Reference ID: 06GUANGZHOU29875   

Created: 2006-09-12 07:32    

Released: 2011-08-30 01:44      


Origin: Consulate Guangzhou




DE RUEHGZ #9875/01 2550732


R 120732Z SEP 06

























E.O. 12958: N/A


SUBJECT: IPR Enforcement in South China: USTR-led

Interagency Journey into the "Heart of Darkness"


REFERENCE: A) Guangzhou 20753; B) Guangzhou 15230


(U) This document is sensitive but unclassified.  Please

protect accordingly.


¶1. (SBU) Summary: Following JCCT IPR Working Group meetings

in Beijing, a USTR-led delegation traveled to Fujian and

Guangdong provinces in late August to engage local leaders

on IPR issues and raise specific areas of concern.  The

visits were part of the provincial review of China announced

in the Special 301 Report issued on April 28, 2006.  Though

most of the Chinese officials stuck to Beijing's talking

points, the meetings revealed differences in emphasis.

Shenzhen budgets specifically for software procurement and

cooperates closely with optical disc industry associations.

Dongguan is more concerned with holding seminars than

developing criminal cases.  Fujian officials would like U.S.

companies to more closely oversee their contractors and

assist in counterfeit verification.  Guangdong acknowledges

that administrative penalties are not a deterrent and

encourages closer engagement with the U.S. Chamber of

Commerce.  All of the Chinese enforcement agencies continue

to rely on short-term campaigns and initiatives, such as the

recently announced "100 Day Campaign" on copyrighted

materials, despite facing increasingly organized

counterfeiting rings.  Visits to local counterfeit markets

and discussions with U.S. industry provided further evidence

that only a sustained, long-term coordinated effort will be

enough to reduce overall levels of piracy.  End summary.


Background on the Interagency Visit



¶2. (SBU) In an effort to pinpoint the problems in China's

IPR enforcement system and develop more effective solutions,

USTR has focused on regional IPR enforcement this year.  The

2006 Special 301 Report spotlights Guangdong, Fujian, and

Zhejiang provinces and Beijing as IPR "hot spots" and

recommends more sustained, deterrent enforcement.  The visit

by USTR, Commerce, and Patent and Trademark officials to

Fujian and Guangdong provided an opportunity for face-to-

face discussion with local enforcement officials, U.S.

business representatives, and first-hand glimpses of

counterfeiting markets.


¶3. (SBU) The Special 301 Report names Guangdong as the

center of large-scale counterfeiting in China for goods

ranging from low-cost consumer items to electronics.  As one-

third of China's exports pass through Guangdong, it is a

crucial link in the global piracy chain.  In Fujian, the

report highlights widespread production of counterfeit

athletic shoes, among other products.  Nike, Reebok, and New

Balance are all engaged in long-running legal actions in

Fujian (Nike representative Bill Wei asked the Consul

General to raise Nike's concern during an upcoming trip to

Putian the week of September 11).  Optical disc piracy is

common throughout Guangdong and Fujian.


¶4. (SBU) Attending on the Chinese side at most of the

meetings were representatives from the Intellectual Property

Office (IPO), Copyright Bureau, Culture Bureau,

Administration for Industry and Commerce (AIC), and Foreign

Affairs Office (FAO).  No representatives from the Public

Security Bureau (PSB), Customs, or Procuratorate accepted

invitations to meet.  Representing USTR were Stan McCoy,

Chief Negotiator on IPR, and Audrey Winter, Deputy Assistant

USTR for China.  Lisa Rigoli, International Trade Specialist

represented the Department of Commerce; Tim Browning

participated for the Patent and Trademark Office.  Guangzhou

Econ/Pol officers and staff accompanied the delegation.


Fujian Province: Shoe Central



¶5. (U) Bai Jingzhao, Director of the Fujian Copyright

Bureau, told the U.S delegation that Fujian has encouraged

IP protection through progressive legislation and strong


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enforcement.  Eighty percent of Fujian counties now have a

Copyright Bureau.  All computer manufacturers in Fujian must

preinstall legitimate software.  Copyright officials inspect

government offices to verify the use of legitimate software

and are just beginning to promote legal software use in

large private enterprises.  Fujian has also implemented

national police campaigns, including the "100 Days Campaign"

against optical disk piracy, the "No Fakes" joint campaign

with retailers, and the establishment of one-stop IPR

Complaint Centers.


¶6. (U) An official from the Fujian AIC told the team Fujian

administrative authorities had transferred 26 trademark

cases to the police in 2005, reportedly the second largest

number in China (Note: this number did not match official

statistics published by the central government, which

indicated only 5 trademark referrals in 2005.  End note).

