The Great Gall of China

A visitor to the website hosted by China's Ministry of Science and Technology is greeted by an advisory when the mouse meets a link marked “international co-operation.”

It reads: “Under construction.”

And so goes China's efforts to build an economy that respects intellectual property - and physical property, such as auto parts.

How much money is annually siphoned from the global auto industry by illicit China-based enterprises? Combined estimates from the World Trade Organization (WTO) and the Organization for Economic Co-operation and Development suggest a figure in the range of $5.4 billion.

Anxious to put an official stamp on its expanding commercial influence, the world's most populous nation is actively seeking to appease the WTO and to comply with international agreements.

As the third quarter drew to a close, China's State Intellectual Property Office declared it will renew its commitment to track down violators. Meanwhile, trademark applications soared to nearly 184,000 last year, compared with fewer than 5,700 in 1980.

“You'll see the same things in patents. You'll see the same thing in copyrights,” says Sharon R. Barner, chairwoman of the intellectual property litigation group of Foley and Larner in Chicago. “I don't want to defend the Chinese government, but I do want to look at it realistically. They are indeed making strides.”

Barner pauses.

“That's the good news. The bad news is that of all the counterfeit goods we seize in the U.S. and around the world, 47% of it came from China and Hong Kong.”

From tires to trim, “it's every component imaginable,” says Tony Bol, an investigator with General Motors Corp. “You could construct an entire vehicle.”

The world's No.1 auto maker quietly bristles as its Chevy brand competes in China with the domestic Chery marque. Earlier this year, disagreement boiled to the surface with GM's accusation that SAIC Chery Automobile Inc. hijacked the design of the Chevy Spark to build a knock-off, the QQ.

Chery denies the allegation.

What's wrong with China's system?

Culturally, it's not equipped to deal with infringements, suggests Patrick Rasche, chairman of the intellectual-property practice group at Armstrong Teasdale LLP in St. Louis. Counterfeiting is an accepted practice in some Chinese quarters, partly because it pays so well, Rasche notes.

“Your competitor is selling your product for one-tenth the price,” he tells auto industry representatives at a recent conference on China hosted in Troy, MI, by GlobalAutoIndustry.com.

Adds Barner: “They've set up a whole court structure that would be remarkably similar to what we have. Of course, the problem was … there weren't a lot of lawyers or judges in China.”

The U.S. sent delegations to assist with set-up, she says, but there remains a deep divide between common practice in China and the expectations of a world whose standards of fairness evolved over decades. So, not only does China lack infrastructure, it lacks the depth of understanding required to make it work.

“Even if they were the most embracing of all, it would still take years to get it in place,” Barner maintains.

Max Castellano, tax and trade counsel for Michigan Congressman Sander Levin, a Macomb County Democrat, disagrees.

“The perception is that only incremental change is possible, but we can't accept that,” Castellano says. “We need to make sure China is fulfilling its WTO obligations. I don't buy the argument that China doesn't have the law enforcement capability to police itself.”

What to do? Be first to market with products that are difficult to duplicate, Rasche says.

Persevere and continue to work with the Chinese government, advises Barner, whose clients include Nissan Motor Co. Ltd. and Johnson Controls Inc.

And how does China rate its system's effectiveness in the fight to protect intellectual property? “The procedure is working,” says C.F. Tang, who works in the economic and commercial section of China's Consulate General in New York.

Consider this: Less than three weeks after China's IP Office announced its intention to crack down on violators, a Beijing court ordered Dow Jones & Co. to cough up RMB405,684 ($49,000) to a Chinese calligrapher for using his handcrafted work as part of its web site logo.

The China Daily reports a Dow Jones executive received the elegantly crafted letter symbol as a gift and thought it would look good as part of the website design. Beijing court ruled Dow Jones was in violation because the company used the handiwork without the calligrapher's permission.
— with Tom Murphy and Cliff Banks