When the RABO S-RV hit China's roads in 2003, Honda suffered whiplash.
The injury was understandable: The sport-utility built by Shuanghuan Auto Co. had sheet metal that closely mimicked Honda's CR-V, and a name that was downright Honda-esque.
"If you look at the outward design, it is clear it is a copy of our CR-V," Honda spokesman David Iida told Automotive News
Europe. Honda approached Shuanghuan with its concerns, and when the Chinese manufacturer didn't respond, filed a lawsuit in late 2003. "We just want to make it clear that we want to protect our intellectual property rights," said Mr. Iida.
The case has yet to go before a Chinese court.
Vehicles like the S-RV weren't part of the auto fantasy when China's market opened in 1993. Dreamers saw a vehicular Valhalla where more than one billion people without cars were hungry for Chevrolets, Hondas and Volkswagens -- and were on the cusp of being able to afford them. The business promise could have been written on the Great Wall.
Skip ahead a decade. The car-clogged streets in Shanghai, Beijing, Tianjin and Guangzhou show that China has exceeded even the rosiest expectations, becoming the fastest-growing car market in the world.
But for outside automakers, there's a problem: Honda, General Motors, Volkswagen, Toyota, Nissan and many others have been bit by what's been called "rampant" piracy of their logos, parts, trademarks, technologies, and even entire cars.
Observers say China's legal system is too weak to protect intellectual property, known as IPR and the very substance of brand names and images, and its foreign ownership laws even encourage piracy.
But others point to progress made in Chinese law, and to a future where the country ends its copying ways and start fostering genuine innovation.
The Chinese auto fantasy, they say, is still just beginning. Besides, those copy-cars are really, really bad.
"People ask me how they can protect their technology in China," says C. Peter Theut, head of the international law department at Butzel Long, a Michigan-based firm that counsels American car manufacturers. "My standard answer is, 'You don't.'"
He says auto technology -- the expensive, research-intensive knowledge of how to build cars and make them better -- is a tug-of-war between the West and China. Global carmakers want to get into China's market and employ its cheap labour; the Chinese want access to the West's latest technology. When they get it, it can be "blatantly" copied, he says.
He has been to China more than 45 times in the past eight years, and his international experience has shown him that piracy is a problem in all developing countries, but one that's "absolutely rampant" in China.
To build cars in China, foreign car companies must partner with a Chinese manufacturer, and can own no more than 50 per cent of the resulting joint venture (JV).
It's not a one-to-one arrangement, however. A single manufacturer can build cars with several different foreign companies. And foreign companies can partner with several domestic manufacturers, too.
The mixing of partners is a headache for companies trying to keep expensive secrets from global competitors. Mr. Theut says these situations can lead to technology theft.
"Just imagine taking a piece of high-tech stuff over there. As much as you watch it, if you're in a joint venture, the other person watching it every day is your partner. You can pretty much assume 10 per cent of what you're making may go out the back door, whether you like it or not."
When it leaves, technology is copied or reverse-engineered, a skill at which the Chinese are "absolutely brilliant," he says
Many feel that's how the Chery QQ was born. Upon its release in 2003, the Chinese-made QQ looked very much like the Daewoo Matiz, which GM builds as the Chevrolet Spark in China with its joint partner, Shanghai Automotive Industry Corporation (SAIC). SAIC also builds cars with Volkswagen.
Because SAIC bought a large stake in Chery in 2001, it didn't surprise many when the Spark-knockoff QQ appeared, or when other Chery models were found to be using VW knockoff parts, such as brake discs.
"It is a common practice that a company absorbs good features of others when it develops new products from the start," Jin Yibo, deputy general manager of sales for Chery, told the state-controlled China Daily when the controversy erupted in mid-2003. GM has not ruled out taking legal action against the company.
Nissan recently saw its Paladin SUV mirrored -- it's "exactly the same," said Nissan executives -- in the Great Wall Automobile Holding Co.'s Sing model. Great Wall is China's largest privately owned automaker. Nissan is still considering legal action.
And last year, Toyota took action against Geely Group, another Chinese manufacturer, after the company's Merrie sedan appeared with a logo that looked very similar to Toyota's. Toyota lost the court case.
When competitors help themselves to intellectual property in the West, lawsuits fly. But in China, says Mr. Theut, lawyers must struggle to protect IPR in a system that's still developing.
When China joined the World Trade Organization in 2001, its membership hinged on assurances that copyright piracy would be controlled. While the laws do exist, Mr. Theut says enforcement often does not. "At the moment in China, the judicial system has not caught up to the laws on the books."
Also, unlike the West, the Chinese legal system lacks a body of case law to cite as precedent. As more cases are tried, however, the case law will build.
Several decisions have rocked foreign confidence in China's legal system, most notably Toyota's recent loss to Geely. Still, Mr. Theut says today's legal problems are growing pains, and that in 10 years, the laws will doubtlessly be better enforced.
Chinese government officials could not be reached for comment. But others note that China is bowing to foreign pressure to reduce piracy. It has recently been setting up tribunals with other countries, including Singapore, to resolve disputes.
"We find these tribunals to be quite fair. In addition, China is in the early stages of setting up a mediation and dispute resolution system with offices in Beijing and offices in New York," says Mr. Thuet.
"The tide is beginning to turn, judicially, in China."
