Some of the Chinese manufacturers that intellectual property specialist Victoria Wang works with can't escape a vicious cycle on product innovation: Their profit margins are too small to fund much of their own research, yet to be competitive, firms have to spend their profits licensing technology from other companies.
Wang sees it as a major challenge for them. As China research director for the London-based Intellectual Property Institute, she works with companies in South China's digital television supply chain, some of whom may only make US$2 profit on a product after spending $25 to license technology.
``Because the profit margin is so low, you find it is difficult to invest in [research and development] and brand development,'' Wang said.
``This is a very vicious circle. You don't have [intellectual property], so you have to acquire it, but that takes away most of your profit. So you are cut off, constrained to the lower part of the value chain.''
Because of this model, Chinese companies have been hurt very badly, she said.
Wang was one of several intellectual property experts who spoke at the Business of Intellectual Property Forum, held Dec. 11 in Hong Kong as part of the Business of Design Week, offering advice for firms seeking to innovate in China's much-maligned intellectual property environment.
While the perception is that Chinese firms reap the benefits of the country's weak or poorly enforced intellectual property rules, China's lack of intellectual property protection actually hurts Chinese entrepreneurs, argued Douglas Glen, chief executive officer of Hong Kong-based movie studio Imagi International Holdings Ltd., which specializes in computer graphics films like Teenage Mutant Ninja Turtles.
He said no Chinese firms have emerged in their home market to challenge dominant computer software firms like Microsoft Corp., because it doesn't make sense for a Chinese company to spend money developing a product that can be easily copied and stolen.
It's the same in luxury brands, Glen said: Chinese-made luxury labels have not developed because as soon as they get into the marketplace, they are copied.
Microsoft and other global names have the advantage of relying on markets other than China to develop their products, he said.
``The biggest damage in many ways has done been to mainland companies,'' Glen said. ``Across all the industries, like software, companies like Microsoft, which would have been challenged by programming skills in China and India, have had a completely free run to develop and improve their software because nobody in China or India could compete with products that can be knocked off for 2 yuan.''
Intellectual property piracy has kept Chinese entrepreneurs down, Glen said. ``That's why it's clear that the Chinese government is going to be diligent in enforcing intellectual property protection, because they want to see Chinese industries move up the value chain and add value in ways other than low-cost manufacturing.''
Wang agreed that Chinese software firms have a much harder time surviving because of piracy, and she said a major problem is a lack of police to enforce laws.
Still, Chinese manufacturers are trying to develop their own brands in world markets.
Hong Kong-based toy maker Blue Box Holdings Ltd. has been selling preschool toys, action figures and other products under its own brands in North America and Europe, and also makes toys on a contract basis for other firms.
``Manufacturers like ourselves, doing our own products and our brands, I can see more and more work in that direction, although it is moving a little slow,'' said Vice Chairman C.K. Yeung.
``Doing branding is not easy. You have to have the patience and resources and you have to insist on doing this long term. It is not an instant noodle business,'' he said.
Blue Box has been trying for the past several years to introduce its brands into mainland Chinese markets, because the firm sees potential and wants to foster a home market rather than solely relying on external markets, Yeung said.
While Blue Box has had success on the mainland, many challenges remain, he said. The company lost ``rather substantial'' revenues to product piracy at first, but has had some success fighting it, he said.
Yeung said it's important for companies concerned about piracy to build relationships with the Chinese government, in part because counterfeiters may operate from small factories and sometimes can be sheltered by local officials.
He said Chinese intellectual property laws can be complicated and time consuming, but do provide protection if the registration process is done correctly.
Yeung said Chinese government officials are interested in improving the system.
Wang, who said she agreed with Yeung on the importance of building relationships with local officials in China. She said that Chinese intellectual property laws are not the complete black hole that some people think they are.
``There is this myth that you can't sue in China,'' Wang said. ``In China, it is not as gloomy as people think.''
She said foreign companies win 90 percent of the intellectual property cases that are tried in Chinese courts.
Wang wondered if a foreign company would have an equal shot at winning in some parts of America, where juries decide the outcome of intellectual property cases.