China Moves a Step Closer to Economic Superpower Status

By: Money_Morning

Keith Fitz-Gerald writes: When a Beijing court recently ordered three China automakers to pay more than $3 million in aggregate damages for allegedly selling a knockoff of an upscale German tour bus, it underscored that China is getting serious about intellectual property theft - one of the next major steps the Red Dragon needs to make as it evolves into a true global economic superpower.

Intellectual-property theft not only remains a major problem in the world markets - it actually seems to be escalating. And many of the worst offenders continue to operate in the Asia-Pacific Region.

Take software. Software piracy in this part of the world continued to worsen last year, fueled by the rapid growth in computer sales and the growing availability of bootleg programs online, concluded an annual survey of the Business Software Alliance (BSA) and industry research firm IDC. An estimated 61% of the software in use in the region in 2008 was unlicensed, up from 59% the year before. That cost software vendors $15.3 billion, up 8.3% from 2007.

On a worldwide basis, software piracy cost producers nearly $53 billion.

And that’s just software. It doesn’t include piracy of movies, music, or engineered products such as computer chips, machinery or even motor vehicles - including tour buses, the focus of the recent Beijing court case.

In this particular court case, the First Intermediate People’s Court of Beijing found that the A9 Coach made by the Zhongwei Passenger Coach Co. and the Zhongda Industrial Group Co. was virtually identical to the $292,000 Starliner made by Germany’s NeoPlan GmbH. The Chinese manufacturing companies have been ordered to stop producing the A9 and Beijing Zhongtong Xinghua Auto Sales Co. has been ordered to halt sales of the vehicles.

NeoPlan developed the Starliner back in 2005 and made sure it was well covered by patents. The high-end tour bus is produced both in Germany and in Southeast China’s Zhejiang Province by the Youngman Coach Co. A year after the Starliner debuted, the German company discovered that Zhongwei’s A9 was all but a carbon copy of its own Starliner. NeoPlan sued for patent infringement.

The defendants claimed the A9 coaches were developed independently, but the court ruled that apart from some slight differences, the two vehicles were essentially identical. The three Chinese automakers were ordered to pay German bus-maker NeoPlan an aggregate $2.92 million in direct compensation and $169,000 dollars in legal costs.

These particular numbers aren’t big.

But the impact of the court ruling could be.

Western firms - from the United States and Europe - want to capitalize on China’s vast business promise. And they want to make investments in, and create joint ventures with, China-based firms. But Western companies also want some assurances that the products, technologies, production processes, trade secrets and other intellectual properties that they’ve spent billions developing will enjoy some legal protections beyond their native borders.

When it comes to intellectual property rights, consumers and corporations here in the United States have long viewed Asia as untamed territory, with no rules - and with little hope for order in the future. But I knew differently. What critics failed to understand is that China really does “get it.” And that’s why I’ve spent years urging patience, even as I’ve urged continued investment.

 China understands the stakes better than Westerners think. Its leaders have long understood that there would be open, measured change that is directly proportionate to their country’s emergence on the world’s stage.

Now that China is clearly assuming that global mantle, its leaders are shrewdly speeding up both the timetable and, in an important vote of confidence for foreign investors, the penalties associated with intellectual property violations.

For instance, according to recently issued directive from the Supreme People’s Court, victims of copyright theft can now receive as much as $146,000 (up to 1 million yuan) in compensation for cases where intellectual property has been stolen.

That may not seem like much in the Western court system, where multimillion-dollar rewards are the norm, but it’s an important step forward in China. In fact, as I discovered during my recent investment trip to that country, the People’s Court directive contains three key elements that should make it easier than ever before for Western firms to protect intellectual property. Specifically, the directive:

• Is much broader in both scope and intent than past efforts. Covering everything from Web-based domain squatting to CD and DVD piracy - and even covering designer-clothing knock-offs - the ruling is supposed to aid the clampdown on local piracy. It’s also intended to help Western companies become more confident that their property rights will be protected, an advancement that should encourage those firms to boost their investments in China.
• Finally puts some real teeth in the potential penalties.
• And no longer requires that foreign plaintiffs be physically be in the country at the time of the legal proceedings. Since U.S. companies will now be able to have local counsel acting on their behalf, it opens the door to more rigorous enforcement and an increasingly willing number of companies likely to challenge infringers.

The results are already visible.

The actual number of intellectual-property-rights claims in China’s courts rose by more than 30% last year. According to the China Daily newspaper, China’s courts concluded 27,876 property rights infringement cases last year, a jump of more than 32% from 2007.

I can’t wait to see what’s next with other well-known pirated brands we’ve highlighted to readers. In early January, we took you to the East Coast China city of Nanjing, where a new mall contains a McDonald’s Corp. (MCD) look-a-like burger bar called “McDnoald’s,” a Starbucks Corp. (SBUX) style coffee shop called “Bucksstar Coffee,” and a wannabe Pizza Hut called “Pizza Huh.”

While there is clearly a long way to go on this issue, the increasingly serious stance that Beijing is taking with regards to intellectual-property-rights protection is yet another important step in China’a modernization. As such, the chances are very good that it will not only encourage an  entirely new wave of Western investment, but a whole new level of product development and cooperation, too.

And that will be good for both the United States and China, especially as we work our respective ways out of the ongoing global financial crisis.

[Editor's Note: Thirteen trades. All profitable. Since launching his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 13 for 13, meaning he's closed every single one of his trades at a profit. And he did this in the face of one of the most-volatile periods since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.]

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