Supply chain must rally to protect proprietary technologies

By Diane Trommer

In March 2007, the Chinese government will begin enforcing its version of the RoHS environmental regulation. Termed the “Administrative Measure on the Control of Pollution Caused by Electronic Information Products,” China’s RoHS mandate represents more than just another administrative challenge to members of the electronics supply chain, according to Robin Gray, executive director of the National Electronic Distributors Association (NEDA), Alpharetta, Ga. In fact, Gray cautions that compliance with the China RoHS directive could put manufacturers’ and suppliers’ intellectual property (IP) at even more risk for piracy than it already is.

Electronics firms doing business in China need to be aware that while China RoHS targets the same substances restricted by the EU RoHS directive, the China policy stipulates that compliance can only be verified by testing done in accredited Chinese laboratories. “So these labs will know the composition of the product down to the most minute detail,” Gray explains. “Any intellectual property, with respect to alloys or chemical content, is going to be documented by these labs.”

This could be extremely detrimental to the competitiveness of U.S.-based electronic component makers and OEMs, since reverse engineering and outright IP piracy are common practice in China. In fact, the U.S. Customs and Border Protection agency reports that 70 percent to 80 percent of counterfeit technology products seized at U.S. borders come from China.
 
“Reinnovation,” as the Chinese government has termed the practice of reverse engineering foreign-developed products, is a fact of life in today’s China, according to Dave McCurdy, president and CEO of the Electronic Industries Alliance, Arlington, Va. McCurdy recently testified before the U.S.-China Economic and Security Review Commission hearing on China’s enforcement of intellectual property rights, and the dangers of the movement of counterfeited and pirated goods into the United States.

EIA is one of nearly 185 U.S.-based businesses and organizations that have rallied together to form the Coalition Against Counterfeiting and Piracy (CACP) in association with the U.S. Department of Commerce.

The coalition is not only actively working with government agencies to ensure greater detection, enforcement and prosecution of IP crimes in China and worldwide, but is also committed to increasing the public’s understanding of the negative impact of counterfeiting and piracy on the U.S. economy.

For example, the U.S. Department of Commerce estimates that in 2005 the value of the copyrighted works that were pirated exceeded $2.3 billion, and counterfeit goods make up an estimated 5 percent to 7 percent of world trade.

Fortunately for the electronics industry, the Chinese economy is becoming more dependent on foreign imports and exports, and as a result, the government is making a concerted effort to appease its trading partners by enforcing the intellectual property rights of both native and foreign companies in the region.

The U.S. Department of Commerce reports that the Chinese government has stated it will establish 50 Intellectual Property Rights (IPR) trial courts across China and 50 IPR Infringement Reporting Centers across the country. While these efforts are a good first step, U.S. companies doing business in the region still need to be cautious with potential suppliers before entrusting their strategic technologies to them, NEDA’s Gray advises.

This is where the value of having strong relationships with global distributors can be critical, according to Greg Frazier, Avnet executive vice president, supply chain services. Frazier notes that with 23 offices covering major cities in China and a workforce of nearly 900 representatives composed entirely of local talent, Avnet Electronics Marketing’s Asia team can offer invaluable insights into the pros and cons of working with indigenous suppliers.

“We are finding more and more customers are asking us to help them establish their supply chains in China because they don’t have the local presence or the intimate understanding of the business practices and culture that our team does,” Frazier says. “We know the suppliers in China, and we know who can be trusted and who can’t. So if customers go through us to establish their supply chain, we can connect them with reputable companies, and they face a much lower risk of IP theft.”

Frazier also recommends that customers moving production to China start with technologies that have less intellectual property to infringe upon, such as commodity products. “There is less risk with these products because there is simply less to lose if they are copied,” he notes.

For the time being, companies that choose to do business in China will have little choice but to comply with the RoHS requirements and hope for the best, NEDA’s Gray says. He adds that it is imperative that members of the electronics supply chain be aware of the risks and lend their support to organizations working for better intellectual property protection in China and across the world.

This is just what Rochester Electronics Inc.’s CEO Curt Gerrish is doing.

Gerrish, who is chairing the Semiconductor Industry Association’s Anti-Counterfeiting Committee, is also hosting an Anti-Counterfeiting Symposium at his company’s Newburyport, Mass., headquarters. He hopes the symposium will give attendees a better awareness of the risks and the costs of the problem, as well as ideas about what they can do to combat it in their own organizations.

In addition to driving down market prices for certain devices, counterfeit chips could also pose substantial health and safety risks, Gerrish says.

Many of the counterfeit devices in the market are not just copied products, but original devices that have been previously rejected or pulled from scrap bins, he says. As a result, the integrity and reliability of these devices may be significantly compromised. When one considers the variety of applications in which these faulty chips may end up — such as commercial aviation or military defense weapons — the cost of this problem goes far beyond dollars and cents.

 “Counterfeiting and IP theft are becoming a full-blown industry,” Gerrish concludes. “This issue has reached a crucial level, and we as an industry need to take strong action to stop it.”