VZCZCXRO7464
RR RUEHCN
DE RUEHGH #0053/01 0500824
ZNR UUUUU ZZH
R 190824Z FEB 10
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8561
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 0902
RUEHUL/AMEMBASSY SEOUL 0691
RUEHGH/AMCONSUL SHANGHAI 9228

UNCLAS SECTION 01 OF 04 SHANGHAI 000053 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM - WKLEIN AND SFLATT, EEB/IPE - TMCGOWAN AND INL 
- JVIGIL 
USTR FOR CHINA OFFICE - KALVAREZ, AWINTER, TWINELAND, SMCCOY, 
TPOSNER, CREADE 
DOC FOR NATIONAL COORDINATOR FOR IPR ENFORCEMENT - WPAUGH 
DOC FOR ITA/MAC: ESZYMANSKI, JYOUNG 
LOC/ COPYRIGHT OFFICE - STEPP 
USPTO FOR INT'L AFFAIRS - LBOLAND, EWU 
DOJ FOR CCIPS - TNEWBY 
FBI FOR LBRYANT 
DHS/ICE FOR IPR CENTER - DFAULCONER, TRANDAZZO 
DHS/CBP FOR IPR RIGHTS BRANCH - GMACRAY, PPIZZECK 
TREASURY FOR OASIA - DOHNER/WINSHIP 
NSC FOR LOI 
 
E.O. 12958: N/A 
TAGS: KIPR ECON ETRD PGOV CH
SUBJECT: 2010 SHANGHAI IPR ROUNDTABLE -- CANDID COMMENTARY FROM 
INDUSTRY 
 
SHANGHAI 00000053  001.2 OF 004 
 
 
¶1. (U) This cable contains business proprietary information and 
is Sensitive but Unclassified. Please handle accordingly. 
 
 
 
¶2. (SBU) Summary:  Shanghai remains the "best place overall" for 
IPR protection and enforcement in China despite continued 
problems, according to U.S. industry representatives at a recent 
Consulate-hosted roundtable.  Many companies have adopted 
pragmatic business strategies that allow their companies to 
flourish in spite of the shortcomings in the regulatory 
environment.  Participants welcomed future IPR initiatives by 
the USG, especially in seeking ways to convince Chinese 
authorities that robust enforcement of intellectual property 
protection serves China's long-term interests. End Summary. 
 
 
 
¶3. (SBU) During a February 4 IPR roundtable hosted by ConGen 
Shanghai, representatives from over 25 U.S.-based companies 
discussed recent developments and continuing challenges in 
protecting intellectual property rights in East China.  USG 
participants included Consul General Beatrice Camp; Deputy 
Assistant USTR and Chief Negotiator for IPR, Kira Alvarez; 
Embassy Beijing Minister Counselor for Trade, Chris Adams; 
Embassy Beijing Economics Minister Counselor, Bill Weinstein; 
U.S. Patent and Trademark Attachi, Nancy Kremers, Embassy 
Beijing Resident Legal Advisor, Amy Lee; Embassy Beijing 
Immigration and Customs Enforcement Attachi,  Bruce Gordon; 
Embassy Beijing Commercial Section Trade Policy Officer, Lisa 
Rigoli; and Embassy Beijing Economic Officer Sally Behrhorst. 
 
 
 
============================================= ====== 
 
Industry Pragmatically Adapting to IPR Shortcomings 
 
============================================= ====== 
 
 
 
¶4. (SBU) Several roundtable participants described how they had 
adopted pragmatic business practices to protect their 
intellectual property, including selective investment policies, 
allowing many of their businesses to prosper despite China's 
regulatory shortcomings.  General Motors General Counsel Kenneth 
Wong noted, in order to protect core IPR, many U.S. 
manufacturers, including GM, only licensed the production of 
non-critical components to local Chinese partners allowing GM to 
retain the design and production of core technology in the 
United States.  Tao Taodi of Cisco Systems stated that while 
this approach may have worked well in the past, the Chinese 
government now has its sights set on obtaining core technology 
and was no longer satisfied with attracting low-tech production. 
 Tao cited tax incentives and other preferential policies such 
as Beijing's 2008 "High-End New Enterprise Certification," 
designed to attract high-tech investment as examples. (Note: 
The High-End New Technology Enterprise Certification reduces the 
corporate income tax rate from 25 percent to 15 percent. End 
Note). 
 
