Technology Transfer Fuels Counterfeiting

Does reverse engineering a competitor's product bother you ethically? The pervasive practice of opening the other guy's enclosure to see what's inside is not considered outright espionage, but it is rarely done openly.

If it is unacceptable to peek into another company's R&D labs, then why do many businesses have their competitors' products on the dissecting table behind closed doors? There could be a myriad of technical reasons a company would want to fish from this covert but readily available knowledge pool. Whose OEM chips did they use? How did they do their cooling? How did they handle their noise problem? What power supply values did they use? Did they do this on a two-sided board or multilayer? What is hidden under that encapsulated or shielded section? I know because I was asked to perform this kind of analysis a number of times.

On numerous occasions, I was asked to open a competitor's box and roll up the top-level cost based upon years of experience in sourcing and purchasing electronic components. I may have been asked to do this in a matter of minutes prior to going into a negotiating session in order to know what we should be charged for a similar product. Sometimes my cost evaluations were used in planning meetings where the company would be setting cost budgets at the earliest stages of product development. Invariably, while I was rolling up the cost mentally, I just could not help notice particulars in the design that, for all intents and purposes, the competitor would not necessarily be willing to divulge in a casual or technical conversation about its product.

I did not make a career of this practice, but I did it often enough to be the person assigned the job whenever the need arose. For my own part, as a component engineer, I was always interested in seeing how other people were using, mounting, or configuring a component I was already familiar with. Sometimes curiosity alone was enough to have me cross over this ethical gray line. I justified it by calling it a necessary engineering practice to help my company stay competitive.

Did you hear about Japan and China and the bullet train dispute? It seems Japan is claiming that China is using Japan's designs to manufacture its own bullet trains and thereby underselling the Asian rival and reducing its share in the worldwide market. How did China get all the technical goodies to build a similar train? Well, I will tell you.

Japan had to provide a “Transfer of Technology” package to China before China would build Japan's bullet trains and grant them market access. A Transfer of Technology article is the whole kit-and-caboodle on how to build the product. It includes the bill of materials, acceptable suppliers, assembly drawings and procedures, testing instructions, and virtually the entire product in documents. Have you seen the new Chinese Pterodactyl drone? It sure looks a lot like the US Predator.

This is not new news for anyone, but the fact that US technology has been being handed over for years to our biggest economic competitor makes my little excursions into the competitor's boxes seem almost like innocent fun. Every time a US company outsourced a product or a printed circuit board for assembly in China, you had to know that there were forensic and component engineers assigned to look at the technologies for the sake of China's “greater good.”

I know that there are export restrictions on some semiconductor components like microprocessors, microcontrollers, and other devices key to our Homeland Security concerns, but with China's reach almost in every country in the world, how difficult would it be to find, import, and clone a restricted part that could be sourced by China from a country where the part was authorized for use?

There are no secrets. Homeland Security cannot stem the tide or stop the flood. Counterfeiting is becoming the largest economic and security concern because the technology, software tools, and fabrication equipment to clone components and entire products are on the open market. How much of the counterfeiting can be stopped if we curtail the transfer of technology practice? Like I said, the dam is already broken, and trying to stop this flood is like trying to rebuild the dam while the reservoir is overflowing and the river is at flood stage.

19 comments on “Technology Transfer Fuels Counterfeiting

  1. rohscompliant
    February 6, 2013

    It is unfortunate that a US company or any other country for that matter has to succumb to the Technology Transfer extortion that the Chinese gvt imposes on 'outside' company's. But the allure of the Chinese cosumer market (etc) is to big of a carrot for company's to resist…….all in the name of shareholder value.

  2. Daniel
    February 6, 2013

    Douglas, counterfeiting the technology is the easiest way for competitors. As of now there are no options to stop such illegal things. When Apple released IPhone 5, with in a couple of days Chinese companies release similar product with all similar features. From where they got such technology? No answer, but its true that a certain percentage of such leaks are happening through employees.

  3. prabhakar_deosthali
    February 7, 2013

    The practice of reverse engineering of the competitor's product happens almost in evry company's  R & D department. I remember to have bought the television sets of all the brands that existed that time when our company was developing our own TV .

    In India , in earlier times when the import of electronic product was restricted and also very expensive, many a companies would import one piece , and try to build an indigenous product by reverse engineering the same.

    But in my opinion such reverse engineering cannot be called as counterfeiting as the reverse engineered product is sold under different brand name. Counterfeiting tries to fake a product as original by having the exact packaging and the product logo.

  4. _hm
    February 7, 2013

    @Prabhakar: Yes, I agree with you. When I read it, I had same comments like you. One way to preserve market share is to release technology features in progressive way. i..e introduce new features when market share starts reducing. Also, keep doing more innovation and provide best quality at reasonable profit.

  5. Adeniji Kayode
    February 7, 2013

    @ Jacob, The question is where was the phone manufactured in the first place.

    Is it not from the same China and this is not the first time its happening.

    China has gained ground making similar products with low price when compared to the original devices too and for that ,people love them for what they are good at.

  6. owen
    February 7, 2013

    Hello Douglas,

    I came across this a couple of weeks ago in GSN. It looks like DARPA is working on at least one solution…

    “Defense Department researchers want to develop a new type of electronics that can be installed in everything from radios, remote sensors, listening devices and phones that can melt away when they're lost or have completed their mission.”

    I doubt it will end the practice but it couldn't hurt, especially when it comes to super-secret military technology.

