUEEN, CELICO, DAS LEVINE USDOC FOR 
MAC 3204/ACELICO, LRIGOLI, ESZYMANSKI 
USDOC FOR MAC 3043/KSCHLEGELMILCH 
LOC/COPYRIGHT OFFICE - STEPP 
USPTO FOR DUDAS, BOLAND, ANTHONY, NESS, BROWNING, WU, 
BOLAND 
DOJ FOR CCIPS -- ASHARRIN 
FBI FOR LBRYANT 
DHS/ ICE FOR IPR CENTER - DFAULCONER 
DHS/CBP FOR IPR RIGHTS BRANCH - PPIZZECK 
 
E.O. 12958: N/A 
TAGS: KIPR ECON ETRD CH
SUBJECT: China IPR: Better Recognition of the Problem but 
Weak Implementation Hinders Enforcement 
REF: Guangzhou 3874 (notal) 
 
¶1.  (SBU) Summary: It is still common for both domestic and 
American enterprises to face IPR infringement in South 
China.  Despite increasing recognition of the problem at the 
provincial and local levels, a lack of training, limited 
human resources, corruption, and local protectionism 
continue to result in weak and inconsistent enforcement. End 
Summary. 
 
¶2.  (U) During a visit to Guangdong in late February, 
Economic Minister Counselor Robert Luke and Congenoff 
visited four Chinese and American companies, Guangdong 
Provincial Intellectual Property Office (IPO), as well as 
the Economic Crime Investigation Division (ECID) of Shenzhen 
Police.  Interlocutors discussed the IPR protection problems 
they faced and the causes behind them, and explained their 
differing protection strategies. 
 
Corporate Reality: IPR Protection Still Not Satisfactory 
--------------------------------------------- ----------- 
 
¶3. (U) Han's Laser Company is a Shenzhen-based high-tech 
enterprise making laser-manufacturing machinery.  It was 
also the first company enlisted in China's Small & Medium- 
sized Enterprise Board in Shenzhen Stock Exchange. Han's 
Laser suffered from IPR infringement when former employees 
stole its operational software as well as other trade 
secrets.  The company's experience showed that litigations, 
 
SIPDIS 
which are usually lengthy and expensive, were not helpful in 
stopping infringements as counterfeiters could circumvent 
the penalty by declaring bankruptcy and subsequently opening 
new companies under other people's names. 
 
¶4. (U) Century Epitech Co. Ltd. is a firm planning to 
establish a Compound Semi Conductor Industrial Base in 
Shenzhen. Occupying an area of three square kilometers, the 
company plans an eventual USD 2.5 billion investment if it 
is able to attract investors with similar interests to 
create synergy in the sector.  The firm, a creation of Liang 
Zhiming, former President of the Shenzhen Chamber of 
Commerce, and a number of investors from Hong Kong and 
elsewhere in China, reportedly with Shenzhen government 
encouragement, initially plans to focus on producing energy- 
efficient lighting, optoelectronics and optical storage, 
fiber optic communication, and microwave technology.  The 
technology the company plans to utilize will be purchased 
from Taiwan, Japan and the United States.  Acknowledging the 
need for protecting IPR, company officials did not sound too 
sure on how to tackle protection issues other than to 
protect valuable IP via licensing and non-disclosure 
agreements.  They based their main confidence in protecting 
their IPR in Shenzhen on their close relations with the 
local government.  When asked what they would do if the 
infringers came from outside of Shenzhen, company officials 
were lost for an answer.  Liang admitted that he had not had 
success outside of Shenzhen when an uninterrupted power 
supply (UPS) unit was counterfeited by over 40 enterprises 
in Shunde, in Guangdong Province's Foshan Prefecture, and 
Liang was just unable to stop their infringement. 
 
¶5. (U) The American company DAHON, the world's leading 
folding bicycle manufacturer with a plant in Shenzhen, has 
been suffering from other companies' copying of its patents 
 
GUANGZHOU 00010260  002 OF 004 
 
 
and the leaking of trade secrets by former employees.  The 
firm has hired two full-time lawyers to combat the 
infringements.  Company owner and inventor David Hon 
complained that local police are often not cooperative in 
handling DAHON's cases.  For another American company, Nike, 
also based in Guangdong Province, brand protection officials 
pointed out that China still has many "untouchable places," 
such as Fujian Province's Putian City, where local 
protectionism and corruption was too strong for Nike to take 
any substantial measures.  In such cases, Nike makes 
representations to the local and provincial authorities and 
tracks counterfeit shipments, tipping off a more receptive 
Customs Bureau to make seizures. 
 
Police: Not Our Priority 
------------------------ 
 
¶6. (U) Li Honglang, Deputy Director-General of Shenzhen 
Public Security Bureau (PSB) and concurrently the Chief of 
the Bureau's ECID, said that while his Division contributes 
to the fight against IPR violations, IPR only represents a 
fraction of his Division's total crime load. IPR crime 
investigation only accounted for a small portion of the 
ECID's workload, which totaled 300 cases in 2005.  China's 
laws have over 300 criminal charges, and ECID handles 
investigation and enforcement for 77 of them, while IPR 
charges only account for seven of the latter.  ECID is 
responsible for patent and trademark criminal violations, 
while the PSB's Social Order Division is responsible for 
criminal copyright cases. 
 
