AUS DEM SPIEGEL
Ausgabe 8/2006

Product Piracy Goes High-Tech: Nabbing Know-How in China

It used to be jeans and Adidas. Now, though, China is becoming adept at stealing much more technologically advanced products -- like passenger jets and magnetic railway systems. Is this the beginning of an economy based on thievery?

A poster in China advertising the Transrapid magnetic railway in 2002.
EPA/DPA

A poster in China advertising the Transrapid magnetic railway in 2002.

When German Foreign Minister Frank-Walter Steinmeier visited China on Wednesday, he had more on his agenda than the usual diplomatic niceties. Freedom of the press? Human rights? Those are important issues, of course, but Steinmeier isn’t traveling alone in China. He'll be accompanied by a business delegation including representatives from a dozen German companies. They're interested in a completely different issue, one that could gradually threaten the very existence of many a small to mid-sized German company.

Politely put, these business executives are concerned about what some would call the German-Chinese technology transfer. But to be blunt, they're really incensed about China's growing large-scale theft of ideas and patents, trademark and product piracy. And Steinmeier on Wednesday managed to voice his disapproval even within the constraints of diplo-speak. "We have to discuss the Chinese government's attitude on this question," the German foreign minister said.

Never before have the Chinese robbed the West of so much and such sensitive merchandise. Fully 70 percent of all illegal copycat products come from Asia, and most of that comes from China, in what has mushroomed into a $300 billion market. And the issue is no longer just a pair of poorly copied Adidas running shoes or a plastic version of a Gucci watch. More recently, the Chinese and others have taken to pirating expensive, high-tech knowledge, allowing them to duplicate entire machines and systems.

Some companies discover copies of their own equipment at trade shows, copies that are sometimes almost identical with the original product, down to the very last solder joint and paint color. Others, on the other hand, suffer because the fakes are of such poor quality that they threaten to ruin the real brand's reputation.

A major capital of patent theft

"More than half of the companies affected by patent theft have had these experiences in China," says Heiko Beploat of the German Machinery and Equipment Manufacturing Association. For a country like Germany, which derives much of its economic advantage from innovation and cutting-edge technology, this is a threatening development.

This rising menace facing the West was amplified by two reports that came out shortly before Steinmeier's trip to China. In the first case, European Aeronautic and Space Company (EADS) subsidiary Airbus announced that it plans to build its own plant in China, news that promptly set off a heated debate over the need to protect European aircraft construction secrets. In the second, China announced that it was beginning trial runs of its own magnetic levitation train -- less than two years after the opening of Shanghai's German-designed Transrapid system. It was an announcement that smelled strongly of industrial espionage.

While Airbus still has faith in the East as a land of opportunity, the Transrapid consortium of German industrial giants Siemens and ThyssenKruppp is already experiencing the uglier side of China's economic boom. Both cases ultimately revolve around the same fundamental issue: To what extent should, can or must German, European and Western companies kowtow to the rising economic power in hopes of generating future business? Airbus need only look to Transrapid to see the dangers that may await: the gradual threat of know-how theft.

The history of China's new magnetic levitation rail system is instructive. Whereas Germany's Transrapid has been tested on a stretch of track in the country's northern Emsland region since 1983, the Chinese version -- led by Chinese engineer Wu Xiangming, nicknamed Commander Wu -- only took 22 months to build. The 30-kilometer (18 mile) stretch of magnetic track went up on the perimeter of Shanghai at the behest of the Chinese government. The rapid completion, of course, was made possible because  the German companies involved contributed funding, top-notch personnel and expertise. A Sino-German joint-venture company oversaw the project.

But the cooperation turned sour in December 2004, when Chinese engineers broke into the Transrapid maintenance room in the middle of the night and took measurements of the new train. The bizarre incident was even captured on film, and German economic weekly Wirtschaftswoche speculated that it was a case of Transrapid technology theft.

Still lacking key technologies

The story generated a tremendous uproar, but it went away as quickly as it had appeared. The German end of the consortium did its best to limit the damage, especially in light of the fact that Shanghai is its only showcase for its prestigious train. Both ThyssenKrupp and Siemens hope -- at the very least -- to land the contract for construction of an extension of the system to Hangzhou, an industrial city 160 kilometers (about 100 miles) from Shanghai. But ever since the nighttime spying incident, the Chinese members of the consortium have proven expert at subterfuge, camouflage and stalling, until Commander Wu announced the Chinese maglev project last week.

Despite its history, the Chinese project shouldn't really come as a surprise. Engineers at China's Chengdu Aircraft Industrial Group have been tinkering with magnetic technology since 1986. In 2001, The Changchun Railway Vehicles unveiled a competing project in northeastern China. And the Transrapid project in China has been designed -- from the selection of the militarily secured production sites to assembly instructions -- in such a way that has allowed Chinese engineers to acquire as much Western knowledge as possible.

The Chinese designed train is being built by Chengdu Aircraft Industrial.
DPA

The Chinese designed train is being built by Chengdu Aircraft Industrial.

Though the evidence of industrial espionage is hard to ignore, executives at Siemens and ThyssenKrupp continue to play down the incident, claiming that the Chinese still lack key technologies, such as the system's highly complex control software. At least, so goes their thinking, they might be able to earn a bit of money on blueprints and patents -- almost all concrete Transrapid plans have gone up in smoke in recent years.

And who should they sue? ThyssenKrupp is hoping for major steel contracts in China. Siemens is spending billions on new plant construction in the country, where it already manufactures everything from semiconductors to microelectronic components. The last thing it needs is to quarrel with the government. The two companies seem unwilling to risk so much for a technology that, while popular, has failed to generate many customers outside of China.

