Outsourcing manufacturing operations and/or sourcing from low cost countries such as China can provide significant cost reduction opportunities for companies across a range of industries. But the savings opportunities come with a significant added risk: theft of intellectual property (IP).
According to the office of U.S. Trade Representative, worldwide IP theft costs U.S. companies over $250 billion a year. And many companies on the vanguard of outsourcing―who began outsourcing manufacturing to Asia years ago—have learned first-hand that IP theft can cost them. Cisco, the networking vendor, entered the Asian market over a decade ago, taking many safeguards to prevent the theft of its intellectual property, including filing international patents. But a suit by the IT giant against a Chinese networking company alleges significant IP theft.
IP theft goes beyond the high tech world. General Motors, who has operated extensively in China for some time, recently alleged that Cherry Automobile, a China-based auto OEM, copied the designs for a car that GM produces in China with two partners under a $100 million joint venture agreement. In another recent suit, Toyota also alleges IP theft against Chinese automobile OEM’s as well.
How can companies manufacturing or sourcing from China and other emerging market regions protect themselves from global IP theft? As a start, organizations should invest heavily in legal IP protection, both domestically and abroad. This includes the timely filing and enforcement of domestic and international patents. For example, if a U.S. company plans to have significant operations in China, it’s worth filing for patent protection in China in addition to the U.S. But legal protection of IP is only a start. We believe that companies should protect themselves in three ways outside of the legal route.
First, companies can hold back critical parts, while outsourcing the majority parts and assembly to low cost regions. According to the Chicago Tribune, Manitowoc Company, a Wisconsin-based manufacturer, has been manufacturing ice machines in China since 1995, but continues to produce a critical component that helps differentiate its product outside of that region.
Second, companies can protect themselves by taking greater control of manufacturing operations abroad. This might include co-locating facilities with contract manufacturing or joint-venture partners or building company-owned manufacturing operations abroad. Many of the large automotive companies on the OEM and tier one level are following this strategy.
Third, companies can protect themselves leveraging software to safeguard against IP theft. FreeMarkets, the parent company of Surplus Record, recently developed an Internet-based software application that converts a range of file formats (including over fifty CAD types) into a unique, time-stamped graphics format designed to thwart IP theft. This format is only viewable by parties with a certain browser plug-in, and then, only for a set period of time, on their own computer (the file cannot be sent to another individual, copied, or printed). Alter the time stamp expires, the file becomes unreadable. FreeMarkets has worked with over a dozen manufacturing organizations to use this application to help prevent against IP theft in China and other regions.
In the Wild West, property and business owners did not depend on the law to protect their assets―a six-shooter was a more reliable means. Likewise, companies outsourcing manufacturing operations or sourcing from emerging markets, can’t depend entirely on the law to protect their assets. In the Wild East, it’s critical to take IP protection into your own hands. Ultimately, the law might afford some protection, but sometimes it’s necessary to proactively protect your assets by taking the first shot.