China and Intellectual Property Rights

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The subject of China and intellectual property rights came up again in the news the other day. In trading stocks today it is tempting to invest in Chinese companies in an expanding market or in foreign companies doing business with China.

The issue of China and intellectual property rights is important to understand in either case. As a case in point, Chinese authorities are investigating the collision of two trains in its high speed rail network. No foreign companies were allowed to bid on any part of the system. However, there are foreign parts used throughout.

According to news reports Hitachi of Japan provided circuits to a Chinese company. Hitachi used a form of "black box" engineering in order to make it harder for the Chinese to reverse engineer the circuits. This is a common problem for companies dealing with China and intellectual property rights.

The weakness of and often times absence of intellectual property right enforcement tends to keep many US, European, and Japanese companies from doing business with China. Boeing -- BA - has outsourced large parts of the construction of its game changing 787 jets, none to China.

Years ago Fairmont Railway Motors (now part of Harsco) left essential details out of its specifications and did not even patent essential design details making it virtually impossible for Chinese buyers to reverse engineer their product, according to a company employee.

In response to repeated questions the company merely suggested that the Chinese send the locomotive in question back to Fairmont, Minnesota for inspection.

China obviously wants to develop its own technologies. It also wants to maintain a positive balance of payments. Its rail system was "fast tracked" in an effort to maintain a high level of employment in the face of the worldwide recession. All of these are understandable.

China also is known for reverse engineering designs and then manufacturing its own products. The issue of China and intellectual property rights goes back at least to the 1930's when it purchased three state of the art, US designed electric generators. They used one, saved one, and took one apart.

Subsequently they produced these generators for use throughout the country, never paying a cent for US based patent rights. For those interested in investing in Chinese companies the issue is often not one of property rights but one of transparency and competence.

Technical analysis of stocks listed as American Depository Receipts can be as effective as trading any US stock. However, fundamental analysis of these stocks can be tricky. For example, there is no clear published report of precisely what happened in the Chinese high speed rail crash.

Around the time of the crash the head of the railway ministry was fired on charges of corruption with no details supplied. Bits of news about the crash investigation include one company expressing "sorrow" and an official said to have died of a heart attack during interrogation.

As China begins to export its higher technology it is matter of increasing concern for investors, as well as buyers, that, in the opinion of this author, property rights are not widely respected in China and that transparency is largely lacking.

Dealing with China and intellectual property rights problems needs to be in the mind of anyone investing in or dealing with China.
http://www.youtube.com/watch?v=4Q4gDeXFWMA

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