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RUEHBJ/AMEMBASSY BEIJING 0857
RUEHCN/AMCONSUL CHENGDU 0262
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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