Safeguarding Your Manufacturing Operation: Protecting Against China Intellectual Property Theft

Last Updated on July 5, 2023

China's rise as a global manufacturing powerhouse has been accompanied by persistent concerns regarding intellectual property (IP) theft. Intellectual property theft refers to the unauthorized use, reproduction, or distribution of someone else's creative work, inventions, or trade secrets. In this blog post, we will delve into the concept of China intellectual property theft, provide real-world examples, and discuss strategies to protect yourself against IP theft in Chinese manufacturing. Furthermore, we will explore the advantages of shifting manufacturing to Mexico as a viable option to mitigate these risks. Additionally, we will touch upon how the USMCA treaty bolsters intellectual property protection for manufacturers.

What is Intellectual Property Theft?

According to the World Intellectual Property Organization, Intellectual property (IP) “refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.”

“IP is protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create. By striking the right balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish.”

There are a few ways in which China violates this definition: First, the Chinese government requires foreign firms to form joint ventures with local partners in China, which can result in the transfer of technology and product manufacturing designs. Additionally, the Chinese government actively encourages businesses to conduct their R&D activities only within the country. 

There is a catch-22: if companies do not agree to these terms, the Chinese government then restricts their ability to manufacture in their companies.  In the event that they do agree to the terms, then the companies are effectively handing over their trade secrets to the Chinese companies and, in turn, the Chinese government. 

Examples of China Intellectual Property Theft

Cyber Espionage: The Chinese government and affiliated entities have been accused of state-sponsored cyber espionage to gain unauthorized access to valuable intellectual property. The 2015 breach of the U.S. Office of Personnel Management, which compromised the personal data of millions of Americans, is believed to be linked to Chinese hackers.

Counterfeit Goods: China has long been associated with the production and exportation of counterfeit products. From designer clothing and electronics to pharmaceuticals, these knock-offs damage the reputation and revenues of legitimate companies.

Is China Stealing Ideas From Manufacturers?

There seems to be plenty of evidence that they are:  According to the Chicago Tribune, there are have been several high profile cases involving large American companies in just the last 5 years alone:

• Federal prosecutors charged in an indictment unsealed last month that the Chinese tech giant Huawei stole trade secrets from U.S. cellphone company T-Mobile and offered bonuses to employees who managed to swipe technology from other companies.
• Apple has been infiltrated by thieves trying to steal driverless car technology for a Chinese company, according to criminal charges filed in Silicon Valley. 
• In November 2019, the Justice Department charged a government-owned Chinese company, Fujian Jinhua Integrated Circuit Co., and co-conspirators with stealing trade secrets from the U.S. semiconductor company Micron Technology. 
• A year ago, a Chinese company, Sinovel Wind Group, was convicted in a federal court in Wisconsin of stealing technology —the electronic brains that run wind turbines — from its American partner, AMSC, formerly known as American Superconductor Inc.

According the Guardian:

The theft of trade secrets by China costs America an estimated USD 300 to 600 billion annually and according to the FBI, “No country posts a greater threat [to the United States] than Communist China.

Source: IP Closeup

How do I protect myself from China Intellectual Property Theft?

If you have concerns about China intellectual property theft, there are a few steps that you can take to secure your product rights.  It should be noted that you should consider doing all of the following suggestions BEFORE you begin manufacturing in China:  

• Secure Legal Protection: Register your intellectual property in China, including trademarks, patents, and copyrights. This ensures legal recourse and offers a stronger defense against infringement.
• Get Signed Exclusivity Contracts From Your Suppliers: Again, if you are dealing with sourcing in China (a common practice that is often demanded by Chinese manufacturers) this will be very difficult.  If you are sourcing from the US, this will be less of a challenge.
• Confidentiality Agreements: Establish clear confidentiality agreements with all parties involved in your manufacturing process. Clearly define the terms, obligations, and penalties in case of breaches. Consult with legal experts to create robust agreements tailored to your needs.
• Conduct Due Diligence: Thoroughly research potential partners, manufacturers, and suppliers before entering into agreements. Verify their reputation, track record, and commitment to intellectual property protection. Seek recommendations from trusted sources and consider performing on-site audits.
• Use Multiple Factories for Components and Do Final Assembly Somewhere Else: This will keep companies who may steal from having access to all your parts, and knowledge on how you do the assembly for your product.
• Protect Trade Secrets: Limit access to proprietary information within your manufacturing operation. Implement stringent physical and digital security measures to safeguard trade secrets from unauthorized access

How Moving Manufacturing to Mexico Mitigates Intellectual Property Theft Risks

While China has been a popular choice for manufacturing due to its low labor costs and vast production capabilities, moving manufacturing operations to Mexico has gained prominence as a viable alternative. Here's why:

1. Proximity to the United States: Mexico's geographical proximity to the United States offers several advantages. Reduced shipping times and costs enable businesses to maintain tighter control over their supply chains, minimizing the risks associated with long-distance logistics.
2. Strong Intellectual Property Laws: Mexico has made significant progress in strengthening its intellectual property protection framework. It is a signatory to various international treaties and agreements, including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). These commitments provide manufacturers with legal avenues to enforce their intellectual property rights.
3. Cultural and Legal Similarities: The legal and business cultures in Mexico bear similarities to those in the United States. This shared legal framework facilitates better communication, understanding, and enforcement of intellectual property rights between companies from both countries.
4. Improved Enforcement: Mexico has made efforts to enhance its enforcement mechanisms against intellectual property theft. It has established specialized units, such as the Mexican Institute of Industrial Property (IMPI) and the Mexican Copyright Office (INDAutor), to investigate and prosecute intellectual property infringements.

