Owned in China: Building Factories to Avoid Intellectual Property Theft

The growing tendency among U.S. companies to build their own factories in China has a not-so-hidden agenda, say some China experts: protecting intellectual property. IP theft is rampant in China. Ninety percent of software sold in China in 2004 was stolen, according to the Business Software Alliance, a software industry trade and lobbying group. Chinese suppliers need to thoroughly understand the products of their Western clients in order to troubleshoot problems, but that knowledge sometimes results in knockoffs appearing in the local—or global—market.

“Companies going to China should start with products that are more standard and have less intellectual property in them,” says Mark Stonich, a director at PRTM, a supply chain consulting company.

“Captive” factories are thought to provide a measure of protection against IP theft, because they can more safely incorporate the Western company’s design, manufacturing and security processes. But some China veterans such as Scott Hicar, CIO of hard-drive manufacturer Maxtor, are skeptical that having dedicated factories provides much extra protection from the IP problem. “You deal with so many outside suppliers even when it’s your own factory, that they could get information if they wanted it,” he says.

Hicar sees the main advantages of direct ownership as having complete control over manufacturing processes and IT, instead of having to integrate Maxtor’s processes and systems with local Chinese companies or cajoling them to build a new system from scratch. –C.K.