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Reference ID: 06GUANGZHOU10260
Created: 2006-04-05 09:15
Released: 2011-08-30 01:44
Classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY
Origin: Consulate Guangzhou
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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
WWeek 2015