Fujian officials reported that they had transferred 10 cases

involving U.S. rights-holders since the end of 2004, one of

which involved Nike.  In response to questions about how to

improve enforcement against counterfeit athletic shoes, the

official noted that the shoe industry is difficult to

monitor because of the preponderance of OEM enterprises,

usually Taiwan- or Hong Kong-owned, that manufacture for

foreign companies.  He recommended that U.S. companies or

industry groups more closely monitor their contractors and

also set up verification teams in Fujian to assist officials

in identifying counterfeit products.


¶7. (U) To highlight Fujian's stake in an effective IP

protection regime, Bai raised the example of Dehua, a Fujian

county of 300,000 residents that has a long history of

manufacturing ceramics and sculpture products.  Dehua

enterprises hold numerous design patents and residents have

per-capita incomes higher than the provincial average.

Dehua enterprises have even sued Italian and Spanish

manufacturers for infringing their patents and copyrights.


¶8. (U) USTR McCoy encouraged Fujian officials to undertake

more ex-officio actions on behalf of U.S. rights holders,

particularly small and medium-sized enterprises, for example

Wisconsin ginseng farmers.  He called attention to

counterfeiting of the athletic shoe trademarks of companies

such as New Balance.  He also noted that the U.S.

delegation's visit coincided with the start of the fall

school semester, and urged local officials to crack down on

pirated textbooks.  The U.S. team encouraged Fujian

officials -- and other officials in subsequent meetings --

to open a channel of communication through the U.S.

Consulate in Guangzhou to provide useful data on enforcement

and examples of successes.


Guangdong Province: We Know There's a Problem



¶9. (U) Guangdong Deputy Secretary General Luo Ou noted that

Guangdong IP officials have targeted specific cities for

enforcement efforts during the past five years: Guangzhou,

Shenzhen, Shantou, Jieyang, and Chaozhou.  Civil IPR courts

in 21 municipalities and eight counties in Guangdong have

accepted an accumulated total of 2,800 cases.  Luo noted

that some lower-level courts in Guangzhou and Shenzhen have

begun accepting IP cases in a pilot program to reduce case

backlog and that the province established three IPR

Complaint Centers.  In addition, Guangdong has increased

budget funding for its court system.


¶10. (U) USTR McCoy emphasized that U.S. industry remains

concerned about a lack of counterfeiting and piracy cases

transferred to the police for criminal investigation, due in

large part to inconsistent standards of valuation for seized

infringing products.  Luo acknowledged that in some cases

penalties for infringement are not severe enough to deter

counterfeiting, and agreed that the number of criminal cases

needs to be increased.  With respect to copyright piracy,

Luo mentioned that a total of 200 optical disc production

lines have been confiscated by Guangdong officials since


GUANGZHOU 00029875  003 OF 006



copyright enforcement began in May 1996.  He added that many

of the pirated CDs and DVDs sold in Guangdong are imported

from nearby Asian countries, such as Vietnam.  McCoy called

on the provincial government to help address this problem by

encouraging the Shenzhen optical disc testing facility to

share exemplars with the international library maintained by

IFPI.  He also raised copyright industry concerns about book

piracy and government use of software.  McCoy encouraged

Guangdong officials to continue working with the U.S.

Chamber of Commerce on training and benchmarking initiatives

(see reftel A on a recent IP seminar co-hosted by the U.S.

Chamber and Guangdong authorities).


Shenzhen City: More Than Talk



¶11. (U) Li Ping, Deputy Secretary General of Shenzhen,

former head of the Shenzhen IPO, and current chairman of

Shenzhen's leading group on IPR, acknowledged that

Shenzhen's growing reliance on the high-tech sector meant

that the city must create an effective IP protection

environment.  He mentioned that he personally read USTR's

Special 301 Report entry on China and was aware of foreign

industry concerns.  Li noted that four of the nine heads of

IP agencies present at the meeting were educated in the

West, three in the United States.  Li explained that

Shenzhen has unique legislative power because of its status

as a special economic zone, and its leaders have put into

place IP laws that are more stringent than national laws.

This is particularly in the area of software and optical

discs, which are the focus of enforcement in the city.


¶12. (U) Li said Shenzhen has a specific budget of RMB 14

million for the purchase of legitimate software in

government offices.  (Note: This was the first time any of

the U.S. participants had heard of a specific budget for the

procurement of legitimate software.  End note).  He noted

that IPO and MOFCOM officials will be at the upcoming

Shenzhen High-Tech Fair to verify that all products are

legitimate, then will issue certificates to those who pass



¶13. (U) Li added that the number of cases transferred for

criminal investigation in Shenzhen has increased each year.

