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Tech & China’s Rule of Law

First impressions are important. And that's especially true for this week's visit to the United States by China's vice president, Xi Jinping. By all accounts, Xi is the frontrunner to become president of the People's Republic when Hu Jintao's term ends this year. Xi's visit gives each side a chance to size up the other and gauge whether the relationship will become more or less contentious.

US Vice President Joe Biden set a combative tone from the start when he said at a State Department luncheon on Tuesday that cooperation “can only be mutually beneficial if the game is fair.”

It's an election year, and Biden was playing to the domestic audience, but the US has been growing frustrated for some time now with China's stance on a number of trade and geopolitical issues. Whether it's rampant counterfeiting, IP protection, China's suspect rule of law, human rights violations, support for Syria, or an unwillingness to let its currency appreciate, the US has been demanding more vocally that China become a better global citizen and trading partner.

Of course, China doesn't see it quite like that. In a speech on Wednesday, Xi said the two nations need to respect each other's “core interests.” This means, among other things, that the US should back off from its support of independence for Taiwan and Tibet and reconsider its restrictions on the export of high-technology products to China.

Given China's inability — or unwillingness — to protect intellectual property, the US is unlikely to relax its high-tech restrictions soon. At the heart of the issue is China's poor track record on protecting foreign companies' rights in its courts. Until China can demonstrate it's serious about a strong rule of law, nothing will change.

That system is being tested now by a case brought by American Superconductor (AMSC), a struggling Massachusetts developer and manufacturer of next-generation technology for wind turbines and power grids. Last year, AMSC filed three civil suits in Chinese courts accusing Sinovel Wind Group Co., formerly its largest customer, of breach of contract and IP theft. The US company is seeking to recover more than $1.2 billion for contracted shipments and damages from Sinovel.

One of those cases, a civil action against Sinovel for software copyright infringement, has been filed with the Beijing No. 1 Intermediate People's Court. The case alleges that Sinovel illegally used portions of AMSC's wind turbine control software source code developed for Sinovel's 1.5 MW wind turbines and the binary code of AMSC's software for its PM3000 power converters. AMSC is seeking a cease-and-desist order and damages totaling $6 million in this case.

AMSC alleges that Sinovel acquired the software illegally from Dejan Karabasevic, who worked at AMSC Windtec in Austria. Karabasevic was arrested in Austria in July and pleaded guilty in September to passing information to Sinovel.

Sinovel denied any wrongdoing and vowed to “actively respond” to any legal action brought by AMSC. In November, Sinovel filed a motion to remove this case from the Beijing court and transfer it to the Beijing Arbitration Commission. On Tuesday, the court denied Sinovel's motion to remove the case.

This is good news for AMSC, but it's just a very small step in a long and costly battle. Technology corporations around the world will certainly be watching it closely. AMSC's future is in the balance, and Sino-US relations may be, too.

16 comments on “Tech & China’s Rule of Law

  1. Barbara Jorgensen
    February 17, 2012

    The case you mentioned is likely to be a bellwether for IP and copyright cases regarding China going forward. Some time ago, Analog Devices was one of the first companies to successfully uphold a patent infringement case against a Taiwanese company. I think the case was adjudicated outside of China, however.

  2. mfbertozzi
    February 17, 2012

    @Barbara: given the fact that graphene is coming in our tech sector as revolutionary semi-metal for producing devices, as soon as new patent will be ready by adopting tant, I am suspecting we will assist quite soon to stories similar to which one you have mentioned !

  3. Eldredge
    February 17, 2012

    This will be an interesting case to watch. It is impossible for any domestic company to enforce IP protection in China with having the rule of law to rely on in their judicial system.

  4. Bruce Rayner
    February 17, 2012

    Barbara – I”m no familiary with the ADI case. But there's a big difference between Taiwan and the PRC when it comes to the rule of law.

  5. elctrnx_lyf
    February 18, 2012

    I think other countries also should enforce more restriction on supplying any high technology supplies to china. The breach of any IP should be punished seriously anywhere in the world otherwise soon we will not see any one investing to develop new technologies.

  6. ITempire
    February 18, 2012

    IP theft case where a Chinese corporation is at blame is not a surprising news as China has been previously accused by many for such incidents and rightly so.