 
 
¶5. (SBU) Roundtable participants were skeptical of the 
effectiveness of these incentives.  Several industry 
representatives, particularly those from the pharmaceutical 
industry, expressed concern that their IP remains vulnerable to 
theft in China and that none of the incentives, including hefty 
tax breaks, would be enough to compel them to invest their core 
technology in the local market.  Cisco noted that it had chosen 
to forego filing for the high-end new enterprise certification, 
 
SHANGHAI 00000053  002.2 OF 004 
 
 
which would require the company to share its core technology, 
and was giving up a major tax rebate as a result. 
 
 
 
¶6. (SBU) Industry representatives were similarly wary of recent 
developments in indigenous innovation policy.  Corning Inc.'s 
representative Ken Chan noted that indigenous innovation 
policies were beginning to "guide" investment decisions, even if 
they were not yet "determining" factors in whether to invest in 
China. Other participants noted that China's promotion of 
indigenous innovation was forcing their companies to do 
additional rounds of analysis of the regulatory environment 
before investing.  Still other companies expressed concern over 
"second order" effects of China's indigenous innovation 
policies, including preference for domestic firms in government 
procurement, standards requirements, and onerous licensing terms 
for foreign companies. 
 
 
 
=========================================== 
 
Litigation: Is the Juice Worth the Squeeze? 
 
=========================================== 
 
 
 
¶7. (SBU) Roundtable participants were divided over the benefits 
of pursing civil litigation in China.  Jay Hoenig of Hill and 
Associates, a security and risk management consultancy, said 
Shanghai is entering into a new period in which enforcement and 
litigation outcomes are increasingly predictable and encouraged 
foreign companies to take greater advantage of civil litigation. 
 He stated it was hard to make the argument that China's civil 
system was ineffectual if litigants did not pursue all of the 
legal remedies available to them.  A pharmaceutical industry 
representative echoed these comments, noting that in his 
experience, "99 percent of civil cases involved Chinese rights 
holders suing other Chinese nationals while only 1 percent of 
civil cases involved foreign companies suing Chinese defendants. 
 Yet the vast majority of the complaints about the civil system 
tend to be from foreign rights holders." 
 
 
 
¶8. (SBU) Tao Taodi of Cisco Systems offered a differing view, 
claiming Cisco was a textbook case of how litigation in China 
can backfire and hurt a company's long-term interests.  She 
noted Cisco now had regrets over having sued state-owned 
telecommunications giant Huawei in 2003 because, during the 
suit, Cisco was portrayed by the Chinese media as a bullying 
multi-national corporation trying to crush a local competitor. 
Ultimately, Tao argued, the damage to Cisco's reputation in 
China outweighed any benefit achieved through the lawsuit.  Tao 
recommended that other companies seriously consider the 
long-term implications of pursuing civil actions in China. 
Motion Picture Association (MPA) representative William Feng 
agreed, noting that MPA had been reluctant to engage in 
wide-spread litigation against online pirates for fear of 
drawing the wrath of Chinese netizens, many of whom currently 
enjoy access to free content.  GM's Ken Wong cited the GM Daewoo 
vs. Chery case as an example of how refraining from litigation 
may, in some instances, be more useful than pursuing a civil 
case in China.  In 2005, GM Daewoo initiated a law suit against 
Chinese car manufacturer Chery Automobile Company for copying 
the design of its Matiz model.  GM, however, ultimately decided 
to settle with Chery after much internal deliberation.  As a 
result, GM Daewoo was seen as a good corporate citizen by the 
Chinese government and still retains a positive reputation with 
the Chinese public. 
 