All the reasons stated above will help you protect yourself against possible China intellectual property theft, but there is no guarantee that once your product is sent to China that it will happen anyway.  

The USMCA and Intellectual Property Protection

The United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), brings additional intellectual property protections for manufacturers. According to the Office of the United States Trade Representative: 

The United States, Mexico, and Canada have reached an agreement on a modernized, high-standard Intellectual Property (IP) chapter that provides strong and effective protection and enforcement of IP rights critical to driving innovation, creating economic growth, and supporting American jobs.”

Here are some key features of intellectual property protection from the USMCA:

1. Strengthened Intellectual Property Rights: The USMCA includes enhanced intellectual property provisions that align with international standards. It strengthens patent and copyright protections, extends the duration of copyright terms, and enhances protections for digital commerce.
2. Enforcement Mechanisms: The USMCA establishes comprehensive enforcement measures, including civil and criminal penalties, to deter intellectual property theft. It promotes cooperation among the signatory countries to combat counterfeiting and piracy effectively.
3. Increased Transparency: The USMCA introduces greater transparency in intellectual property matters. It mandates the publication of laws and regulations related to intellectual property, providing clearer guidelines for businesses operating in the signatory countries.

It is nearly impossible to steal intellectual property rights from Mexican manufacturers due to the enforcement of these rights.  

Conclusion: China Intellectual Property Theft Remains a Significant Concern

China intellectual property theft remains a significant concern for manufacturers worldwide. However, adopting strategies to protect intellectual property and exploring alternative manufacturing locations, such as Mexico, can help mitigate these risks. By conducting due diligence, securing legal protection, and taking advantage of the intellectual property provisions outlined in the USMCA, manufacturers can safeguard their innovations, trade secrets, and creative works. By staying informed and proactive, businesses can navigate the complex landscape of intellectual property protection and ensure the continued success of their manufacturing operations.

FAQs: Safeguarding Your Manufacturing Operation: Protecting Against China Intellectual Property Theft

1. Why is protecting intellectual property (IP) crucial for manufacturing operations? Protecting intellectual property is crucial for manufacturing operations as it safeguards proprietary technology, designs, trade secrets, and innovations. IP theft can result in financial losses, reputational damage, loss of competitive advantage, and erosion of market share. Protecting IP ensures companies maintain their uniqueness, competitiveness, and ability to profit from their innovations.
2. What are the risks of intellectual property theft from China? China has been associated with intellectual property theft due to a history of lax enforcement and inadequate legal protections. Risks may include:

a) Counterfeit products: Unauthorized production and distribution of counterfeit goods that infringe on original IP rights.

b) Trade secret theft: Unauthorized access to and theft of valuable trade secrets, such as manufacturing processes, formulas, or proprietary technologies.

c) Patent infringement: Unauthorized use, replication, or filing of patents based on stolen or misappropriated IP.

d) Technology transfer requirements: Collaborating with Chinese partners or setting up manufacturing operations in China may involve technology transfer, increasing the risk of IP leakage or misuse.

3. How can manufacturers protect their intellectual property when dealing with China? Manufacturers can take several steps to protect their intellectual property when dealing with China:

a) Conduct due diligence: Thoroughly research potential partners, suppliers, or manufacturers in China to assess their reputation, compliance with IP laws, and commitment to protecting IP rights.

b) Implement confidentiality agreements: Use legally binding confidentiality or non-disclosure agreements with Chinese partners, suppliers, or employees to protect sensitive information.

c) Register IP rights: Register trademarks, copyrights, and patents in China to establish legal protection and enforceable rights within the country.

d) Control access to information: Limit access to sensitive information to trusted individuals or entities, both within the company and when collaborating with Chinese partners.

e) Monitor and enforce: Regularly monitor and enforce IP rights in China through proactive monitoring, investigation of potential infringements, and legal action when necessary.

4. Are there alternative manufacturing locations that offer stronger IP protection than China? Yes, there are alternative manufacturing locations that offer stronger IP protection compared to China. Some countries, such as the United States, European Union member states, Japan, and South Korea, generally have more robust IP protection frameworks and stricter enforcement mechanisms. These locations prioritize the safeguarding of IP rights and provide stronger legal recourse in case of infringement.
5. What are the benefits of manufacturing in countries with stronger IP protection? Manufacturing in countries with stronger IP protection offers several benefits, including:

a) Enhanced IP security: Manufacturers can have greater confidence in protecting their IP, reducing the risk of theft or infringement.

b) Legal recourse: Stronger IP protection frameworks provide manufacturers with better legal recourse and a higher likelihood of successfully addressing infringements.

c) Market differentiation: Operating in countries with strong IP protection signals a commitment to innovation, which can enhance a company's reputation and attract customers who prioritize IP security.

d) Collaboration opportunities: Manufacturing in countries with strong IP protection may provide opportunities for collaboration with local companies, research institutions, and innovators who prioritize IP rights and offer potential synergies.