Su Huijian, director of Shenzhen's Culture Bureau, said his

office has transferred 145 copyright-related cases to

criminal authorities since 2004.  All of cases were charged

under the illegal business law, because the Cultural Bureau

itself does not have the authority to bring charges under

IPR statues.  Su expressed hope that future cases could be

charged under the copyright law if the Cultural Bureau's

operating authorities were changed.  (Note: The illegal

business law includes tougher penalties for infringers and

is less burdensome in terms of evidence collection.  The

Copyright Bureau is authorized to bring charges under the

IPR statues.  End note).


¶14. (U) USTR DAUSTR Winter said she looked forward to

improved coordination between industry associations and the

national optical disc forensics lab located in Shenzhen.

The lab holds China's only complete exemplar library of

optical discs produced in China; it is the only lab housing

sound spectrogram and optical media "fingerprinting"

equipment to conduct forensic analysis.  Though the lab did

permit a USG visit on May 19 (reftel B), U.S. industry

faulted the lab for a lack of transparency and its

unwillingness to contribute exemplars to a global database.

Li said the lab is under the authority of the central-level

Ministry of Public Security, and the city of Shenzhen has

minimal say in its operations, though he promised that the

IPO and Copyright offices would raise with lab staff and the

MPS in Beijing the issue of contributing to a global

exemplar library.


Dongguan City: Turning a Blind Eye




GUANGZHOU 00029875  004 OF 006



¶15. (U) Liang Bing, Deputy Secretary General of Dongguan,

commented that Dongguan's robust enforcement has meant

relatively low piracy.  Since Dongguan intends to shift from

being a center of low-cost manufacturing to a "city of

innovation," it places great importance on IP protection.

He noted that Dongguan, in accordance with national

mandates, has set up an IPR Complaint Center and an

experimental lower-level court for IP cases.  Lian Xibo,

head of the Dongguan IPO, commented that foreign companies

do not always follow correct procedures in filing

administrative cases.  USTR McCoy responded that industry

has expressed concern that different localities in China use

different procedures for case filing, and a higher level of

transparency would help both sides.  He also said that

Dongguan can improve its IP enforcement reputation with U.S.

industry by increasing the number of ex-oficio actions on

behalf of U.S. companies.


¶16. (U) The Dongguan authorities did not provide any data on

case transfers, but claimed the number of such cases is

increasing.  Lu Jingna, head of Dongguan AIC, said the

number of criminal cases involving foreigners is "few," in

part because such companies are better at protecting their

own IPR by themselves.  Liang said that Japanese enterprises

put together a catalog of major Japanese trademarks and

provided copies to enforcement authorities, helping them to

better protect Japanese marks.  Liang opined that the reason

Dongguan sees few IP-related criminal cases is that few

infringers operate in Dongguan and little piracy takes place

there.  Regarding optical disc piracy, Liang said Dongguan

does not produce any optical discs, legitimate or fake.


Industry Views: An Increasingly Complex Problem

--------------------------------------------- --


¶17. (SBU) In meetings with the U.S. delegation in Shenzhen

and Guangzhou, U.S. companies voiced their frustrations with

local IP enforcement authorities, whom they say routinely

partner with IPR violators, are susceptible to corruption,

are outmatched by increasingly sophisticated counterfeit

rings, and attach little importance to trade secrets cases.

Sam Ho, MPA's Director of Operations for Greater China, has

successfully cooperated with the Shenzhen and Guangzhou

Culture Bureau, but said Dongguan authorities are not

completely honest in their claim to low piracy rates.

(Note: Numerous industry contacts have told us that Dongguan

officials are guilty of local protectionism and are

notoriously corrupt.  End note).  Shenzhen in particular has

shown great improvement in recent years, but Ho noted that

optical disc warehouses have unfortunately begun to move

from Shenzhen to Dongguan.  John Groves, Director of IP in

Asia for Emerson, said the situation has "deteriorated"

during that past two years, with counterfeiters moving up

the value chain by copying high-end products such as USD 500-

1000 petrochemical plant pressure valves.  He said

authorities are generally cooperative, but lack resources

and expertise to deal with the problem.  Emerson has applied

for certification as a "famous trademark" in China in the

hope that it will see improved responsiveness on IP issues.


¶18. (SBU) Several U.S. companies said they have been the

victim of employees who steal trade secrets or violate non-

compete agreements.  A representative from HR management

firm Hewitt Associates said China's draft labor contract law

improves the situation somewhat, but does not provide

deterrent remedies.  Moreover, few companies even try to sue

employees who steal trade secrets because of the low rate of

success in the court system.  In the case of a bicycle

manufacturer (Dahon), police claiming  that no harm had

occurred refused to get involved in a case in which a former

senior engineer blackmailed the company by threatening to

divulge data to competitors.  Emerson currently has a case

pending in Shenzhen involving an employee who stole company

secrets and set up a competing enterprise.




