Ties That Bind - Bay Area Council Economic Institute

Investment: Building Global Businesses in a New China
enough to stop unfair or illegal practices before their market
position is permanently compromised.
Traditional defenses such as antidumping complaints, for
example, which worked in the past for semiconductor manufacturers
have not proven effective for consumer electronics
more recently. Concentration of buying power among a few
large discount retailers in the United States has compounded
the problem.
Regulators, trade negotiators, and courts struggle to define
what can be protected and how protection is to be measured
and enforced across a wide range of categories. The result is a
turbulent, high-risk IP environment that may persist for the foreseeable
future. And it is not confined to only China; the country’s
own global expansion initiative has forced the issue to become
one of global importance. Thus, regardless of whether a
company is doing business in China, it must adapt to these
significant changes.
Key Findings
Chinese manufacturers are ultra lean and ultra agile. They
can quickly become effective price and volume leaders in global
manufacturing. Challenges to the established IP rights paradigm
in the developed world will mount as China’s influence on
global product markets grows. The issue is not only one of IP
infringement, but more importantly the pace and scale at which
derivative products—at significantly lower price points—are
brought to market by Chinese players, collapsing pricing structures
and shortening the profit cycles of products.
The preponderance of corporate value in mature markets is
in intangibles, and a sizable percentage of that value is exposed
in emerging economies involved in outsourced production.
In 1998, as much as 85% of the value of U.S. corporations
in the Standard and Poor 500 index was in intangibles,
up from 38 percent in 1982. By 2005, significant amounts of
these intangibles had already been transferred—legally and
illegally—from foreign companies to Chinese corporations. Tactical
and legal, low-cost acquisitions of operations and facilities
that include IP—from struggling foreign companies or vertically
integrated MNCs who seek to shed their lower value manufacturing
units entirely—are accelerating this movement.
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