Chinese President Hu Jintao is touring the United States. Yesterday he met with President Bush and discussed, among other things, intellectual property rights (IPR). A meeting with Microsoft Chairman Bill Gates a few days earlier was explicitly about IPR. The timing couldn’t be better for me. If you’ve been reading this blog lately, the you know I just got back from China. IPR was one of the issues that I was interested in learning more about, and I managed to talk to government officials, corporate executives, and even street vendors about the issue. I was planning on sharing some of these things with all of you, and President Hu’s visit gives me what we in the journalism business call a news hook.

The first thing, as indicated in the title of this post, is that there is no one answer to any question about China and IPR. We in the West have a tendency to say China this and China that, but the truth is there really isn’t one China when it comes to IPR. Instead there are three distinct constituencies, the government, the corporate sector, and the people, all of whom have different agendas. Sometimes these agendas overlap, sometimes they don’t. Also, it’s probably a stretch to imply that each of these groups has only one agenda; reality is much more nuanced.

The bottom of the food chain is the most straightforward. The average citizen in China has no need and little regard for intellectual property. IPR is not something that people grew up with (and even if they taught it in schools only half the population ever makes it as far as high-school) and the percent of citizens who learn about it by engaging in international commerce is tiny. As everyone knows, China has a thriving black-market for counterfeit goods. When I was in Beijing I was surprised by how out in the open these markets were. The knock-off DVD store had a marquee, gave register receipts, and looked exactly like neighborhood video stores in the U.S. used to before Netflix put them all out of business. The people selling blue jeans, shoes and handbags operated with complete impunity – my hotel even had printed brochures for the Beijing Silk Market, which is basically a giant mall full of these items. The government could shut all of this down tomorrow if it wanted to, but it won’t because it creates jobs and gives people a chance to buy things like clothes and movies that they otherwise could never afford.

Chinese companies are next. My impression is that they are stuck somewhere in the middle. Most have no incentive to respect IPR unless they are doing work for Western companies that demand it. In fact, there is probably a disincentive. For example, DVD players now retail for about $60. Account for manufacturing, shipping, and tariffs and it quickly becomes a low margin product. But on top of that, royalties on a DVD player can run between $15-20 per unit. Chinese companies know that they will eventually need to respect IPR in order to become fully accepted members of the global economy. But that’s a lot of money that could go right to the bottom line. And since most of the intellectual property royalties are headed out of China there isn’t a lot of incentive for the government to crack down on companies that choose to ignore IPR.

In the parts of Beijing where I was at least, drug dealers worked pretty much in the open. One of the things I heard is that the government looks the other way as long as they only sell to foreigners, but considers it a capital offense to sell to Chinese. What does this have to do with IPR? As Chinese innovators start to develop their own intellectual property they will demand protection from the government, and a lot of people suspect that the government will take the same approach as it does with drugs. That said, I spoke to a number of Chinese entrepreneurs and none of them have any confidence that their IPR will be protected. (An interesting aside: Last fall, Warner Bros formed a partnership with a Chinese movie company, and one of the things I heard is that it has since become harder to find Warner’s movies in the DVD stores. It’s quite possible that the next big trend will be companies cutting their own deals directly with the Chinese government.)

That leaves the government. Right now they talk a good game about IPR. Based on my interactions with government officials I think that they know it is in their long term interest to play on the same field as the rest of the world. It’s just that getting there is not going to be easy, and too swift a transition will result in rising prices and social unrest. The plan right now starts with developing Chinese standards that have very low royalties. An example is the AVS video compression standard, which is an emerging Chinese rival to the MPEG-4 standard. Right now, MPEG costs $2.50 per use. AVS would only cost one Yuan, or about 12 cents. Using a Chinese standard like AVS would lower the barrier for Chinese companies to respect IPR and at the same time keep royalty money in China. The Chinese government is aggressively pushing a ton of standards right now. It’s not always working – a few weeks ago the ISO rejected a Chinese wireless standard, nearly causing an international incident in the process  – but there are so many that some are destined to stick. And it clearly a long term plan.

For all the rhetoric, my gut feeling is that it will take a generation before the West is satisfied with China’s IPR enforcement. The first step is creating affordable Chinese standards and encouraging – and eventually forcing – companies to use them. That will get Chinese companies and citizens used to following intellectual property laws. As that happens, Chinese companies will be developing more and more of their own intellectual property and demand that the government protect it. Eventually the scale will tip, and the government’s and the corporations’ interests will be aligned. And as long as it happens slowly and doesn’t raise the cost of goods too much the people will go along with it. I’m not sure you can ever stop people from selling counterfeit jeans or handbags, but then again you can get those in New York and the head of Luis Vuitton isn’t complaining about IPR to our government.

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