Daily Business Zen: China’s Global Subsidy
As young professionals, we often overlook the fact that we will be competing with the massive effects of China’s intellectual theft for the foreseeable future.
“China’s failure to police intellectual property, in effect, creates a massive global subsidy worth hundreds of billions of dollars to its business and people. Seen another way, China’s vast counterfeiting schemes act on the rest of the world the way colonial armies once did, invading deep into the economies of their victims, expropriating their most valued assets, and in so doing, undermining their victims’ ability to counter. As China grows into a great power, the wealth transferred into the country by stealing intellectual property will propel it forward.” - China, Inc.: How the Rise of the Next Superpower Challenges America and the World
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Tags: China, Daily Business Zen, Global Business, Young Professional
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January 25th, 2008 at 8:30 am
Call me crazy, but I don’t see this as a very big threat (at least today). Chinese counterfeits are generally sold mainly in China. In the case of big-ticket software packages like Microsoft Windows, it’s a simple matter of economic reality: the average Chinese consumer cannot afford to pay $200 for a software title, so the counterfeiters fill in the gap by selling the same title for $2.
Might this become a larger problem as Chinese consumers continue their rise in affluence? Absolutely.
Even so, I think the threat is greatly exaggerated by the RIAA, MPAA, and similar groups who are struggling to comprehend how their old business models can adapt in a global world.
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January 25th, 2008 at 10:24 am
I actually started reading this after you and Blake recommended it. It’s a great book
There is a whole chapter on how deep this goes.
It’s not just consumers in China, the argument you used is the exact one debunked in the book. Software piracy is widespread across most business, only 10-13% of software packages used in business in China are legitimate. What effect does this have? If a business here in the US has to buy 1000 copies of windows and office at $1000 dollars a license, they have a far higher fixed cost to spread out over the units they sell. Chinese companies barely pay $2 per seat on average for pirated copies of windows and office. Would you rather startup a business with $2000 in software costs or $1,000,000. It’s just another reason they can charge less for what they produce.
It’s easy to blame big companies like the RIAA and MPAA but, this isn’t a matter of “old business models”, it’s a matter of intellectual theft that gives a huge advantage to Chinese businesses.
The book details the effects of all intellectual theft in the chapter Pirate Nation that starts on page 231.
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January 25th, 2008 at 12:12 pm
That’s a really good point. Maybe I should read this book!
I’m having trouble thinking of the kind of company or product where the software costs are going to significantly impact product price. I would think that employee wages & benefits would vastly outweigh any difference in software costs. (Not to mention the relative value of the dollar vs. RMB)
Another question: what can we do about it? In some ways it’s like the drug trade–when there’s overwhelming demand for a product, there’s simply nothing you can do to stop producers from servicing that demand. Or so we’ve learned after 30 years of a failed “drug war”.
China has a lot to teach us, and we clearly need to mold and bend our business rules to fit this new global giant. Very interesting topic to consider!
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January 25th, 2008 at 12:46 pm
Your last comment highlights the problem. Chinese “capitalism” was started by a group of farmers who “bent” the rules and started making a profit. China’s economy is built on breaking the rules and getting rewarded for it.
When companies in the US are competing on contracts where 2-10 cents per item can make a difference a few million dollars worth of software can kill a deal!
It’s not just software though, the chinese have literally stolen designs for cars that took billions to develop from chevy and other global manufacturers. (see the first part of the pirate nation chapter) And their government refused to penalize them! China knows it is benefiting from theft and refuses to deal with it. The same thing happens in the drug industry. The chapter is pretty extensive.
What we can learn from China is how to inspire work ethic and motivate students to study engineering and math. They are quickly surpassing us in these areas due to desperation and necessity. I would rather not emulate their widespread abuse of intellectual property, if we did we never would have had the funds to support the development of the innovations they do not hesitate to steal.