Transrapid, of course, isn't alone: Many Western companies, from Shell to Volkswagen, are competing for attention from the Chinese government. VW, for example, is helping Chinese engineers at Tongji build a hybrid engine scheduled for completion by the 2008 Olympics in Beijing. The Stuttgart-based Institute of Internal Combustion Engines and Automotive Engineering is helping build China's first wind tunnel. There are many other similar cooperative ventures, and the most important raw material they're bringing into the People's Republic is knowledge.

Jets next?

An influential rail expert at Tongji University complains about the Germans' arrogance in the Transrapid case. He says that the Germans must begin "to understand the Chinese philosophy. If they don't involve us in the technology, we don't feel comfortable." France, he adds, has been far more generous in this respect and, as a result, was promptly awarded the contract for construction of a new high-speed rail system between Beijing and Shanghai.

But how attractive are these types of deals to Western companies when they're being forced to essentially give away costly technology -- or at least look the other way when it's copied by the Chinese? It's a question that's also been on the minds of Airbus executives recently.

The European aviation group plans to benefit from growing air traffic in China. Airbus could sell thousands of its jets there, earning billions in the process. But that would mean giving in to Beijing's demands for the establishment of joint venture companies and the construction of production facilities in China.

Although Airbus has promised to comply, it plans to limit initial production to older and smaller models. In return, Beijing announced late last year that it plans to buy up to 150 of Airbus's A320 models.

At the same time, however, the government announced, as part of its upcoming five-year plan, that it will begin developing its own jet for 150 to 200 passengers in 2010. Given such behavior, and amid fears of industrial espionage, it comes as no surprise that the US government has thus far barred its own aviation giant, Boeing, from building aircraft production plants in China.

New laws aren't much help

Suspicions are also mounting in Europe. European Union Industry Commissioner Günther Verheugen plans to make the issue of patent theft and industrial piracy a focal point of his agenda this year. And if his efforts are unsuccessful, the EU Commission will address these problems at this year's meeting of the World Trade Organization (WTO). Verheugen is well aware that the problem has grown far beyond counterfeit drugs, cigarettes and designer clothing brands, and that the burning issue today is cutting-edge technology. His commission has already received many complaints from the European auto industry, which routinely finds fault with the Chinese' abrasive business practices.

Airbus may also be victimized by technology theft in China.
DPA

Airbus may also be victimized by technology theft in China.


Western automakers, from VW to DaimlerChrysler, General Motors to BMW, have had similar experiences in China. They've all been allowed into the country, where they invested billions and formed joint ventures, only to look on as they were spied upon and played off against one another. Meanwhile, the Chinese were busy developing their dreams of launching their own auto industry.

When an ambitious Chinese company, Chery, simply copied the Spark, a small car designed by General Motors, the US company took the Chinese to court, and a settlement was reached in November. Even a giant like GM, it appears, has no interest in destroying good relations with the Chinese Communist Party leadership by embarking on lengthy lawsuits.

Beijing did increase it penalties for product piracy last year, and all Western standards, such as trademarks, patents, design patents and utility models can now be protected in China. But the more recent Chinese legislation was more likely passed because Chinese companies are now accusing one another of piracy. Although companies like Starbuck's and Ferrero have experienced some success in the courts in recent months, there is still a wide gap between legal theory and economic reality.

German small and mid-sized companies, in particular, are often "taken to the cleaners" in China, says attorney Thomas Pattloch, who recently helped a German eyeglass manufacturer win a legal battle.

Rainer Hundsdörfer is all too familiar with the problem. "Dozens of Chinese manufacturers are shamelessly copying our machines," says Hundsdörfer, the CEO of Weinig AG, a German company that's been manufacturing machine tools for the Chinese market in its plant in the People's Republic since 1997. Hundsdörfer is constantly discovering copies of his company's products at trade shows. "And when I point this out to the Chinese in their booths, they're not even embarrassed. On the contrary. They're proud of the quality of their copies and want to know how they can improve them even further," he says, half outraged and half amused.

"Incredibly bold"

The Chinese are "incredibly bold," he says, especially when it comes to smaller foreign companies. In fact, they even used photos taken directly from Weinig brochures in their own product catalogs.

The giants are just as likely to be affected by Chinese industrial practices. About ten years ago, Siemens was still shipping entire fossil fuel power plants to China. In return, the company was required to turn over its expertise to its local partners. Nowadays, Chinese companies are producing many different types of power plants without outside help, treating Western firms as little more than suppliers. "Of course, it's a bitter pill for us to swallow," says one Siemens executive. But, like many others, his company finds itself in a dilemma.

On the one hand, China is Germany's second-most-important export market outside Europe. Each year German companies ship goods worth €20 billion to the East, and machinery and equipment are at the top of the Chinese shopping lists.

On the other hand, the Chinese remain deficient in many respects, lacking media openness, human rights and an awareness of injustice. Despite the country's shift toward capitalism, property ownership is still ideological virgin territory for the Chinese regime. According to a German industry association dealing with product and trademark piracy, the statistics on confiscated goods show that the People's Republic is the world's number one copycat economy.

Minister of Science and Technology Xu Guanhua recently suggested that the Chinese "must acquire as many key technologies as possible, as well as more intellectual property." What he didn't mention is whether China plans to pay for its acquisitions.

By Dinah Deckstein, Markus Dettmer, Frank Dohmen, Sebastian Ramspeck, and Wieland Wagner

Translated from the German by Christopher Sultan

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