  7. elctrnx_lyf
    February 7, 2013

    Technology transfer is always done for the business sake. I mean the Japan may not given the technology to china for free. When all the information is available all the companies try to design a similar product for the commercial and business purpose. The counterfeiting should be take care by stringent measures in supplier selection and supply chain management.

  8. CmdrDick
    February 7, 2013

    Those of us who are old enough will remember when our trade shows of the 50's and 60's were swarming with Japanese engineers. Every one of them was carrying a camera and they were taking very detailed shots of every product that we had on display. Don't think for a second that this was for home enjoyment. They studied the photos and markets, then bought copies of our products for reverse engineering. Now that China is doing the same to them, they are complaining.

    Our early engineering knowledge ALL came from Europe, much from Germany, where high tech was coupled with quality. Anyone that believes that we didn't go thru our own version of reverse engineering to get where we are has their head in the sand.

    We need controls on the release of technology for a period long enough to maintain a lead. The best way to accomplish this is “Made in America”, and restrictions on the export of high tech designs. But, any way you look at it, when you crash the first one, the competition will be all over the pieces.

    This is and will always be a large part of “progress”. The Japanese suit will undoubtedly fail. They are foolish to think anything else. Actually, I find it amusing that the monopolistic guys that stuck it to everyone else are now in the receivers corner. Chuckle, chuckle. !

  9. FreeBird
    February 8, 2013

    From what I understand, there are efforts underway to reform export practices. For instance, the cutting edge technology that is not to be exported hasn't been updated for years. With the rate of change, I'd imagine CRTs might be on the do-not-sell list 🙂

    In spite of the government efforts, though, it is pretty clear that anyone who wants something can get their hands on it. If US companies aggressively defend their IP in the courtroom (against counterfeiters–not each other) it sends a message—whether anyone listens is another matter

  10. t.alex
    February 10, 2013

    I have heard from some young startup mentioned that one of the lessons they learnt is that their business will be doomed if they outsource manufacturing to china without any means of IP protection.

  11. Cryptoman
    February 10, 2013

    I agree that in this day and age, there cannot be any well hidden secrets unless you are prepared to invest large sums into ensuring that the secret stays as a secret. (One good example of this is how what goes around in Area 51 is still a big secret.) Not being able to have well kept secrets is the price we all have to pay as a result of transforming the world into a global village.

    Regarding “reverse engineering” practices mentioned in the article, I know many companies do this. I was never involved in reverse engineering a competitor's product directly but I do know of cases where other colleagues were assigned to carry out such tasks. However, reverse engineering may not necessarily be a threat if your product has unique features that are difficult to mimic. One good example of this is a metal detector. You can take a metal detector and cut open the detector coil but you will find it hard to mimic all features of that particular coil to achieve the same performance. All you can do is to simply stare at it in awe appreciating what a good job the competitor has done.

    There are other cases where some competitors do not feel confident and prefer to take any action (reasonable or not) to prevent others from accessing the inner secrets of their product. One extreme case I came across in the past was one radio equipment manufacturer refused to sell their products to any employee of a competitor purely to avoid the risk of reverse engineering.



  12. Daniel
    February 11, 2013

    Adenji, it’s not a matter of place, it’s all about the integrity and credibility of employees. Most of the secrets are leaking through a small percentage of employees, for some marginal money. This is happening all over in world

  13. Daniel
    February 11, 2013

    t.alex, I agree that there is no any technology protection in China. But it's not only in china, in some of the Middle East countries too. That's the one reason most of the companies are handholding the R&D division and main manufacturing unit without any outsourcing.

  14. Adeniji Kayode
    February 11, 2013

    @ Jacob; I agree with you on that , sometimes this could also be as a result of a worker that got laid off which must also make ends meet.

  15. mike_at_DCA
    February 12, 2013

    Yes, I did lots of reverse engineering of competitors products as well, both as a manufacturer and as a consultant. Always fascinating.

    Don't forget that China has also been trying to force (material composition) testing of components in Chinese labs – along with a complete bill of materials – in order to qualify products as compliant with restrictions in phase 2 of China RoHS…that phase has yet to begin because the electronics industry pushed back hard on that. There is now a voluntary approach defined instead. One of industry's concerns was, indeed, the amount of information that could be gleaned from this practice by the labs, with counterfeiting – at the component or product level – one of the key risks. This is one approach to getting around “Technology Transfer”.

  16. dalexander
    February 12, 2013

    @Michael,  I think there is still a major part of the USA's R&D braintrust that believes that China isn't as sophisticated as they truly are. In fact, their technology sector is highly advanced with the latest test and production equipment, software, and management systems that allows them to be in transition to a “Created in China” from a “Made in China” operation. Take a look at Jan's Popular Science on “China's Arsenal” as it informs us on the advanced warfare capabilities in place and what products are underway that will help patrol and enforce their claims to China Sea's disputed international bounderies. Good to hear from you Michael.

  17. t.alex
    February 14, 2013

    Jacob, how bad is it in the Middle East as compared to China? I guess there are a lot of outsourcing companies there too.

  18. Daniel
    February 17, 2013

    “how bad is it in the Middle East as compared to China? I guess there are a lot of outsourcing companies there too.”

    Alex, now Chinese people are doing more hacking with companies located outside china. This will help them to grab the technology without spoiling their countries name. In Taiwan, Hong Kong, Malaysia, Singapore etc are some of their targeted manufacturing/development hub.

  19. Daniel
    February 17, 2013

    Adenji, this is one of the issues faced by most of the corporate world. In your company have you adopted any necessary measures to stop leak outing corporate secrets or technology?

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