SHANGHAI 00000053  003.2 OF 004 
 
 
 
 
 
=========================================== 
 
Copyright Enforcement Weak Link in Shanghai 
 
=========================================== 
 
 
 
¶9. (SBU) Motion Picture Association (MPA) stressed that it had 
been effectively shut out of the China market but expressed hope 
that with the 2010 World Expo Shanghai would do a better job of 
cracking down on retail piracy.  MPA singled out a lack of 
cooperation between the Shanghai Municipal Public Security 
Bureau and the Copyright Bureau as a key concern.  MPA also 
hoped that Shanghai would consider adopting tactics similar to 
those used by Chaoyang district in Beijing to prosecute more 
infringers. (Note:  In March 2006, Beijing City and Chaoyang 
District Administrations for Industry and Commerce issued 
notices establishing a "trademark authorization system," which 
obligates landlords to check the sources of their goods and 
verify legal authorization from rights holders. End Note.) 
 
 
 
================================ 
 
Pharmaceutical Industry Concerns 
 
================================ 
 
 
 
¶10. (SBU) Shanghai-based pharmaceutical companies cited data 
protection as their top concern and called on the USG to raise 
the profile of this issue in negotiations with the Chinese 
Government.  According to the representatives' estimates, U.S. 
pharmaceutical manufacturers lost $1bn in China last year to 
piracy and counterfeiting.  The representatives claimed IP 
infringement would disappear overnight if the State Food and 
Drug Administration (SFDA) had the political will to enforce 
China's existing laws.  The pharmaceutical industry 
representative also cited lack of action on SFDA's 2005 
regulation on patent linkage as another key concern and asked 
the USG to urge SFDA to stop issuing licenses to Chinese 
companies who do not own patents for their pharmaceutical 
products.  He stressed that, in order to gain the maximum amount 
of traction with SFDA, it was critical to frame these issues in 
an economic context, highlighting how better data protection 
will lead to more indigenous innovation and more jobs. 
 
 
 
====================================== 
 
Recommendations for Continued Outreach 
 
====================================== 
 
 
 
¶11. (SBU) Participants were enthusiastic about the Ambassador's 
proposal to locate and designate "model IP cities," which might 
tap into a "culture of competition" between Chinese cities 
spurring one another to raise their standard of IP protection 
and enforcement.  They also endorsed re-invigorating the U.S. 
Ambassador's IPR roundtable and supported the idea of inviting 
domestic Chinese companies to participate in future roundtables, 
which, they said, would help make a more compelling case that IP 
protection and enforcement helps both foreign and domestic 
 
SHANGHAI 00000053  004.2 OF 004 
 
 
companies.  Pharmaceutical industry representatives noted in 
particular that East China has several innovative domestic 
pharmaceutical companies, which could be enlisted in this 
effort.  GM's Ken Wong said that Geely Automotive, a large 
privately owned firm in Zhejiang Province, might also be a 
willing participant, given Geely's efforts to break into the 
U.S. market.  When asked whether Chinese companies might be 
afraid of being perceived as being too close to U.S. companies 
and the USG, Cisco's Tao Taodi said that those perceptions would 
ultimately depend on who was organizing the event.  Chinese 
firms would most likely be more comfortable with some Chinese 
Government involvement.  GM's Wong proposed one possible 
solution would be for the USG to partner with a local government 
agency and jointly sponsor the program. 
 
 
¶12. (SBU) Other industry representatives noted their success in 
working directly with local governments to establish 
public-private partnerships, and cited Microsoft's R&D center 
and affiliation with local universities, as an example.  Cisco 
Systems is also working with local governments and recently 
signed an MOU with the government of Chongqing, featuring a 
section encouraging greater IPR protection. 
 
 
 
======== 
 
Comment: 
 
======== 
 
 
 
¶13. (SBU) The extremely frank observations by the U.S. industry 
representatives -- particularly with respect to their own 
interests in dealing with the China's tricky IPR environment -- 
impressed the USG participants in the roundtable.  Overall, the 
approach favored by industry tended toward accentuating the 
positive, i.e. looking for ways to convince the Chinese 
authorities at all levels that robust enforcement of 
intellectual property protection serves China's long-term 
interests.  Notably, none of the industry participants indicated 
they would be leaving the China market despite their ongoing IPR 
problems. 
 
 
 
¶14. (U)Embassy Beijing and USTR have cleared on this cable. 
CAMP