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January 26th, 2008 at 10:39 am
When a guy in Chicago steals a car, we don’t blame “America”. We don’t say those in Chicago have an advantage over those in Minneapolis because their cost of living is less when you steal a car. If theft is a problem, it is the producer’s job to protect their product. This is why cars have locks. If Microsoft can’t secure their junk, then it is on them to solve the problem - not some government. If businesses here can’t compete with $2 operating systems, maybe they should try a free one. Maybe they should innovate. Maybe they should get clever with their licensing. All this finger pointing gets us nowhere. If you sit around and wait for a government to solve the problem, you are gonna get left in the dust. You can spend time appealing to moral imperatives or legal standings, but in the free market … competition is dirty. The cheaters win and the slow-pokes whine about it. By the time the lawyers are done, the market is commoditized and nobody wins - well, nobody other than the cheater that started the whole thing.
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January 26th, 2008 at 10:58 am
One final thought: business law (contract law, IP law, etc.) was not delivered to us on some stone tablets from a mountain top. The goal may be to create a level playing field for all, but the reality is that powerful interests have molded & shaped various laws to suit their interests. Why did Disney lobby the US government (successfully) to extend copyright protection to 120 years? (Hint: not to level the playing field)
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January 26th, 2008 at 11:44 am
1. Widespread Minneapolis to Chicago car theft is not an issue, the comparison is an apples to oranges comparison.
2. I am not finger pointing, I was only trying to expose the realities of the market (the book is). The fact is that capitalism has flourished here in the US due to property rights. The government strictly protects our right to own property and when we innovate (if they didn’t, why innovate?), Americans believe you should be able to realize the value of the innovation. Chinese “capitalism” has flourished due to the subjugation of laws and a lack of property rights, from kicking people en mass off of their property to stealing the innovations of American businesses.
Your argument that Microsoft needs to innovate to protect what they create is like saying that it’s your own fault if someone breaks into your house and steals your stuff, after all you should have a had a better security system right? And to Tad’s 1st argument, they couldn’t afford a plasma TV so they are justified in stealing yours.
3. Tad , you are correct, contract law and IP law were not delivered on a stone tablet but, they work to foster innovation in the long run. Lets take on one of the biggest targets, big pharma. If they didn’t have copy protection for their medicines, they would be immediately copied (as they are in China) and the profit would be so spread out from the innovation that further R and D funds would be scarce, prohibiting or at least inhibiting further innovation.
I cannot justify the stealing of entire automotive designs, industrial techniques and software that adds to China’s might. In Dan’s words China is the “cheater that started the whole thing” in many aspects. I am not throwing stones, just pointing out the many methods they use to beat us at our own game. After all, you can’t compete with them if you don’t take the time to understand how they gain their advantage.
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January 26th, 2008 at 3:33 pm
My thoughts, and I don’t know if Brandon already said it, he writes to much and I didn’t feel like reading all the way through is post. I agree with Dan that it is the companies job to police their products and software. However it is the Governments job to provide a venue to take legal action, i.e. patent laws and court systems.
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January 28th, 2008 at 3:55 pm
This is the classic fallacy when it comes to IP law. Me stealing Microsoft Windows is not comparable to you stealing my Plasma TV. The crucial difference here is that in any case of IP theft (digital music files, software, text, etc.) the original content holder still owns that content. I’m not taking it away from anybody, I’m just making a copy.
The analogy would be if someone broke into my house (without actually damaging my windows/doors) and copied the floor plan of my house. I’m only worse off if I am an architect trying to sell that floor plan. And then, I’m really only worse off if the person who copied it would have purchased it otherwise. (So I should really learn to lock my doors if I don’t want people harmlessly walking into my home and copying the floor plan!)
Ironically, I think Brandon H used an “apples to oranges” comparison directly after scolding Dan for doing the same.
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January 28th, 2008 at 4:27 pm
This is a great example Tad! It’s much cheaper for the Chinese businesses to steal our floor plans (software, pharmaceuticals, industrial designs, technology, manufacturing techniques) and use them to compete with us than it is for them to create their own.
It hurts everyone, the businesses they are stealing the “floor plans” from and the businesses who have to compete with them. Hence, the “global subsidy” worth hundreds of billions of dollars the Mr.Fishman describes in the book. (page 231
January 29th, 2008 at 9:30 pm
[...] it the “Pirate Nation”. (If you care to opine on Chinese piracy, please check out this recent post that has sparked an extensive [...]