Some Success - Mostly Systematic Failure 
---------------------------------------- 
 
¶7. (U) All interlocutors recognized the central and local 
governments' growing understanding of the importance of IPR, 
and agreed that the IPR protection environment in China has 
been improving in recent years, though company 
representatives still asserted that the counterfeiting 
problem is growing at a faster rate than government efforts 
to stop it.  Despite the problem it noted above, Nike 
Company had a successful year of combating counterfeiting in 
¶2005.  It recorded 351 seizures involving 500 counterfeiting 
factories and shoes worth about USD 100 million, while their 
anti-counterfeiting costs amounted to only 0.6% of this 
value.  Nike representatives pointed out that while this was 
a good ratio, it was still money that did not produce a 
profit, it only prevented further damage to the company. 
 
¶8. (SBU) On the other hand, Gao Yunfeng, President of the 
Han's Laser, believes that it was impossible for the Chinese 
Government to effectively protect IPR because of China's one- 
party system.  The one-party system excludes the 
independence of China's justice system, which thus is 
inevitably vulnerable to manipulation or lobbying by 
interest groups, such as counterfeiters, especially at lower 
level governments.  Local judges have confirmed that they 
are often contacted by interested parties, including more 
senior officials, to influence their decisions (reftel). 
 
¶10. (U) Li Honglang of the ECID said that the valuation 
threshold in China's IPR criminal prosecution created a 
 
GUANGZHOU 00010260  003 OF 004 
 
 
large loophole by the undervaluing counterfeits.  This 
enabled government administrative enforcement agencies to 
not transfer infringement cases to the police for criminal 
investigation.  Li gave a recent example of an IPR case in 
which Shenzhen's Bao'an District Government refused to 
transfer an IPR case to the ECID.  The District 
administrative authorities calculated the value of the 
seized counterfeits at only RMB 290,000 (USD 36,000), lower 
than the ECID's estimated value of RMB 300,000 (USD 37,300), 
the criminal threshold, even though both sides are supposed 
to assess the counterfeits by their market value. 
 
¶11. (U) Huang Guoqiang, a deputy director general of the 
Guangdong IPO, admitted that the IPO basically only focused 
on the patent part of IPR protection and its development 
despite having a coordination role.  The IPO only plays a 
coordination role in interagency cooperation, especially 
during major campaigns involving joint action. On a day-to- 
day level, each agency acts on its own priorities. 
 
¶12. (U) Gao mentioned that most Chinese police at the 
working level are very cautious in avoiding the risk of a 
misjudgment in patent disputes because they lack sufficient 
technological expertise in understanding patents.  David 
Hon, General Manger of DAHON, also pointed out the Chinese 
traditional culture of "sympathizing with the poor and 
hating the rich" weakened the police's willingness to 
protect the "rich" IPR rights holders.  Both rights holders 
and enforcers said that IPR awareness of Chinese public was 
still low and most people did not feel it wrong to buy 
counterfeits. 
 
Different strategies 
-------------------- 
 
¶13. (U) Han's Laser now adopts a protection as well as a 
competition strategy of rapid launching of new machine 
models that make it difficult for counterfeiters to follow. 
DAHON will continue the direct combating of infringements 
through legal means.  Both Han's Laser and DAHON will 
continue to try to lower the risk of trade secret leakage by 
increasing the salary for their engineers and having them 
sign non-disclosure and non-compete agreements.  Nike is 
expanding its brand protection staff size and will continue 
to maintain its close partnership with local enforcement 
agencies, such as local Customs and AIC, which guarantees 
their success.  Nike generally uses administrative 
enforcement cases as a starting point and takes the decision 
against the counterfeiter to civil court to seek damages, a 
strategy which it feels has been quite successful, though it 
does not shut counterfeiters down.  Century Epitec will 
continue to focus its efforts on improving relations with 
local government, though hopefully it will begin to consider 
protection strategies for cases that go beyond Shenzhen. 
 
¶14. (U) As counterfeiting criminals are getting more 
specialized in their manufacturing chain and subdividing the 
manufacturing functions to lower the likelihood of getting 
caught, Shenzhen Police will pay more attention to clearing 
the criminal networks at multiple levels through the use of 
simultaneous actions.  The police have a regulation that 
generally links landlords' criminal liabilities with their 
 
GUANGZHOU 00010260  004 OF 004 
 
 
tenants' criminal activities, but not specifically with 
distribution or retailing of pirated products.  Guangdong 
IPO will continue its education and training programs for 
the public, especially aimed at primary students and local 
enterprises, and is beginning to place a priority on 
protecting IPR in trade fairs or exhibitions now that new 
trade fair regulations have come out in draft.  Both the IPO 
and Shenzhen Police welcome the USG's suggestions and 
cooperation in IPR work and are willing to support a USG 
program to teach American enterprises how to use Chinese 
judicial to protect their IP. 
 
Comment 
------- 
 
¶15. (U) Despite the Chinese Government's growing efforts and 
understanding of the significance of protecting IPR, the 
effectiveness of the protection of IPR remain problematic 
and relies on individual enterprises' relations of with 
individual local governments.  Local protectionism and 
corruption remain the major barriers for protection. As an 
interlocutor pointed out, "it still has a very long way to 
go."  End comment. 
 
Dong