    Moreover, without legal protection available to foreign companies in China, it will be very difficult for China to attract/maintain foreign trade. However, we should not forget that since China and US have been fierce trade rivals, they both would be having many complaints against each other and many of them would be believable. Visit by Chinese politicians will certainly break the ice as when the decision for a political visit is made, it comes with an agreement for give and take with the host nation.

  7. Taimoor Zubar
    February 19, 2012

    I agree that unless China improves the IP protection rights, foreign companies will not be encouraged to invest in China. But the point here is whether China really wants the presence of US companies inside China? Would China get any additional benefits if US companies establish their factories in China directly?

  8. ITempire
    February 19, 2012

    But the point here is whether China really wants the presence of US companies inside China? Would China get any additional benefits if US companies establish their factories in China directly?”

    @ TaimoorZ

    I think China would definitely want presence of all major companies including those from US. With foreign direct investment come in major benefits to the economy such as foreign currency inflows, unemployment levels go down, knowledge bank arrives through advanced processes and systems that are implemented at these large organizations and employees are trained with these introductions.

    It is highly surprising to see China imposing barriers (such as legal barriers that Bruce mentioned) as I dont see any benefit to China from these. While we discuss the restrictive actions taken by China, we should not forget that despite all this, many US companies have their manufacturing facilities outsourced in China.

  9. Taimoor Zubar
    February 19, 2012

    @waqas:I agree that foreign investment is a source of inflow of foreign currency. But China is already exporting a lot in the form of goods and manufacturing services to the world. If China encourages direct foreign investment, it may result in a reduction of exports of goods and services. For instance, take the example of Foxconn which is a major EMS to Apple and other leading brands. If instead of outsourcing manufacturing to Foxconn, Apple decides to invest directly into China in the form of its own factories, would such a move be beneficial for the Chinese government and economy? I am not sure.

  10. ITempire
    February 19, 2012

    @ Taimoor

    The point is debatable. If Apple invests directly in Chinese as permenant manufacturing unit, Chinese government may find it hard that all the profits are running out of the economy as the shareholders remain those residing abroad. Encouraging investors to list the company on Chinese stock markets may be a solution however, the investors might be forced not to do so by the parent country's government, i.e. the US.

    However, with a growth to economy and the infrastructure development that are probable positive effects of investment in China, the Chinese government would find it appropriate to let the investment levels go up. Increase in exports would also increase as the manufacturing takes place in China and worldwide demand is fulfilled through it.

  11. Daniel
    February 20, 2012

    Bruce, none of the Chinese laws are favorable to corporate world. All there laws are based to promote countries capital investment and for generating internal revenue. They are very keen in attracting foreign investments, but they never promote any products from any MNCs. Most of the disputes are happened because of their monopolistic behavior and unilateral decisions. Their ultimate aim is to extract the foreign companies, for internal benefits and promote GDP growth. They never bothered or will think from investors point.

  12. bolaji ojo
    February 20, 2012

    Bruce, What's your opinion on the view that China's form of capitalism (state-managed) is different and so requires a rather different set of rules and regulations than what is applicable in the West. If China is growing with its mostly state-managed system, why should it conform with Western laws? The West knew this is different going into China so why should we expect them to conform with our own laws?

  13. ITempire
    February 20, 2012

    Jacob. I totally agree with you. What I think is that every country has the right to protect its own industry esp when the local organizations are not as powerful. Not every country is like those Asian and African countries who let the imports rule through and are under too much pressure to apply protectionist policies. Although this kind of protectionism that is applied by China is against the free trade treaty but when you look at it from the Chinese point of view, they are doing what is earning the most for their economy.  

  14. Anne
    February 20, 2012

    This is a test of ties between US and China.

  15. FLYINGSCOT
    February 20, 2012

    USA talks with China can only be a good thing.  It will take a long time until both parties are perfectly in sync but both need each other so it will have to work.  USA is the world's largest consumer and China is the largest producer.  China bankrolls USA so USA keeps buying Chinese goods.  The ties are irrevocable. 

  16. Mr. Roques
    February 22, 2012

    Is it only the US companies that have issues with IP infringement? There must be Chinese companies that have IP, does China protect them? Is it a nationalist issue?

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