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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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