The Idea-Stealing Factory

Chi

na has grown into the world's made-to-order contract manufacturer, source of more than half the world's output of toys, radios, DVD players, telephones, cameras, and much more. But while most of that production is legitimate—China's factories are paid by foreign companies to mass-produce the latter's ideas and designs—much of it is illicit. The nation has deployed its prodigious replication skills to flood world markets with pirated goods and fakes, from designer clothing to consumer electronics. China's trading partners tell themselves that this blatant disregard for the intellectual property of others is natural for a former command economy at an early stage of free-market development. The problem, they say, will ease over time as legal institutions and Chinese entrepreneurs mature and the country begins to attach the same importance to property rights as do Europe and the U.S.

No business should be foolish enough to believe this hypothesis. In a country where government-controlled companies comprise the industrial base, piracy is not derived from commercial callowness—it appears to be official policy. Authorities may be quite willing to mop up small, unregulated businesses to curtail street sales of counterfeit brands, but protecting core foreign technology is another matter. That is why Beijing declares victory when street sales of pirated DVDs move into licensed stores that present the same product in better packaging with money-back guarantees and, of course, taxes duly paid. That is why a decades-long campaign to clean up Beijing's "Silk Alley," a national showcase of pirated foreign sportswear and wristwatches, ends with fanfare when the new "Silk Street" shopping center opens, selling the same products under city regulation. And that is why China's leaders can promote a national campaign to protect intellectual property and at the same time declare that foreign patents useful to Chinese technologies may be legally expropriated, as Beijing's bureaucrats proposed in draft regulations released last year.

How did this happen? When the government is the main business owner, private parties cannot secure their property rights, especially when those properties are easy-to-appropriate intangibles such as brands, trademarks, business processes and ideas, whether they are protected by a foreign patent or not. The problem has been made worse because China emerged as an economic power around the time when information technologies created highways over which ideas could easily traverse the planet. Just as railroads and telegraphs in the mid-19th century made copyright and patent theft commercially important, so the Internet and associated information technologies redefined the market for inventions. Communications networks allow a tech employee of a Zhuhai company to search patent registrations internationally and look for legal vulnerabilities. IT also made the promulgation of digital content instantaneous and cost-free. Movies can be secretly recorded in a theater in New York, uploaded to the Internet minutes later, and downloaded in China and pressed onto CDs within hours. Technology and globalization have created the most prodigious copying machine the world has ever seen.

The Washington lobbying community has girded for battle on intellectual property, which has become a preoccupation of the U.S. Congress as well. As the lines are drawn, constructive moves would certainly include heightened enforcement of legal rights by governments. But the legal system that grew up around the old paradigm, pre-IT and premodern-day China, is too thin a thread on which to hang an international trading system. The commercial community must adjust to the new reality.

You cannot wipe out piracy. But you can minimize its bottom-line impact. Just as music companies, rightly or wrongly, made peace with MP3 file-sharing services like Napster, so must manufacturers from the U.S. heartland learn strategies for coping—by developing new revenue models that emphasize service offerings around intellectual property. Such models may include lowered pricing for a developing market; universal licensing schemes to sell music, films, games and software on a subscription basis; or emphasizing revenues that flow from service and support rather than product, a model that has been successfully exploited by the Linux community.

The point is not that piracy of intellectual property is right but that it's a fact of life. Legal defenses are right and necessary. Legal and political means alone will not solve the problem.