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Onshoring Because IP Matters

Imagine that you ship your idea for the next great electronics product to China. You'll watch it flourish. The problem? Your name has been scrubbed from the product.

Though this does not happen in all cases, the frequent and blatant theft of intellectual property (IP) in China is making more US companies turn to domestic markets for better protection, adding yet another dimension to the onshoring movement.

The Commission on the Theft of American Intellectual Property said in a 2013 report:

A core component of China's successful growth strategy is acquiring science and technology. It does this in part by legal means — imports, foreign domestic investment, licensing, and joint ventures — but also by means that are illegal. National industrial policy goals in China encourage IP theft.

Though some of its does occur via cyberspace, a lot of IP theft takes place in countries where the laws are lax and enforcement is haphazard at best. In fact, the report said, “Much of it occurs the old-fashioned way” — bribing, re-engineering, and physically stealing documents still rule in China.

In some instances, the Chinese government has even made divulging company technology a prerequisite for opening a factory. Further exposing carefully engineered properties to foreign supply chain partners is a risk some US companies are no longer willing to take. In a 2012 Hackett Group study, the protection of intellectual property ranked third among the drivers of strategic sourcing decisions, trailing only total landed cost and product quality.

The theft of everything from trade secrets, proprietary products, and parts to music, movies, and software costs the United States billions of dollars every year. Cyber espionage alone accounts for 500,000 domestic jobs lost annually, according to McAfee and the Center for Strategic and International Studies.

For an individual company, the lack of respect for its intellectual property can lead to the demise of the entire operation.

Imagine the feeling of a company rep from a Midwestern firm that had outsourced to China as he was walking the floor at a tradeshow. A display showcased products that were more than familiar. Even the marketing materials were identical. A closer look revealed the Chinese company had stolen everything, right down to a promotional photo featuring the rep's own child.

Apple has tried for years to crack down on bootleg products and fake Apple stores across China, but few companies can afford such legal wranglings. They likely will go nowhere because of weaknesses and biases against foreign IP in the Chinese legal and patent systems.

Though Apple has not said so outright, it's a good guess the protection of IP played at least some part in its decision to bring back to the US the production of one line of Mac computers, as well as the assembly of other products. In any event, Apple is not alone.

What's your take on IP and the onshoring trend?

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3 comments on “Onshoring Because IP Matters

  1. SP
    May 6, 2014

    Yes in China, copying is just normal. They copy anything and everything that makes business sense. And the Government kind of support it. There is no democracy so what the Government says is the last word. The bribing and other old fashioned techniques are still pretty strong. So if you give your design to any Chinese company for manufacturing, there is always a good chance that the same would come in the market with the name of one of the Chinese company and no one can do anything about it. SO better dont outsource to China. Its more to do with ethics.

  2. FLYINGSCOT
    May 7, 2014

    I am afraid it is a risk we all take as we go after the massive Chinese market and low cost labor pool.  Things are improving slowly but always remember China's govt looks after number one first so if you are willing to play by their rules (or lack thereof) then quantify the risks, put mitigation measures in place and if it all stacks up then go for it.  Most companies work very hard to limit the technology that is divulges to Chinese divisions and this is always prudent.  However I do believe China is not alone in this issue and we should work to fix it rather than run away from it.  

  3. t.alex
    May 8, 2014

    China takes  a lot of blame on copying, but in fact other countries copy too. Just in subtler ways.

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