Describing China's auto industry growth takes one word: gangbusters. In 2003, car sales in the capital of Beijing alone hit 400,000 units. Auto imports were up by 84 per cent. Imports account for nine out of 10 cars in China, though the country's auto export market was already worth $4.3 billion U.S. last year, taking in cars, parts and motorcycles.
"China is the fastest-growing market in the world and will continue to be over the next decade," says Carlos Gomes, a Toronto-based economist with Scotiabank. "Last year, China had motor vehicle sales increasing by more than 70 per cent, to 1.9 million cars. Japan is the second-largest market in the world, with around 4.5 million cars sold.
"Probably over the next four or five years, China will surpass Japan to become the second-largest market next to the United States."
One in 22 people works in the Chinese auto industry. Yet Mr. Gomes says China still has one of the lowest vehicles-to-people ratios in the world, at three cars for every 1,000. Canada has 580 cars per 1,000 people.
While copying cars, logos and technology may appear like a Chinese get-rich-quick scheme, Murray King says the real explanation is cultural. China, explains Mr. King, trade commissioner with the Canadian consulate in Shanghai, is a "copy society" that has historically struggled to develop industrial innovations.
It's also a culture accustomed to copying brand-name consumer goods and selling them, affordably, to a poor populace.
"A phenomenon in this society is if you find someone's success you can copy it," says Mr. King. Combine this with an Asian love affair for things that appear expensive -- as cars most definitely do -- and you've got fertile ground for knockoffs.
"People (in China) can't always afford expensive consumer goods, but they want the image that goes along with them."
China is a bazaar for copies of anything. In the markets, people can buy high-quality knockoffs of designer sunglasses, DVDs and Nintendo video games.
"People buy them for 1/20th the retail price of the genuine items," says Mr. King. "It looks the same; everyone thinks it's real."
China has become a major manufacturing hub for Western consumer goods, so access is easy and the copying is quite sophisticated. This is now
affecting the auto industry.
But Mr. King believes people should look at the overall picture. While there have been several cases of automotive piracy, he says the companies involved are small, second-tier manufacturers that build automobiles in small numbers, with "all kinds of problems with quality control."
Geely, the company accused of copying Toyota's logo, makes cheap, "poor-man's" vehicles, according to Mr. King.
And while it may appear the Chinese don't value brand authenticity, that's a myth.
China "is a country where brand name is really important, it's hugely important, and many Chinese consumers are very conscious of what's a real thing, and what's a copy."
What is eye-opening for him is the regional trade barriers across China. If a local manufacturer has partnered with Volkswagen, as is the case in Shanghai, 80 to 90 per cent of the cars in that region are VWs. There is very little trade within the country itself.
Add to this the fact that the local government usually owns the local car manufacturers, sets the licensing standards for vehicles (to meet its own products, naturally), and that these governments are the largest customer of vehicles in China, and one can see the inherent bureaucratic nature of automobiles in China.
Thus, Mr. King believes companies suffering piracy should always seek legal channels and work closely with government.
"In a country like China, where industry is state-owned, and governments are partners in the business, it's really important to work with government representatives."
It creates pressure, he says. Despite legal difficulties Western firms are experiencing, he says the Chinese government is making positive changes.
"The IPR side of the legal system has reformed the fastest because there's been so much of a lobby. If there are legal precedents that have gone in favour of foreign companies, they are likely on the IPR side. China values the foreign investors."
Further, Chinese companies are starting to take legal action against other Chinese companies that copy their brand names. That's because China is starting to develop its own successful brands, further pushing the courts to reform the intellectual property sector.
There are ways to get around the piracy problem for now, says Mr. Theut. He has watched companies bring in dated technology, for example. "It may not be obsolete in China, but it may be in the West."
German automakers such as BMW take this approach. When an alternator or brake caliper is about to be replaced by a new version, the Germans license the old part to the Chinese with royalty rates. "It keeps the companies one step ahead, but it's a difficult thing to manage," he says.
This strategy can prove unpopular. The Chinese are intent on having the latest technology. Joint ventures are infamous for leveraging their partners and playing one against the other to get technology into the country. Chrysler walked away from a partnership to build its minivan in the '90s because the pressure to provide future product plans was too intense.
The pressure is now to bring in things like antilock braking systems, and hydrogen and hybrid powertrains -- all of which are massively expensive to research and develop.
Toyota, despite its encounter with Chinese piracy, wants to take advantage of China's incredible size in pursuing green auto technologies. "Hybrid vehicles are not yet at a critical mass, but with this technology, scale will be important," Toyota president Fujio Cho told the Times of London. "Once you have the scale, the motors and batteries would have to become cheaper."
Toyota is working with the government-sponsored China Automobile Technology Research Centre, and plans to start selling its Prius hybrid car in China. The partnership could see China leading, not copying, the West in environmentally friendly cars.
"China, we feel, you have to deal with," says Mr. Theut. "There's so many companies going over there, you really have little choice. When you put politics aside, the people are more than willing to work with Western companies. It
isn't all bad. They're going to be a major force on the world scene forever."
Mr. King says copying has been a "quick fix" for the
Chinese economy, but must be overcome if China intends to sell cars to the rest of the world.
"From a longer-term perspective, if you're always copying, you're always second-tier. Our IPR rights have fostered innovation in Western society. These are all things that wouldn't have developed if there wasn't a regime of protection," he said from Shanghai.
"Considering there is very little innovation in this society, China's got to change, and they recognize that."Ottawa Citizen:
