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How to Protect Your Intellectual Property When Developing Products in China

IP Protection in China and Taiwan

Protection of Intellectual Property (IP) in China is a big concern for many of map of chinaour clients, and understandably so. Stories abound of products being copied, and even of factories using the molds that clients paid for to make and sell their product behind their back.

That's why at Titoma we go to great lengths to protect the confidentiality of our clients' ideas and inventions.This is actually one of the main reasons people prefer to work with us rather than just handing their idea to an unknown factory somewhere in China.

Patent Protection in China

In China, patents are of very little use because there is still a lack of effective enforcement--even after China joined the WTO. If after years of litigation you win a lawsuit in China, it by no means guarantees that the offending factory will be closed down. And if you close down that one factory, they will very likely take their machines down the road and start up again in a new building.

A few years ago, I participated in a conference in Shanghai organized by the Economist. A US lawyer who had been practicing in Shanghai for 10 years was presented as China's leading expert on IP protection. He showed a PowerPoint with pictures of factories which they had shut down. One particular place made an impression on me: In one factory, a guy smoking a cigarette was stirring big tub of goo with a wooden stick to make "Colgate."

Intrigued by his experiences, I wanted to get him aside to talk more. The following conversation ensued:

Me: "Of all the factories you have taken on in the last 5 years, what percentage have you been able to really close down successfully?"

IP Lawyer: "Well, you really shouldn't look at it in that way..."

The forum moderator intervened: "Yes, I talked with a lot of lawyers in Shanghai; they all say it is difficult to get lasting results despite their best efforts."

Me: "So what's the percentage?" I pressed.

IP Lawyer: (Shrugs)

The problem of course is that first you have to convince a local judge to make 200 workers unemployed because a foreigner wants to make even more money than he already has. Then you have to have endless dinners with the police department to actually carry out the factory's closure. So it usually takes 3 to 5 years to get there. And when the factory really is about to be raided by the police, the boss is of course fore-warned, and all the machines are moved to a new factory 2 blocks down the road.

Low risk for new products

On the other hand there is no need to get overly worried: the Chinese generally do not have the marketing ability and resources to promote a brand new, unproven product. For this reason a factory will only invest the time and money in making molds, etc, to copy your product after they have seen it sell at least say 100,000 units--and when that many units have been sold, anybody could copy it, so in that sense developing in China does not add too much risk.

When to patent in your target market (and when not)

An important thing to realize isthat most copying originates from the target market. Factory bosses in Ningbo or Wuxi don't keep abreast of what is selling well this month in Los Angeles or Paris, so in most cases it is actually a US or other importer who asks the China factory to rip off a product he saw in a store. So patenting your idea in your home country and other target markets will likely make more sense than only doing so in China.

In fact, some of our senior engineers have registered and defended many patents themselves in their careers. But in general we only recommend patenting if you can make a very strong functional claim (what the product does) on the uniqueness of your idea, as patents on a design are often all too easy to circumvent. Patents can scare off some potential copycats. On the other hand, registering a patent effectively publicizes lots of detailed information on exactly what your product does and how it does it.

Another important issue is cost. Paying for exhaustive patent searches, registration and maintenance fees is one concern; a second concern is whether you have US$2 million to back up your claims in court against a large corporation.

We have seen quite a few clients who have spent so much on patent protection that they had to really struggle to pay for all the other things needed to make an idea into a successful product: development, tooling, the first production batch and proper marketing.

Flooding the market: Protection in numbers

The traditional way to market an innovation is to start selling it at a high price, and slowly lower the price to reach more people. The big disadvantage of this strategy is that the high unit price actually provides a big incentive for people to copy it.

Instead, we often advocate selling the new product at low prices right from the start, flooding the market as much as possible, and thus preempting the competition before they even have time to do their reverse engineering.

Many good ideas are not easy or affordable to protect, so as soon as your product is out on the market it can be copied, which means that you have to exploit your head start by selling as much product as you can before the competition catches up, sometimes only a few months later. This situation again suggests a mass marketing blitz featuring low prices right from the start. The good thing, of course, is that Titoma allows you to do so with our unique capability to design your product for low cost mass manufacturing in China. Keeping the project hush-hush during development is essential.

So how does Titoma protect IP of its clients?

Even though most of our mass production is done in China, we still prefer to keep development in Taiwan. Our usual strategy is to do pilot production in Taiwan, and only after the product is stable and available in the market do we move mass production to China. This is generally a very easy transfer because work methods are so similar, and many of our partner factories in China are actually Taiwanese managed and owned.

Taiwan has made great progress in IP regulation and enforcement in recent years. More important, most Taiwanese firms have been around for 20 years, so they are a lot less likely to just pack up and start anew, unlike China which is still more like the Wild West. Taiwan also has good international law firms that will represent your interests, both in Taiwan and China.

Own the full IP

We always pay our manufacturers a realistic fee for tooling and development, this way there is no doubt as to who owns what. Many IP problems we have seen arose when development or tooling were offered free or far below cost, and the client's sales numbers did not meet rosy forecasts. Since the client was not able to sell, the manufacturer feels morally justified in making back his investment by doing the selling himself.

Own the full IP

We always pay our manufacturers a realistic fee for tooling and development, this way there is no doubt as to who owns what. Many IP problems we have seen arose when development or tooling were offered free or far below cost, and the client's sales numbers did not meet rosy forecasts. Since the client was not able to sell, the manufacturer feels morally justified in making back his investment by doing the selling himself.

Remove the injection molds

For sensitive projects, we take the plastic injection tools in and out of the molding shop for each run to prevent extra "night shifts".

Divide and Conquer

Another possibility for sensitive projects isto have one factory do the housings, another do the PCB's, and do final assembly with rigid incoming QC in our western-managed assembly plant. This way, none of the subcontractors gets to see the complete picture, so they likely won't even know exactly what their parts are used for. They don't see the packaging, instruction manual, or brand name.

Some of the above tactics are easier to implement than others. It will depend on your product how much protection is needed, and there is of course a trade-off with added coordination costs.

In conclusion

So while at first sight it may look rather scary to take your highly confidential new product idea to Greater China for development, when enough precautions are taken, the advantage of selling the product at low prices and thus high volume right from the start outweighs (in most cases) the potential added risks of copying.

The alternative--doing development and initial manufacturing in the West--will cost a lot more, result in a product that will sell slowly because of the high unit cost, and that same high unit cost will attract competition from Asia very quickly, likely even before you start making your high investment back.

Please contact a Titoma representative for more information, a quote, or other inquiries:

 

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