Cablegate: 2010 Shanghai Ipr Roundtable -- Candid Commentary From

VZCZCXRO7464
RR RUEHCN
DE RUEHGH #0053/01 0500824
ZNR UUUUU ZZH
R 190824Z FEB 10
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 8561
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 0902
RUEHUL/AMEMBASSY SEOUL 0691
RUEHGH/AMCONSUL SHANGHAI 9228

UNCLAS SECTION 01 OF 04 SHANGHAI 000053

SENSITIVE
SIPDIS

STATE FOR EAP/CM - WKLEIN AND SFLATT, EEB/IPE - TMCGOWAN AND INL
- JVIGIL
USTR FOR CHINA OFFICE - KALVAREZ, AWINTER, TWINELAND, SMCCOY,
TPOSNER, CREADE
DOC FOR NATIONAL COORDINATOR FOR IPR ENFORCEMENT - WPAUGH
DOC FOR ITA/MAC: ESZYMANSKI, JYOUNG
LOC/ COPYRIGHT OFFICE - STEPP
USPTO FOR INT'L AFFAIRS - LBOLAND, EWU
DOJ FOR CCIPS - TNEWBY
FBI FOR LBRYANT
DHS/ICE FOR IPR CENTER - DFAULCONER, TRANDAZZO
DHS/CBP FOR IPR RIGHTS BRANCH - GMACRAY, PPIZZECK
TREASURY FOR OASIA - DOHNER/WINSHIP
NSC FOR LOI

E.O. 12958: N/A
TAGS: KIPR ECON ETRD PGOV CH
SUBJECT: 2010 SHANGHAI IPR ROUNDTABLE -- CANDID COMMENTARY FROM
INDUSTRY

SHANGHAI 00000053 001.2 OF 004

1. (U) This cable contains business proprietary information and
is Sensitive but Unclassified. Please handle accordingly.

2. (SBU) Summary: Shanghai remains the "best place overall" for
IPR protection and enforcement in China despite continued
problems, according to U.S. industry representatives at a recent
Consulate-hosted roundtable. Many companies have adopted
pragmatic business strategies that allow their companies to
flourish in spite of the shortcomings in the regulatory
environment. Participants welcomed future IPR initiatives by
the USG, especially in seeking ways to convince Chinese
authorities that robust enforcement of intellectual property
protection serves China's long-term interests. End Summary.

3. (SBU) During a February 4 IPR roundtable hosted by ConGen
Shanghai, representatives from over 25 U.S.-based companies
discussed recent developments and continuing challenges in
protecting intellectual property rights in East China. USG
participants included Consul General Beatrice Camp; Deputy
Assistant USTR and Chief Negotiator for IPR, Kira Alvarez;
Embassy Beijing Minister Counselor for Trade, Chris Adams;
Embassy Beijing Economics Minister Counselor, Bill Weinstein;
U.S. Patent and Trademark Attachi, Nancy Kremers, Embassy
Beijing Resident Legal Advisor, Amy Lee; Embassy Beijing
Immigration and Customs Enforcement Attachi, Bruce Gordon;
Embassy Beijing Commercial Section Trade Policy Officer, Lisa
Rigoli; and Embassy Beijing Economic Officer Sally Behrhorst.

============================================= ======

Industry Pragmatically Adapting to IPR Shortcomings

============================================= ======

4. (SBU) Several roundtable participants described how they had
adopted pragmatic business practices to protect their
intellectual property, including selective investment policies,
allowing many of their businesses to prosper despite China's
regulatory shortcomings. General Motors General Counsel Kenneth
Wong noted, in order to protect core IPR, many U.S.
manufacturers, including GM, only licensed the production of
non-critical components to local Chinese partners allowing GM to
retain the design and production of core technology in the
United States. Tao Taodi of Cisco Systems stated that while
this approach may have worked well in the past, the Chinese
government now has its sights set on obtaining core technology
and was no longer satisfied with attracting low-tech production.
Tao cited tax incentives and other preferential policies such
as Beijing's 2008 "High-End New Enterprise Certification,"
designed to attract high-tech investment as examples. (Note:
The High-End New Technology Enterprise Certification reduces the
corporate income tax rate from 25 percent to 15 percent. End
Note).

5. (SBU) Roundtable participants were skeptical of the
effectiveness of these incentives. Several industry
representatives, particularly those from the pharmaceutical
industry, expressed concern that their IP remains vulnerable to
theft in China and that none of the incentives, including hefty
tax breaks, would be enough to compel them to invest their core
technology in the local market. Cisco noted that it had chosen
to forego filing for the high-end new enterprise certification,

SHANGHAI 00000053 002.2 OF 004

which would require the company to share its core technology,
and was giving up a major tax rebate as a result.

6. (SBU) Industry representatives were similarly wary of recent
developments in indigenous innovation policy. Corning Inc.'s
representative Ken Chan noted that indigenous innovation
policies were beginning to "guide" investment decisions, even if
they were not yet "determining" factors in whether to invest in
China. Other participants noted that China's promotion of
indigenous innovation was forcing their companies to do
additional rounds of analysis of the regulatory environment
before investing. Still other companies expressed concern over
"second order" effects of China's indigenous innovation
policies, including preference for domestic firms in government
procurement, standards requirements, and onerous licensing terms
for foreign companies.

===========================================

Litigation: Is the Juice Worth the Squeeze?