¶19. (SBU) Harley Seyedin, President of AmCham-South China,

said the emergence of large department stores in the area


GUANGZHOU 00029875  005 OF 006



has improved the IPR environment somewhat, as they have a

stronger interest in controlling the products they sell in

order to protect their own reputation.  Nevertheless, he

said, "substantial underreporting" of IP infringement exists

because U.S. companies do not always initially see it as a

threat and because they fear damaging relations with

government officials.  In addition, U.S. companies in the

region are faced with a host of other challenges that are

more pressing than IPR protection.  AmCham-South China

recently released a survey of U.S. companies in the region

that found regulatory issues, local competition, and skilled

and unskilled labor shortages as greater challenges than IPR



Impressions from Market Visits: Business as Usual

--------------------------------------------- ----


¶20. (U) The U.S. delegation visited a number of markets in

Fuzhou, Shenzhen, and Guangzhou and found varying amounts of

counterfeit products present.  Some of the markets

prominently displayed blatantly counterfeit merchandise,

others stored their fakes in back rooms but displayed non-

infringing plastic models of branded goods or offered

catalogs with the stock available within a few minutes.

Other markets appeared largely absent of fakes.  Guangzhou's

leather market -- which fills a number of large shopping-

mall sized buildings on either side of a main thoroughfare -

- did not have its usual abundance of fake purses, wallets,

and bags on display.  It soon became apparent, however, that

the vendors were expecting a raid by AIC that very day and

had hidden counterfeit products from view.


¶21. (U) Vendors at a nearby shoe market openly sold fake

Nike, New Balance, and Reebok products as well as those

sporting Disney and Sesame Street characters.  Some of the

vendors were not interested in selling individual items,

preferring instead to deal with large, wholesale orders.

Fake Levi's, Polo, Guess, and Snoop Dogg clothes were widely

available at a Guangzhou clothing market.  Some of the

clothing, particularly winter coats, appeared to be high-

quality, genuine products being sold at low prices.  This is

likely the result of "third-shift" manufacturing, in which

factories produce extras to sell on the side.  Also for sale

was clothing, particularly jeans, without brand labels.  At

a nearby building, however, numerous stores are willing to

produce large quantities of counterfeit labels, buttons,

tags, and bags for customers.


¶22. (U) In addition, foreign buyers -- particularly

Africans, Middle Easterners, and South Asians -- work in

Guangzhou as wholesale purchasers and shippers for

enterprises in their home countries.  This phenomenon has

broadened the global reach of China's counterfeiting

industry.  Indeed, at one of many booths at a Guangzhou

watch market that openly sold fake Rolex watches, Mont Blanc

pens, and Sony MP3 players, a buyer from South Asia was

negotiating a purchase of watches numbering in the tens of



Comment: It's a Regional Issue



¶23. (SBU) This trip drove home the fact that IPR enforcement

in China is as much a regional issue as a national issue.

Even within provinces, particular cities and particular

agencies are more effective and engaged than others in IPR

protection.  Shenzhen is an example of a city that

increasingly takes IPR enforcement seriously, for its own

sake as much as for its foreign enterprises.  It faces well-

organized opposition that tracks visitors, including the

members of this interagency team, by photographing them and

comparing their photos to databanks of known enforcement

agents.  This practice extends to other cities as well.

Shenzhen administrative enforcement agents have been

physically threatened by vendors at retail markets.

Dongguan, on the other hand, showed an unsettling degree of

nonchalance about IPR enforcement that seems to signal


GUANGZHOU 00029875  006 OF 006



systemic problems.  Nevertheless, this visit by USTR, USDOC

and PTO undoubtedly brought home the message to local

officials in Fujian and Guangdong that the USG is closely

watching their IPR enforcement actions and will duly note

any improvements or failures.


¶24. (SBU) Chinese officials continue to rely on short-term

campaigns and initiatives to address what has become an

ingrained problem.  An illustration of the challenge that

Chinese IP officials face was seen during the visit to Luohu

Market, in Shenzhen on the border with Hong Kong.  At Luohu

-- which was specifically listed in the 2006 Special 301

Report and which Shenzhen Deputy Secretary General Li termed

"our headache" -- vendors do not openly display counterfeit

products but rather lead you to hidden rooms in nearby

buildings that are loaded with fake goods.  In one instance,

a roaming vendor offered to lead the U.S. delegation to a

hidden store but was chased off by a security guard.  Five

minutes later, the same vendor was back in the same place,

apologizing for the inconvenience and urging the group to

accompany him.


¶25. (U) USTR has cleared this cable.