China won't protect IP until it gets its own IT
By David Kirkpatrick

(FORTUNE Magazine) – WANG JINGCHUAN, CHINA'S TOP intellectual-property official, confessed to an audience at the FORTUNE Global Forum last month that he was under a lot of pressure in his "very challenging job." As if to illustrate his point, fellow panelist Dan Glickman, the former Congressman who now heads the Motion Picture Association of America, immediately complained that 95% of the DVDs and other recorded entertainment sold in China are pirated, the highest rate in the world. And guess what Wang pointed to as a sign of progress: The central government is clamping down on the use of pirated software--in central government offices.

While intellectual-property protection in China remains weak, experts say they can see how the problem will be solved: when China has its own IP to protect. Says Paul Gewirtz, who heads the China Law Center at Yale Law School: "The pressure thus far has come from foreign companies, but the Chinese won't find the political will until domestic enterprises have their own reasons to want stronger enforcement."

David Frazee, an IP lawyer with Greenberg Traurig in Palo Alto who was on the same panel in Beijing, already detects increased enforcement in software, semiconductors, and telecom equipment--businesses in which Chinese research and development spending is rising rapidly. "And I guarantee you'll see movement for trademarks like the rings for the Beijing Olympics in 2008," he says, "because that's where the money is for them."

Some Western companies operating in China are starting to add a new element to their IP-protection strategy: local industrial development. Philips, the Dutch electronics company, helped three Chinese universities start programs to train experts in intellectual property. But Microsoft, which may be losing more sales in China to illegal copying than any other company, has gone even further. It is helping China build a local software industry. One example: It conceived, co-financed, and helps run a company in Shanghai called Wicresoft, which provides customer support in multiple languages for Chinese software companies operating internationally. "Now the top people in the country bring IP issues up to me, instead of the other way around," says Craig Mundie, Microsoft's senior vice president for policy, who has traveled to China regularly for five years.

The most notable improvement in IP protection so far has been in the attitude of China's leaders. Yale's Gewirtz is impressed that IP commissioner Wang would appear publicly next to outspoken critic Glickman. Some IP laws were recently tightened, and enforcement is improving: Three counterfeiters were recently sent to jail for copying a Philips light bulb.

But even optimists caution that China--where according to some estimates as much as one-third of the economy is dependent on counterfeit goods--has reasons to go slowly on IP protection. "This is sort of the opiate of the masses," says lawyer Frazee. "Giving people in China near-free or supercheap DVDs, music, and designer clothing is a good way of convincing them there is economic progress." Adds Microsoft's Mundie: "It will be some years before there is hard-core progress."