===========================================

7. (SBU) Roundtable participants were divided over the benefits
of pursing civil litigation in China. Jay Hoenig of Hill and
Associates, a security and risk management consultancy, said
Shanghai is entering into a new period in which enforcement and
litigation outcomes are increasingly predictable and encouraged
foreign companies to take greater advantage of civil litigation.
He stated it was hard to make the argument that China's civil
system was ineffectual if litigants did not pursue all of the
legal remedies available to them. A pharmaceutical industry
representative echoed these comments, noting that in his
experience, "99 percent of civil cases involved Chinese rights
holders suing other Chinese nationals while only 1 percent of
civil cases involved foreign companies suing Chinese defendants.
Yet the vast majority of the complaints about the civil system
tend to be from foreign rights holders."

8. (SBU) Tao Taodi of Cisco Systems offered a differing view,
claiming Cisco was a textbook case of how litigation in China
can backfire and hurt a company's long-term interests. She
noted Cisco now had regrets over having sued state-owned
telecommunications giant Huawei in 2003 because, during the
suit, Cisco was portrayed by the Chinese media as a bullying
multi-national corporation trying to crush a local competitor.
Ultimately, Tao argued, the damage to Cisco's reputation in
China outweighed any benefit achieved through the lawsuit. Tao
recommended that other companies seriously consider the
long-term implications of pursuing civil actions in China.
Motion Picture Association (MPA) representative William Feng
agreed, noting that MPA had been reluctant to engage in
wide-spread litigation against online pirates for fear of
drawing the wrath of Chinese netizens, many of whom currently
enjoy access to free content. GM's Ken Wong cited the GM Daewoo
vs. Chery case as an example of how refraining from litigation
may, in some instances, be more useful than pursuing a civil
case in China. In 2005, GM Daewoo initiated a law suit against
Chinese car manufacturer Chery Automobile Company for copying
the design of its Matiz model. GM, however, ultimately decided
to settle with Chery after much internal deliberation. As a
result, GM Daewoo was seen as a good corporate citizen by the
Chinese government and still retains a positive reputation with
the Chinese public.

SHANGHAI 00000053 003.2 OF 004

===========================================

Copyright Enforcement Weak Link in Shanghai

===========================================

9. (SBU) Motion Picture Association (MPA) stressed that it had
been effectively shut out of the China market but expressed hope
that with the 2010 World Expo Shanghai would do a better job of
cracking down on retail piracy. MPA singled out a lack of
cooperation between the Shanghai Municipal Public Security
Bureau and the Copyright Bureau as a key concern. MPA also
hoped that Shanghai would consider adopting tactics similar to
those used by Chaoyang district in Beijing to prosecute more
infringers. (Note: In March 2006, Beijing City and Chaoyang
District Administrations for Industry and Commerce issued
notices establishing a "trademark authorization system," which
obligates landlords to check the sources of their goods and
verify legal authorization from rights holders. End Note.)

================================

Pharmaceutical Industry Concerns

================================

10. (SBU) Shanghai-based pharmaceutical companies cited data
protection as their top concern and called on the USG to raise
the profile of this issue in negotiations with the Chinese
Government. According to the representatives' estimates, U.S.
pharmaceutical manufacturers lost $1bn in China last year to
piracy and counterfeiting. The representatives claimed IP
infringement would disappear overnight if the State Food and
Drug Administration (SFDA) had the political will to enforce
China's existing laws. The pharmaceutical industry
representative also cited lack of action on SFDA's 2005
regulation on patent linkage as another key concern and asked
the USG to urge SFDA to stop issuing licenses to Chinese
companies who do not own patents for their pharmaceutical
products. He stressed that, in order to gain the maximum amount
of traction with SFDA, it was critical to frame these issues in
an economic context, highlighting how better data protection
will lead to more indigenous innovation and more jobs.

======================================

Recommendations for Continued Outreach

======================================

11. (SBU) Participants were enthusiastic about the Ambassador's
proposal to locate and designate "model IP cities," which might
tap into a "culture of competition" between Chinese cities
spurring one another to raise their standard of IP protection
and enforcement. They also endorsed re-invigorating the U.S.
Ambassador's IPR roundtable and supported the idea of inviting
domestic Chinese companies to participate in future roundtables,
which, they said, would help make a more compelling case that IP
protection and enforcement helps both foreign and domestic

SHANGHAI 00000053 004.2 OF 004

companies. Pharmaceutical industry representatives noted in
particular that East China has several innovative domestic
pharmaceutical companies, which could be enlisted in this
effort. GM's Ken Wong said that Geely Automotive, a large
privately owned firm in Zhejiang Province, might also be a
willing participant, given Geely's efforts to break into the
U.S. market. When asked whether Chinese companies might be
afraid of being perceived as being too close to U.S. companies
and the USG, Cisco's Tao Taodi said that those perceptions would
ultimately depend on who was organizing the event. Chinese
firms would most likely be more comfortable with some Chinese
Government involvement. GM's Wong proposed one possible
solution would be for the USG to partner with a local government
agency and jointly sponsor the program.

12. (SBU) Other industry representatives noted their success in
working directly with local governments to establish
public-private partnerships, and cited Microsoft's R&D center
and affiliation with local universities, as an example. Cisco
Systems is also working with local governments and recently
signed an MOU with the government of Chongqing, featuring a
section encouraging greater IPR protection.

========

Comment:

========

13. (SBU) The extremely frank observations by the U.S. industry
representatives -- particularly with respect to their own
interests in dealing with the China's tricky IPR environment --
impressed the USG participants in the roundtable. Overall, the
approach favored by industry tended toward accentuating the
positive, i.e. looking for ways to convince the Chinese
authorities at all levels that robust enforcement of
intellectual property protection serves China's long-term
interests. Notably, none of the industry participants indicated
they would be leaving the China market despite their ongoing IPR
problems.

14. (U)Embassy Beijing and USTR have cleared on this cable.
CAMP

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